If an employee is not 'given scope or discretion to exercise authority or influence, it's unlikely they're considered a fiduciary,' says lawyer
A worker was not a fiduciary employee but breached his normal duties of loyalty and fidelity when he resigned and took company documents with him, an Ontario court has ruled.
However, the employer wasn’t able to prove it suffered any losses from the worker’s breach, so the court declined to award any damages.
Fiduciary employees are those who are integral to a company’s management team, according to Jeff Rochwerg, an employment lawyer at Turnpenney Milne in Toronto.
“When an employee isn’t on the management team and is instead taking directions from them, it's unlikely they'll be seen as a fiduciary or key employee,” says Rochwerg. “[Courts] look at whether the employee is involved in decision-making processes, and if they’re not at the management table or been given scope or discretion to exercise authority or influence, it's unlikely they're going to be considered a fiduciary.”
Small company
Titus Steel Company was a small business specializing in steel products in Mississauga, Ont. The company hired the worker in 2001 as director of sales, reporting to his father, who was vice president of Titus.
The worker started a side business, Dynamic Steel, to address the growing demand for armored vehicles, with Titus’ consent. The new company purchased and developed bulletproof steel to customers’ specifications. In 2004, the worker sold Dynamic Steel to Titus.
Also in 2004, the worker’s father retired and the worker became vice-president of the Dynamic Steel division. His responsibilities remained primarily sales in that division, while other executives took on the duties his father had fulfilled. The worker’s salary remained the same with higher commissions, while the director oversaw and directed the worker’s activities.
In 2015, the worker’s income decreased and he became unhappy with his relationship with the director. He also became more stressed, so his wife incorporated a numbered corporation – later named Progressive Armor - with the worker as the director.
In early 2016, Titus sold steel to a customer with specifications that it had to stop a 9 mm bullet. The company provided a ballistics report verifying that the steel met the specifications, but the worker later admitted he falsified the report. He claimed that the director told him to do it, but the director denied it.
Resignation
In early 2016, the worker had a dispute with the director over product for a client. They met on March 7 and the worker resigned from his position.
Titus retained an IT consultant to prepare the worker’s desktop computer for another employee. The consultant reported that it looked like it was missing files, and a review of the customer database revealed missing information.
The worker returned the laptop he had used for work at the company’ request, admitting that he had used a program to remove his personal data and he had backed up some corporate data. He denied deleting any Titus information.
On March 22, Titus discovered evidence that the worker had copied and downloaded confidential and proprietary information. The company demanded that he return the data or face legal action.
The worker replied that he had backed up the files as part of his regular practice and returned a flash drive that included more than 1,000 files copied from his laptop and desktop.
Competitor business
On March 29, Progressive Armor set up a business account and began operations. The worker solicited a supplier he had met with in February for Titus and entered into an exclusive supply agreement with it. Two other Titus customers contacted him and purchased product from Progressive Armor.
In December, the worker agreed to pay Titus more than $9,000 to address computer replacement costs and fees for database recovery. According to Titus, it was able to recover documents from the flash drive, but it was still missing 108 client files and other information.
Titus launched legal action against the worker, claiming that he breached his fiduciary duty by establishing a competing company. It also accused the worker of breaching his employee duties of good faith, loyalty, and fidelity by competing against Titus and misappropriating its confidential business information. The company also complained that the worker committed grossly negligent misconduct relating to the falsified ballistics test.
Soon after, Progressive Armor filed for bankruptcy.
The court noted that for an employee to be a fiduciary, they have to have “scope for the exercise of some discretion or power” that they can unilaterally exercise to affect the employer’s interests, and the employer must be “peculiarly vulnerable to, or at the mercy of” the employee holding that power.
No fiduciary duty
The court found that, although the worker held the title of vice-president, he didn’t have high-level managerial responsibilities. He remained primarily in sales and he had little power to make decisions that affected the company, as the director oversaw nearly everything he did, said the court, adding that his title only applied to the Dynamic Steel division.
As a result, the court determined that the worker wasn’t a fiduciary employee. However, even if the worker was a fiduciary, the court said that he wouldn’t have breached any fiduciary duty. The supplier he solicited was one of many Titus used and there was no evidence Titus was unable to source product from its other suppliers or it suffered any losses. In addition, there was no evidence the worker solicited any Titus customers – the two he did business with contacted him, the court said, adding that the worker’s business ultimately wasn’t successful so there was no evidence Titus lost customers or profit.
“You can't just look at the employee’s title alone to determine whether or not they're a fiduciary, you have to look at what their actual responsibilities are,” says Rochwerg. “And the court found that the worker was a salesperson - typically, employees with sales roles are rarely fiduciaries, and even though all employees owe obligations of fidelity and loyalty to the employer, only fiduciary employees will owe these expanded fiduciary obligations.”
As for the regular employee duties of loyalty and fidelity, while the worker’s wife incorporated Progressive Armor when he was still employed with Titus, he didn’t actively do anything, such as solicit the supplier, until after he resigned, said the court.
Breach of duty of good faith
However, when it came to the documents, the court found that there was evidence the worker copied and kept them, even though he returned some information at the company’s request. This was a breach of the worker’s post-employment obligations, said the court.
The court also found that the worker’s payment of more than $9,000 for the costs of replacing his computers “demonstrates a consciousness of guilt.”
The court found that only two of the more than 1,000 business documents contained confidential information. Since the worker’s own company went out of business and there was no evidence that Titus suffered any losses from the worker having this limited information, there was no tort of breach of confidence, said the court.
“The court was looking for anything in the documents that could give the worker or the worker’s next employer a competitive advantage or put them in a position where they could harm the employer’s business,” says Rochwerg. “To succeed in these court actions, not only does an employer have to show that there was a breach, but they also need to show that there were damages flowing from that breach.”
“A court isn't going to award an employer damages in a vacuum without any evidence of actual damage suffered,” he adds.
No evidence
As for the worker’s alleged willful misconduct around the falsified ballistics report, the worker and the director offered conflicting evidence, of which neither were particularly credible, said the court. Since the burden of proof was on Titus, the court found no evidence supporting the claim.
The court determined that the worker wasn’t a fiduciary employee, but he breached his normal employment duties of good faith, loyalty, and fidelity by copying and keeping numerous business documents after he resigned. However, Titus failed to prove any losses from the worker’s misconduct. The worker was ordered to return all of the documents to Titus within seven days with no further damages awarded.
This case can serve as a caution for employers to frequently remind employees of their obligations when employment ends, according to Rochwerg.
“Some employers will have a new employee sign an acknowledgement or agreement saying that when the employee eventually departs employment, they're required to return all company property,” he says. “But even in the absence of an agreement on the front end of the employment relationship, employers can still have employees acknowledge that they've returned all property, including hard copies and email copies, and they haven't taken any information with them.”
“If an employee is acknowledging that they've complied with all their obligations and then there's evidence down the road that they haven't, those representations can assist the employer in the event of a breach.”
