The recent decision by the Ontario Court of Appeal in Total Meter Services Inc. v. GVM Integration serves as a critical reminder for Ontario businesses about the legal ramifications that can arise when key employees leave and subsequently compete with their former employers. This case delves into significant areas of employment law relevant to Ontario businesses, including the breach of fiduciary duty, the misuse of confidential information, and the often-overlooked importance of adhering to statutory limitation periods. Understanding the nuances of this case can provide valuable insights into protecting your business interests when faced with similar situations.
Alleged Misappropriation of Employer’s Proprietary Software and Solicitation of Customers
The case revolved around a former software developer and manager (the employee) at Total Meter Services Inc. (the employer). After resigning from his employment in November 2012, the employee continued to work for the employer as an independent contractor for a brief period, maintaining access to the company’s sensitive information, including its software, customer lists, distributor networks, and sales data. His engagement as an independent contractor concluded in May 2013.
The crux of the employer’s legal action against the employee and his company, GVM Integration, was the allegation that the employee had misappropriated the employer’s proprietary software to develop competing products. The employer further claimed the employee had improperly used the employer’s confidential information to solicit its distributors and clients, directly undermining the employer’s business.
Trial Judge Finds Breach of Fiduciary Duty and Confidence
At trial, the presiding judge found the employee and GVM Integration liable for both breach of fiduciary duty and breach of confidence. The trial judge determined that the employee, as a key employee, owed fiduciary duties to the employer. According to the court, this duty was breached when the employee secretly pursued business opportunities that should have rightfully belonged to the employer. The act of copying the contents of his work laptop onto his personal device before his departure was also considered a significant factor.
Furthermore, the trial judge concluded that the employee had breached his duty of confidence by utilizing the employer’s confidential information, particularly the source code of its software products, to create competing offerings. The court also highlighted the employee’s wrongful exploitation of his insider knowledge about the employer’s vulnerabilities to strategically launch GVM into direct competition, effectively gaining an unfair “springboard” advantage. As a result of these findings, the trial judge awarded the employer $750,000 in damages, based on the disgorgement of profits earned by the employees through their unlawful actions.
The Appeal: Challenging the Adverse Inference and the Limitations Defence
The employee and GVM Integration appealed the trial judge’s decision on two primary grounds. First, they argued that the judge had erred in drawing an adverse inference against the employee regarding the development of the GVM software using the employer’s source code. Second, they contended that the trial judge had failed to address their defence that a portion of the employer’s claim, specifically concerning business opportunities with a client named Total Control Systems, was barred by the Limitations Act of Ontario.
The Importance of Disclosure
The Court of Appeal rejected the employee’s argument regarding the adverse inference. The trial judge had drawn this inference due to the employee’s failure to adequately produce relevant documents during the discovery phase of the litigation, as mandated by Ontario’s Rules of Civil Procedure. Specifically, the source code for the GVM software produced was predominantly in the C# programming language, while the employer’s software was written in Visual Basic. The expert evidence confirmed that this discrepancy rendered any meaningful comparison of the source codes impossible.
Employee Rewrote Software Code to Cover His Tracks
The employee argued that there was no basis to infer that a significant amount of Visual Basic source code had been withheld. However, the Court of Appeal disagreed, emphasizing the trial judge’s reliance on the testimony of Bryce McKiernon, a former Total Meter Services Inc. employee hired by GVM. Mr. McKiernon testified that the appellant employee initially wrote the GVM software in Visual Basic and subsequently tasked him with converting it to C#. The trial judge accepted Mr. McKiernon’s evidence that this conversion was partly intended to obscure the employee’s tracks. Consequently, the original Visual Basic source code should have been available for production during discovery.
The Court of Appeal found that this evidence provided a sufficient basis for the trial judge to draw an adverse inference against the employee’s credibility due to the non-production of the GVM source code in its original Visual Basic format. The appellate court underscored the deference owed to a trial judge’s credibility assessments, finding no “palpable and overriding error” in this instance.
Employer Had Put Employee on Issue of Incomplete Disclosure
Furthermore, the Court of Appeal dismissed the employees’ claim of procedural unfairness. The employer had raised concerns about the incomplete disclosure of the GVM source code well before the trial. Therefore, the employee was on notice of this issue and had the opportunity to address it. The employer continued to raise the issue during the trial through cross-examination without objection from the employee. The Court of Appeal concluded that the employee could not claim unfairness when the issue of incomplete disclosure had been raised and pursued throughout the litigation process.
The Limitation Period Defence: A Critical Oversight at Trial
However, the Court of Appeal found merit in the employees’ second ground of appeal concerning the Limitations Act. The employer’s initial claim, filed in 2014, alleged breach of fiduciary duty, breach of confidence, and breach of contract, focusing on events around the employee’s departure in November 2012 and his subsequent actions.
