Corporate espionage alleged in railway dispute

Are restrictive covenants effective?
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 11/23/2015

Canada’s two major railway companies are engaged in a feud over alleged corporate espionage, illustrating the challenges for employers when employees leave — and competition and confidentiality are on the line.

Canadian National Railway (CN) is alleging one of its former employees shared secret customer information with Canadian Pacific Railway (CP) to help lure clients and win market share, according to the Globe and Mail.

In the suit, CN says it lost revenue and market share to CP after confidential customer contracts, pricing information and the corporate business plan were downloaded by Greg Shnerer, who then quit and went to work for CP. CN says a CP manager encouraged or directed Shnerer to take the confidential data, in violation of CN’s employment agreement.

CN is looking to stop CP and its employees from using the information to solicit the business of any customers involved, a return of the “unjust gains” CP made as a result of the information and $2 million in damages, said the Globe.

In response, CP said it will defend itself against the allegations and the client information is no longer available to CP employees or it was already available from customers.

When it comes to this kind of activity, there are insiders who target their own company, outsiders who target different companies, and then there’s a third group, which is growing, according to Eric Shaw, president of Consulting and Clinical Psychology in Washington, D.C.: “Insiders and outsiders combining, so it might be that an outsider would locate and co-op an insider or an insider who’s become disgruntled might co-op an outsider.”

There’s nothing stopping an employee from resigning from her employment, going to the competition and going after your customers, according to Stuart Rudner, founding partner at Rudner MacDonald in Toronto.

“However, there are duties of confidentiality which survive the end of the employment relationship and they can’t take confidential information and either use it to their advantage or give it to somebody else who can then use it to their advantage. 

“That’s where this case, if the allegations are true, might be different from the typical case where someone just leaves and goes to a competitor.”

Executive poaching is always a concern, and if people start stealing trade secrets and confidential information, the court has put inherent value on that proprietary information, said George Avraam,  partner at Baker & McKenzie in Toronto.

“It’s still their property so injunctive relief is all the more so appropriate in those cases because you can’t even quantify it, what the money is,” he said.

“If there’s a proceeding, ultimately, you may win on the liability aspect but not necessarily on the damages aspect. But if the objective is to get the documents or the property information back, most employers don’t care about the damages, they want the property back, so you bring an injunction trying to get that… What you want is the destruction and them not using it.”

Restrictive covenants

Many organizations try to add protection by using restrictive covenants such as non-competition clauses or non-solicitation clauses in employee contracts or agreements. But these are not foolproof.

“What’s interesting and comes as a surprise to many people is, generally speaking, non-competition clauses will not be enforced in Canada. The courts see them as too much of an infringement upon an individual’s ability to have a living,” said Rudner.

Generally, the courts have said they’ll only enforce restrictive covenants if they are reasonably necessary and the terms are reasonable, he said.

“Non-competes usually fall by the wayside because the courts say they’re not reasonably necessary, and what they’ll say is you as an employer should be able to protect yourself by having a non-solicitation clause, which doesn’t prevent your former employee from going to a competitor but it does prevent (those particular claims) for a certain period of time.”

If you ask for too much, the court won’t fix it, said Rudner: “They will just strike out the clause.”

The courts are loath to enforce non-competes — they view them as a restraint of trade, depriving people of the ability to work, said Avraam.

“What the courts have said is there are other tools you can use in contracts: protection of confidential information in a contract; non-solicitation of clients and employees. And, candidly, those are good to have in paper because parties are attuned to it. But you don’t need a contract to prevent somebody from stealing your information and using it elsewhere — it’s just pure theft, is what it is.”

Most employers still use some form of non-competition because the courts haven’t said they’re always unenforceable, they’re just difficult to enforce, he said. So employers would want some kind of non-competition clause that is not too long or too broad in terms of scope, particularly for executives.

And if an employer is dealing with an executive who is likely to have fiduciary duties that survive either a termination of employment or resignation, employers still have the tools, even without a contract, to bring litigation forward and seek an injunction, said Avraam, such as confidential information going to a new employer.

“In some ways, it’s actually easier when it’s an executive because of the fiduciary duties owed.”

It’s not uncommon for a former employer to send a cease and desist letter to a former employee and essentially warn her it is aware or suspects she is breaching its restrictive covenant and it is going to monitor the situation and take appropriate action if necessary, he said.

“In some cases, it’s a bluff; in some cases, the company knows that it won’t be enforceable but they’re just hoping to intimidate the employee; and, in other cases, they’re legitimately waiting to see if there is loss and if so, then they’ll pursue it in court.”

To have any legal cause of action, an employer has to show the defendant breached some sort of legal obligation and it suffered some damages or loss as a result, said Rudner.

“Sometimes, you see situations where an individual has a non-solicitation clause and they left and were blatantly soliciting clients but none of the clients actually followed them, so the former employer is going to have a hard time proving damages. They might be able to if they can show that it damaged their reputation or made some people less willing to do business with them in the future, but it’s a much more difficult claim to prove if you really didn’t lose anything.”

Other safeguards

Aside from legal safeguards, there other ways employers can try to combat potential espionage. For one, maintaining good relationships, said Rudner.

“Organizations really expose themselves when they don’t have their own relationship with a customer and the only person that the customer knows is one individual who may leave, so… protect yourself by cultivating your own relationships with customers.”

People often steal what they have access to every day, so if they’re disgruntled and planning to leave, they might take the stuff they’re working with, which is why it’s important to do a risk assessment, said Shaw, who investigates insider cases.

“It undermines a lot of what we call DLP or data loss prevention technology because it’s looking for people who have unusual activity... if I’m a personal banker at a large company, I’m interacting with my clients and their accounts on a daily basis. But if I get disgruntled and leave, it doesn’t look unusual for me to be interacting with those accounts, so it’s not going to register on a technical system.”

Increasingly, the focus is on managers and HR staff to recognize disgruntlement, recognize people at risk and work with security and others to intervene early, said Shaw, adding he works with software that picks up dissatisfaction in online communications.

“If you even get a whiff that someone’s thinking about leaving, you want to look at their copying, downloading, etcetera, to see if it’s unusual. That’s become almost universal now,” he said. “A lot of people attack after termination because they still have access, so that’s another area where HR could be a big player is helping people do assessments of risk before they take personnel actions.”

It’s also about keeping employees happy, said Rudner.

“Occasionally, I have calls from employers who complain a competitor is coming in and poaching their best employees and, of course, they want us to take immediate action to stop that, which is often not possible. One of the things I say is ‘The best way to prevent it is to keep your employees happy.’”

Ideally, employers want to keep their talent but they still need those safeguards, said Avraam.

“You can try to keep a director happy all they want but if there’s an opportunity (for them) to become a VP somewhere else, they have career aspirations.”

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