Professional Management Advisors Associates, Inc.

What kinds of duties do employees owe their employer after leaving? In this article, I’m going to discuss what, if any, types of duties an employee owed towards a former employer with respect to CONFIDENTIAL INFORMATION, NON-COMPETES, and NON-SOLICITATION. Now, I’m going to be discussing these things OUTSIDE OF A WRITTEN CONTRACT.

In other words, I’m going to be talking about common law (i.e. judge made law). You see, if these things are dealt with in a written agreement (e.g. employment agreement or employee termination agreement), then a breach of this agreement could result in a breach of contract – which is enforceable in court. But what if NO written or oral agreement existed to deal with things like confidential information, non-competes and non-s0liciations? Well, that’s where the common law comes into play. So let’s delve into it, shall we?

Employee’s Duty of Confidentiality In Hub Financial Inc. v. Molinaro, [2002] O.J. No. 2846, the Ontario Superior Court of Justice had to deal with a claim against registered insurance brokers for breaching their fiduciary obligations and duties of confidentiality towards their former employer. There was no specific agreement with their former client; the insurance brokers had been able to carry out their activities with a large degree of independent. When the client unilaterally increased its shares of the commissions, the relationship with the brokers was terminated. But there was no agreement or discussion about the respective rights of the brokers at any point.

Overall, Cullity J. found that the brokers were entitled to compete with the client and that they could solicit business from the clients they had recruited. There was also no common intention that certain information which the brokers acquired (e.g. client lists, policies of the client) should belong to the client. So no duty of confidentiality existed either. Indeed, the court found that the brokers were not prevented from using that information after their association with the client had ended.

Duty of Confidentiality
Now what’s important here is some of the things which Cullity J. wrote in getting to these conclusions. First, with respect to the duty of confidentiality, Cullity J. found that a combination of factors which existed in that particular case warranted NO DUTY on the part of the brokers to hold information in confidence. Those factors included:

* The brokers were NOT employees of the client (they were independent contractors);
* The information was obtained by the brokers and largely at their expense;
* The information related only to clients recruited by the brokers; and
* The information was acquired for the mutual benefit of all parties through an equal sharing of commissions.

Based on these and other factors, the court concluded that there was no COMMON INTENTION that the information should belong to the plaintiff and no rational basis for IMPUTING such an intention. Co-ownership, rather than exclusive ownership, of the information was the more appropriate analogy.

Cullity J. also mentioned that, because the client unilaterally changed the relationship with the brokers (leading to a fundamental breach of that relationship, which entitled the brokers to treat the contract as coming to an end), the brokers were no longer bound by any duties of confidentiality which may have previously existed.

So at the end of the day, the Court concluded that the facts (e.g. agreements, understandings, expectations, industry standards, etc.) warranted an obligation on the brokers to keep the information confidential after their relationship with the client had terminated.

Non-Compete and Non-Solicitation
With respect to whether the brokers could compete with the former client and solicit the same customers, the Court concluded that they COULD DO SO. Why? Well, it has to do with the specific facts of that case. The relationship between the brokers and the client was one of independent contractor and client, not of employee and employer. The brokers were free to carry on their own business for their own benefit and were expected to do so. They earned based on their own efforts. Their clients were as much their own as the clients’. Once the association with the client terminated, the brokers were free to compete and solicit the same clients in the same market place. There was also no contracts, agreements, or understandings to the contrary that would impose such restrictive covenants after the association was terminated.

So when could restrictive covenants be imposed? Well, if there is a fiduciary relationship between the parties (e.g. senior employees and an employer), then the employee may owe duties of good faith, loyalty, avoiding conflicts of interest, etc. to the employer after their relationship ends. This means that restrictive covenants may be enforced in these circumstances. So when will a fiduciary or special trust relationship exist? Well, it depends on factors such as the employee’s discretion and influence and the employer’s vulnerability and trust. For example, a fiduciary duty may be imposed on a former employee if he or she had considerable discretion or power, was high up in the employer’s organization, the employer was vulnerable to the loss of that employee, and the employee was employed for a longer period of time. These factors would tend to make the employee a “FIDUCIARY” employee, instead of an “ORDINARY” employee (who have less onerous post-employment obligations, if any, than a “FIDUCIARY” employee).

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to drafting non-compete agreement, questions about their validity and enforceability, or resolving disputes about confidentiality, non-solicitation, or non-compete clauses, you should seek professional assistance.