In September 2020, the employer amended its claim to include allegations that the employee had breached his fiduciary duties by appropriating corporate opportunities related to the Total Control Systems account. These actions allegedly began in October 2012, while the employee was still an employee of the employer. While the employee consented to the amendment, he explicitly reserved his right to argue that this new claim was statute-barred.
Despite the employee raising this Limitations Act defence at trial, the trial judge’s reasons for judgment made no mention of it. The Court of Appeal found this to be an error. The appellate court stated that the presumption that trial judges know the law and a general reference to reviewing submissions could not substitute for a specific consideration and decision on a pleaded defence.
A New Cause of Action: The Significance of Factual Allegations
The central question for the Court of Appeal was whether the Total Control Systems Opportunities claim constituted a “new cause of action” for the purposes of the Limitations Act. Under Ontario law, amendments introducing a new cause of action after the expiry of the limitation period are generally not permitted. The court emphasized that a “cause of action” refers to the underlying factual situation that gives rise to a legal remedy, rather than just the legal label attached to the claim (e.g., breach of fiduciary duty).
The Court of Appeal meticulously compared the factual allegations in the original claim with those in the amended Total Control Systems Opportunities claim. The original claim focused on the employee’s actions after his employment ended, involving the alleged misuse of the employer’s existing software and the solicitation of existing clients. In contrast, the Total Control Systems Opportunities claim centred on the employee’s conduct while still employed by the employer, specifically his alleged secret dealings with Total Control Systems to secure a new software development opportunity (TCSHUB) related to TCS’s TCS3000 register, thereby depriving the employer of this potential business.
Considering the distinct timelines, the specific client involved (Total Control Systems, which was not mentioned in the original claim), and the focus on a specific new business opportunity rather than the exploitation of existing software and client relationships, the Court of Appeal concluded that the Total Control Systems Opportunities claim was indeed a new and factually distinct cause of action.
The Impact of the Limitation Period: Reducing the Damages Award
Given that the Total Control Systems Opportunities claim was discovered no later than May 8, 2013, and was not formally pleaded until September 2020 (more than two years later), the Court of Appeal found that this claim was statute-barred under the two-year limitation period stipulated in section 4 of the Limitations Act.
As a result, the Court of Appeal partially allowed the appeal. Recognizing that the trial judge had awarded a lump sum of damages for both the original claims and the statute-barred Total Control Systems Opportunities claim, the appellate court sought to isolate the portion of the damages attributable to the latter.
The employer’s expert had estimated the profit earned by the employees from the Total Control Systems contract to be $305,360, contributing to a total damage estimate of $989,942. The trial judge, however, awarded $750,000, representing approximately 75.76% of the expert’s total calculation. The Court of Appeal applied this same percentage reduction to the portion of the expert’s estimate related to the Total Control Systems contract ($305,360 x 0.7576 = $231,340.74). This amount was deducted from the trial judge’s original damage award of $750,000, resulting in a revised damages award of $518,659.26, plus pre-judgment interest calculated on the reduced amount. The employee was also awarded the costs of the appeal.
Key Takeaways for Ontario Businesses
The Total Meter Services Inc. case offers several crucial lessons for businesses operating in Ontario.
Fiduciary Duties of Key Employees
Senior employees and those in positions of trust owe significant fiduciary duties to their employers. These duties extend beyond simply not competing unfairly after departure and can include an obligation to act in the employer’s best interests while still employed, including not appropriating business opportunities.
Protection of Confidential Information
Businesses must proactively protect their confidential information, including software, customer data, and strategic plans. Clear policies, confidentiality agreements, and controlled access are essential. Former employees’ misuse of such information can lead to significant legal repercussions.
Importance of Timely Legal Action
The Limitations Act sets strict deadlines for commencing legal proceedings. Businesses must be vigilant in pursuing potential claims within the prescribed two-year period from the date of discoverability. Delaying legal action can result in otherwise valid claims becoming statute-barred.
The Nuances of Amending Claims
While amendments to pleadings are often permitted, introducing entirely new causes of action after the limitation period has expired can be problematic. Ensuring that the initial pleadings adequately capture the factual matrix underlying all potential claims is crucial.
The Significance of Discovery Obligations
Full and honest disclosure of relevant documents during the discovery process is paramount. Failure to comply with these obligations can lead to adverse inferences being drawn against a party’s credibility at trial, potentially impacting the outcome of the case.
Baker & Company: Toronto Employment Lawyers Providing Top-Tier Advice on Breach of Employee Fiduciary Duties
At Baker & Company, our employment lawyers offer comprehensive legal support to both employers and employees at every stage of the employment relationship, from recruitment and onboarding to workplace management, discipline, and termination. We regularly advise on employment contracts, breach of employees’ fiduciary duties, non-solicitation issues, workplace policies, disability and medical leave, human rights concerns, employee health issues, and matters involving termination and wrongful dismissal. To discuss your employment law matter, please call us at 416-777-0100 or reach out online.
