Entrepreneurs beware.

By Howard Levitt
Financial Post
Feb 02, 2019

It had always been legally acceptable, in the absence of a valid non-competition covenant, to take your talents across the street. Indeed, as long as you did not take confidential documents with you, you were free to — even rapaciously — compete. And without a valid non-solicitation clause, you could contact every client you had.

Many employees received their major break when they were recruited to a competitor and took their knowledge, skills and customer relationships with them.

But that may not now be permitted

Shaver-Kudell Manufacturing (SK) is a small family-owned machine shop manufacturing metal sleeves to repair ball bearings in electric motors. It is one of three manufacturers that make this. It had 13 employees, five of whom were members of the Shaver family. Lucy Shaver was the sister of the founder, Neil, and was SK’s first employee. In her 23 years, she got to know its customers well.

About five months after leaving SK, after being laid off and deciding not to return, she, along with her husband, joined the newly formed Knight Manufacturing (KM) as a telemarketer and sales representative, immediately reconnecting with the customers with whom she had interacted for two decades. Many of them then transferred their business to her and her husband’s new employer. Lucy’s husband had operated an unrelated business from SK’s facility and was a trained machinist who learned its processes.

KM adopted the same manufacturing processes as SK in its competing shop. Indeed, the founder of KM set up business with Lucy’s husband and employed Lucy because their knowledge of SK’s manufacturing process would allow KM to operate successfully. The court therefore found that KM and its principals had committed a breach of confidence and misappropriated SK’s trade secrets. They had access to SK’s processes and secrets under the presumption that they would keep them confidential. That portion of Justice Robert Smith’s decision was unsurprising.

The more revelatory aspect of the case flowed from Lucy’s contacting of SK’s customers.

There was no evidence that she took any customer list. She did not need to. The court found that relying on her knowledge of the customers from 23 years of working with them was tantamount to taking a customer list.

All employees have a duty of confidentiality. More senior executives have an even greater fiduciary duty of the utmost good faith to their employers, even when departing.

Lucy was not a senior employee and was not a fiduciary. But she still had a duty not to use the confidential information of her former employer’s customers to solicit them, even without having purloined confidential documents and even in the absence of a non-solicitation clause. She knew the customers, they knew her by name and she knew the quantities that they ordered and their payment history as result of having performed SK’s accounts receivable work.

In addition to KM recovering its damages, the defendants were required to reimburse it $390,000 for costs.

What lessons does this impart?

It will put a chill on employees who leave one employer to join a competitor. They must be wary of using their personal relationships with customers gained from the previous employer to solicit on behalf of the new one.

It is always useful for employers to have their employees sign non-solicitation covenants. But this decision suggests that, even if they do not, they may not be without a remedy.

This will doubtless cause employers to think twice before hiring new sales employees and concomitantly, will render Canadian sales employees much less marketable than they have heretofore been.

It will surely lead to a rash of new lawsuits.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces.