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Competing with former employers

competing

Image taken from: www.aremploymentlaw.com

The question of whether employees can compete with their former employers has been litigated extensively over the last number of years. The courts have considered questions of fiduciary obligations, confidentiality, and contractual obligations in determining whether or not a given employee is free to compete with her former employer. Courts have generally come down on the side of freedom to compete in circumstances where the employee was not a senior employee and had not signed an employment contract that prohibited competition.

In a recent decision released on May 14, 2010, the Ontario Superior Court once again considered these issues in a case dealing with the obligations owed by professionals employed by a professional firm. In this case, a group of professional engineers left their employer to open a competing practice.

None of the departing employees were officers or directors of the employer, although one of them had held that position some years prior. In this case, the departing professionals had obviously received legal advice, as they made all efforts to smooth the transition and assist their former employer in continuing with its business. In particular, the former employees met with the president of the plaintiff company to review the respective projects on which they were working and discussed what needed to be done in the future.

In determining whether to prevent the employees from continuing with their new practice the court first found that, while there is an obligation on employees to provide reasonable notice of their departure, failing to do so is not a breach of fiduciary duty. The court also found that the four to five weeks’ notice of departure given by these departing employees was reasonable in the circumstances.

The court then went on to consider whether the employees breached their fiduciary duties by secretly planning to establish their competitive business. The court rejects this argument holding that merely planning to open a competitive business is not sufficient to breach any duties. The court found that employees in this circumstance were entitled to take preliminary steps to set up their businesses, particularly when they did so on their own time.

The court did give the employer one small victory. The court held that solicitation of clients by departing employees is unfair as it prevents the former employer from solidifying its relationship with those clients in order to continue with its business. However, in this case the court refused to enjoin such solicitation as it held that the plaintiff had not provided any evidence from any of its clients that they were, in fact, being solicited. This reflects a general problem in such litigation in that employers seeking such orders are reluctant to involve their clients by obtaining Affidavits from those clients as to the efforts made by the departing employees to solicit their business.

Finally, while the court held that the “corporate opportunity doctrine” precludes a fiduciary from usurping a “maturing business opportunity which his company is actively pursuing”, there was no evidence in this case that the employees had, in fact, done so. The court therefore rejects the plaintiff’s request for an injunction or damages and dismissed the claim.

It is interesting to note that the court made it clear that had there been an enforceable contractual prohibition against competition, the decision might have gone differently.

Earl Altman
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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