eCaseNote 2007 No. 01

FREEDOM TO COMPETE NOT SO FREE – EMPLOYMENT RELATIONSHIP IS THE KEY

Western Tank & Lining Ltd. v. Skrobutan [2006] 12 W.W.R. 376

In September 2006, the Manitoba Court of Queen’s Bench released a decision on a case involving former employees of a corporation who opened a business for the purpose of competing with their former employer. We believe a brief summary would be of interest to our employer clients.

Western Tank & Lining Ltd. was in the business of selling and installing geosynthetic liners and bolted steel tanks. The defendants were all employees. Two were salesmen who worked exclusively in Manitoba. One was a field supervisor and one was an installer. In March 2006, each tendered his resignation at about the same time, giving Western Tank two weeks' notice. Prior to resigning, they entered into a partnership agreement designed to compete with Western Tank for business in Manitoba. They also purchased a company intended for use in their new venture.

The former employees had not been required to sign a non-competition clause, therefore Western Tank did not question their right to resign and start a competitive business. Western Tank did however take issue with the abrupt manner in which the defendants gave notice and began to compete.

The Court determined that the issue was whether any of the former employees were subject to a common law duty restricting the manner in which they could compete with Western Tank and, if so, whether the employees breached this fiduciary duty. The Court stated that the nature of the employment relationship determines the existence of a fiduciary duty; more specifically, whether the employer entrusted the employee with all or a significant portion of its business in a manner that has developed a relationship of dependence or vulnerability.

The Court found that the salesmen were unquestionably the face of Western Tank’s operations in Manitoba. Apart from installers, nobody else in Manitoba represented this small business to its customer base. Although they could properly be described as salesmen, Western Tank, for practical purposes, had entrusted them with its whole business operations in Manitoba. The Court was also satisfied that the former employees recognized Western Tank’s vulnerable position prior to deciding to set up a new competitive venture in Manitoba; with the goal of taking over corporate opportunities that previously accrued to Western Tank. The Court decided that the salesmen should have been governed by some basic duties of fairness and equity.

The Court also found that the salesmen were involved in the direct solicitation of Western Tank’s customers before leaving its employ, and that there was strong evidence that they attempted to destroy evidence of their pre-resignation activities by attempting to erase information relevant to their employment. They also admitted to directly soliciting some of Western Tank’s customers shortly after tendering their resignations. The Court found this to be more than sufficient evidence of a breach of fiduciary duty, and stated:

“When one person brings fiduciary duties into a partnership, all of the partners are subject to the restrictions that flow from those fiduciary duties: no partner or fellow shareholder should be allowed to profit from such a breach. That is particularly so in the present fact situation where each of the partners was an employee of the plaintiff and knew of, if not relied on, the vulnerability of the plaintiff when they commenced their new venture.”

The Court determined that the appropriate remedy was to issue an injunction against all former employees from directly soliciting Western Tank’s private customers. The Court further ordered that they not accept business from Western Tank’s private customers either directly or on behalf of another employer. This injunctive order took effect for 12 months, retroactive to the time the employees resigned and set up their competitive venture.

Readers should note that, in making this decision, the Court emphasized that not all employer-employee relationships should attract fiduciary duties. Equity will only intervene to protect a vulnerable employer when it is clear that an employee has been put in a position of trust and takes unfair advantage of that trusted relationship in order to obtain a personal benefit. When setting the length of the injunction, the Court noted that the former employees generally had the right to compete with Western Tank provided they did so fairly. The purpose of the injunction was not to prevent the employees from enjoying fair competition with Western Tank, but rather to restrict them from enjoying income that had been obtained improperly.



The comments contained in this eCaseNote provide general information only and should not be construed as legal advice or opinion. For more information or specific advice on matters of interest, please call our offices at (709) 579-2081.