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Posted on February 21st 2006 in Legal Articles

Duties of Departing Executive Employees

Duties of Departing Executive Employees

Executive employees owe their employer a duty of loyalty as well as a fiduciary duty.

The fiduciary duty arises when an employee is in a position of trust vis-a-vis the employer. Top management and other executives assume this mantle since they are normally charged with an initiative and responsibility far greater than the ordinary employees. They must act in a loyal manner, in good faith and avoid self-interest or situations which precipitate a conflict of duty.

To determine whether a fiduciary duty exists, courts look beyond an employee’s title, to the actual degree of authority and control that the person has over the employer’s affairs.

These obligations continue not only during the term of employment but subsist even after the employment relationship has terminated. They exist in the absence of a specific written agreement in restraint of trade or competition.

The former employee is not prohibited from joining a competitor or making use of the skills and general knowledge accumulated during the period of employment. However, he or she is under an obligation to refrain from directly soliciting clients of the former employer for a reasonable period of time following the termination and/or from using confidential information.

These issues were recently addressed in the case of Sanford Evans List Brokerage v. Trauzzi, et al.

Sanford Evans List Brokerage v. Trauzzi, et al.

Linda T. began her career at Sanford Evans as a secretary. Over the years she rose through the ranks and eventually became an officer of the company and the manager and vice-president of the list brokerage division. In that role, she was responsible for managing day-to-day operations. She was a key employee with extensive knowledge and responsibility in all aspects of the Sanford Evans operations.

In 1988, the company was bought out by Quebecor. Despite Linda T.’s allegations to the contrary, her overall role and mandate with the company did not substantially change, nor was there any fundamental effect on her authority.

Lisa M., the office manager, and Rosalyn D., a junior sales trainee and sales account representative, also played important roles on the Sanford Evans team.

During the Fall of 1991 and while still employed with Sanford Evans, Linda T. entered into talks with Watts to form a competing company. Ultimately, she, Lisa M., Rosalyn D. (both of whom had been recruited by Linda T.) and Watts Distributors formed a new company known as Watts List Brokerage.

They immediately and aggressively began to solicit business for the new company. This campaign included a letter from the CEO of the Watts Group, which was sent to the entire trade announcing the change and soliciting their continued business. In addition, the three employees began contacting former clients to announce their move.

During Watts’ first year of operation, 84% of its business involved former clients of Sanford Evans. For its part, Sanford Evans experienced lost income in the amount of $500,000.

The Lawsuit
Sanford Evans sued its three former employees as well as Watts for the losses it had suffered. It claimed that by reason of their activities, they had breached their fiduciary duties of loyalty and good faith to Sanford Evans. Sanford Evans was victorious and was awarded damages.

The Court’s Reasons
The Court found, that at the time of her resignation, Linda T. stood in a fiduciary position within Sanford Evans. This finding was based on her power and responsibility with Sanford Evans. Lisa M. and Rosalyn D. were also fixed with fiduciary responsibility.

The court also found that all three had breached this fiduciary duty by having chosen to place their own self-interests above that of their former employer. They accepted the offer from Watts long before they had tendered their resignations. Immediately following their departure, they embarked upon a deliberate campaign to solicit former clients of Sanford Evans, and diverting their business to Watts. By engineering a situation favourable to their new company, they had failed to act in good faith and had prejudiced Sanford Evans.

The Damages
In assessing damages, the court found that in the circumstances, Sanford Evans had done all it reasonably could have done to sustain its list brokerage business and mitigate its losses. The Court accepted that it had suffered a $500,000 loss.

In determining the actual quantum of damages, the court took into account that
o some of the clients would have stayed with Sanford Evans had Linda T. stayed during the transitional period,

– a certain quantity of business would have been lost by attrition even had there been no breach,

– the usual risks of commerce endemic to the particular industry, and

– the overall economic downturn in the 1990’s.

Based on these factors, the figure of $500,000 was discounted by 60% and Sanford Evans was awarded $200,000.

Damages were awarded against all four defendants on a joint and several basis and were allocated in accordance with their respective shareholdings in the new company.