Legal News

BC Court of Appeal: Employees did not breach duty of fidelity and non-disclosure by contacting former employer's clients

In a recent decision, the BC Court of Appeal has allowed an appeal from a decision of the Supreme Court which concluded that three employees breached their common law duty of fidelity, and their contractual obligations under non-disclosure agreements, when they resigned from their employment and began competing with their former employer.

The three employees worked for a credit union. One employee, Trach, was a salesperson; the others, Kanester and Willis, worked as his administrative staff. When Trach accepted employment with the credit union, he signed an agreement which prevented him from working in the insurance and financial services business for two years after leaving the credit union’s employ. The agreement also prevented him from soliciting business from the credit union’s clients for two years. In addition, Trach, Kanester and Willis each signed an “Employee Non-Disclosure Agreement” which required that they not disclose confidential information acquired during the course of their duties.

After some negotiation regarding whether Trach might buy the credit union’s group-benefits business, Trach, Kanester and Willis gave the credit union two weeks’ notice that they would be resigning. The employees were candid with the credit union that they intended to open their own group-benefits business. When the credit union received the resignations, it made arrangements to transfer its group-benefits business to an affiliate. During the period of notice prior to their resignations, the credit union asked Kanester and Willis to contact the credit union’s current group-benefits customers and encourage them to move their business to the credit union’s affiliate. Kanester and Willis refused, saying that while they would continue with their usual duties, they would not contact the customers. They explained that their intention to join Trach in his new group-benefits business would place them in a conflict of interest if they were asked to promote the credit union’s affiliate to group-benefits customers. When Kanester and Willis refused to solicit customers, the employer summarily dismissed them.

The following day, Trach, Kanester and Willis made a list of credit union clients they intended to contact. Over the next week, they called approximately 90% of the credit union’s group-benefit clients and told them that they planned to establish a new business.

The credit union brought an action against the three employees, claiming they had breached their contractual obligations and their common law duty of fidelity.

At trial, the judge found that the non-competition and non-solicitation agreement binding Trach was overbroad and not enforceable. However, the trial judge found that all three employees had breached their common law duties of fidelity and their contractual obligations under the non-disclosure agreements “by placing [the employer] in a disadvantageous position, and then using that position to obtain a head start in contacting clients.”

On appeal, the Court of Appeal held that the employees had not breached their duties of good faith and fidelity, nor had they contravened their non-disclosure agreements. They had not removed any proprietary information from the employer, and they had not contacted any former clients until after they were dismissed. The Court commented in this regard:

    A former employee, other than a senior or key employee with fiduciary-like obligations, is free to compete with his or her former employer and to make use of the knowledge and experience acquired while employed so long as he or she does not disclose or make use of the former employer’s confidential information, including customer lists removed from the former employer’s premises. However, a former employee is entitled to solicit customers of the former employer recalled from his or her memory …

Valley First Financial Services Ltd. v. Trach2004 BCCA 312, June 4, 2004