When an employee becomes a competitor

Howard Levitt explains how to prevent customers, data being stolen by stealth

Discovering its regional manager, Luis Cabezas, had been forwarding work emails to his personal account, Accreditation Canada ordered him to stop — immediately. Like many companies, it wished to secure its confidential information. Little did it know that Cabezas had already hatched a scheme to siphon business from his employer and channel it to himself and a partner, another former employee now working as a consultant.

Accreditation Canada provides advice to health-care facilities on how to achieve patient safety and attain accreditation. Cardenas’ job was to reach out to potential clients in Mexico and South America and negotiate service arrangements. In his role, he had access to highly confidential information including client details, accreditation methodologies and market strategies, as did his partner. Dissatisfied with his performance, Accreditation Canada terminated his employment without alleging cause.

As too often happens, Accreditation Canada discovered that even after his dismissal (but prior to his departure), he continued to send confidential work emails to his personal account, and claimed he was ill when he was actually in Mexico soliciting work for his newly established business, one with a confusingly similar name to Accreditation Canada. It also learned he had then diverted business to his new company and destroyed AC information in order to give his new business a competitive advantage.

Accreditation Canada sought an injunction to prevent Cabezas and his partner from using its information and soliciting its customers. The Superior Court of Ontario found both Cabezas and his partner in violation of their employment agreements and their duties to Accreditation Canada and issued an injunction to prevent them from continuing this misconduct.

What lessons can be learned from this case? First, you should have enforceable written agreements, to protect your business.

These should prohibit the disclosure of confidential information; should assign any intellectual property rights to the employer; limit solicitation of valued customers, suppliers and existing employees; and, for high-value employees such as a CEO, restrict competition.

These limitations and restrictions must be reasonable in their scope or a court will not enforce them. In that case, the employer will have to prove the employee has stolen confidential information or is a fiduciary (a very senior officer or director), which has higher hurdles than just proving a breach of contract.

To be enforceable, these agreements must be entered into before the employee begins their employment or in return for the employee receiving a promotion, raise or bonus. Having these agreements reviewed by experienced employment law counsel is essential.

Next, if you are suspicious of an existing or former employee, immediately conduct an inspection of the employee’s files and, most important, any electronic devices that can take an external storage device like a USB drive.

Also determine if the employee has deleted any company information that should be preserved. Check expense and/ or attendance records to ensure the employee has not improperly been spending company time or resources on competitive activities. Of course, any evidence obtained that shows improper conduct may also be grounds for cause and may create a claim for any damages such as lost business.

If an employee gives notice, the employer should interview them, ask about their plans and issue a caution about obligations. Some departing employees are or pretend to be blissfully ignorant of their post-employment obligations and are unpleasantly surprised to be reminded of them.

Finally, I have often sent a letter to the new employer advising them that their new hire has contractual obligations to our client, which it intends to enforce.

If the new employer has not been informed of these obligations, the new employee could be terminated for failing to disclose them.

In any event, the new employer now knows what their new employee can and cannot do. Failure by the departing employee or the new employer to abide by the employee’s obligations can lead to expensive, and sometimes disastrous, consequences for them if the former employer obtains an injunction.

Financial Post

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces. Employment Law Hour with Howard Levitt airs Sundays at 1 p.m. on Newstalk 1010 in Toronto. hlevitt@levittllp.com Twitter.com/HowardLevittLaw