Ontario Court of Appeal Upholds Decision Awarding $12 million in Damages Against Departing Fiduciaries

June 12, 2012

The Ontario Court of Appeal recently upheld a trial decision which held four key employees who resigned in rapid succession and started a competing business responsible to account for ten years’ profits and damages arising from the combined effects of a breach of fiduciary duties, breach of confidence, and a failure to provide reasonable notice of resignation.

Facts and Judicial History:

In GasTOPS Ltd. v. Forsyth, the plaintiff GasTOPS Ltd. was in the niche business of developing software related to the maintenance of jet engines sold to military, commercial, and industrial customers worldwide.  The events that gave rise to the lawsuit occurred in 1996, when GasTOPS was in the process of securing a lucrative contract with U.S. Navy.  In October 1996, two senior business managers involved in this project, Bradley Forsyth and Douglas Brouse, resigned with only two weeks’ notice and signed letters assuring GasTOPS they would not solicit GasTOPS’ business, use its confidential information or property, or solicit its employees.           However, about a week later, Forsyth and Brouse formed a new company, MxI Technologies Ltd., targeting the specialized software development and partnerships that GasTOPS was in the process of securing. Shortly thereafter, two senior specialized software developers essential to GasTOPS also resigned with only two weeks’ notice and immediately began employment at MxI, which succeeded in securing the same customers as GasTOPS.

GasTOPS sued the four former employees as well as MxI for breach of fiduciary duty, breach of confidence and failure to provide reasonable notice of resignation. After a lengthy trial, Justice Granger found that the four former employees were indeed fiduciaries, who had breached their duties by resigning with inadequate notice and starting a competing business using confidential knowledge obtained from GasTOPS. Their company, MxI, was also held liable for breach of confidence.

GasTOPS was awarded damages disgorging MxI of profits earned from its military contracts in its first ten years of operation, which amounted to over $12 million, in addition to pre-judgment interest and costs. The damage award considered, among other things, that the period of reasonable notice of resignation that should have been given by the four employees to GasTOPS was 10-12 months. If such notice had been given, GasTOPS would have had an opportunity to replace the departing key employees and the effect of their breaches duty would have been mitigated.

The Decision of the Court of Appeal:

The former employees appealed several of the Justice Granger’s findings, the most notable of which was Justice Granger’s ten (10) year time frame for disgorgement of profits.  In a unanimous decision, the Court of Appeal upheld the trial judge’s damage award and emphasised that the ten year accounting period for damages was an equitable, fact-driven remedy that considered the amount of time it took to develop software in a “highly technical and specialized business” with a “small number of very large customers.” While the former employees argued that Justice Granger’s choice of a ten year period was disproportional in light of the fact that he had pegged the proper notice of resignation period at only 10-12 months, the Court of Appeal found that Justice Granger’s reasonable notice determination played no part in his calculation of the accounting period.  There was also no reason to doubt Justice Granger’s finding that MxI deliberately targeted the military marketplace using information acquired during the departing employees’ employment at GasTOPS.

A second ground of appeal related to Justice Granger’s finding that the two specialized software developers who followed Forsyth and Brouse to MxI were fiduciaries.  The Court of Appeal concurred with Justice Granger that these developers were equivalent to senior management in light of their responsibility to develop a “significant commercial component” of GasTOPS’ business.

Our Views:

While at first glance the Court of Appeal’s affirmation of Justice Granger’s decision may be seen as a benchmark for the damages that can be awarded against departing fiduciaries, the fact-dependent nature of these cases cannot be understated.  Significantly, in this case, Justice Granger had found that the former employees had deliberately intended to destroy GasTOPS’ business. 

 

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