'You can't come along after the fact and expect this stuff to be enforceable in court,' says lawyer, offering tips for HR
“You've always got a contract with a worker - it'll be an oral contract or a written contract, or a hybrid of both, and it'll be an employment agreement or an independent contractor arrangement, but you've always got this set of terms, whether they're written down or not.”
So says Richard Johnson, a partner at Ascent Employment Law in Vancouver, after a British Columbia tech company won $800,000 in damages for breach of confidentiality against a former employee but had its non-competition and non-solicitation clauses tossed out.
Eric Liu and Jack Jia both worked for a Chinese cybersecurity company and were transferred to the company’s Vancouver office.
In 2014, Liu left his position to develop “anti-drone” wireless technology on his own. He founded Skycope Technology in 2016. Jia contributed $10,000 to Skycope’s startup costs in June 2016. They discussed terms relating to his salary, job title, and equity interest if he moved to Skycope and, in October 2016, Jia left his employment and joined Skycope as its chief technology officer. He signed an employment contract with a non-competition clause and a non-solicitation clause.
The non-competition clause restricted Jia from engaging in “any undertaking or business in North America or Asia” that developed, manufactured, or marketed drone defending technology or internet-of-things security solutions for 12 months after termination of employment with Skycope.
Liu and Jia hired a technical team that all had access to a source code for the anti-drone software.
Dismissal without cause
However, the friendship between Liu and Jia deteriorated and, on Dec. 13, 2017, Liu terminated Jia’s employment without notice, offering two weeks’ pay and a repayment of the $10,000 contribution to Skycope. Jia refused to sign the termination letter or accept the payments. He also didn’t return a company laptop that had a copy of the Skycope source code on its hard drive.
Three members of Jia’s team resigned over the next two months.
In March 2018, Jia incorporated his own company, Bluvec, to develop wireless security products including anti-drone technology. His former team members who had left Skycope joined Bluvec and the new company soon developed similar anti-drone defense products.
Skycope sued Jia and the others for using its confidential information to compete against Skycope, breaching their common law and contractual duties of confidence, as well as the non-competition and non-solicitation provisions of their employment contracts.
Jia counterclaimed for wrongful dismissal and an ownership interest in Skycope from his contribution.
Oral employment agreement
The court found that Liu and Jia agreed orally to essential terms of Jia’s employment with Skycope such as his salary and job title before Jia left his previous job and before he signed the employment contract. They also agreed that Jia would get an equity interest in Skycope with his contribution, of which a July 2016 email from Liu set at 30 per cent. The court also found that it was “inconceivable” that Jia would have left his job without having an agreement about his employment and equity interest. Liu and Jia had a binding oral agreement for Jia to work for Skycope, leading to Jia immediately becoming the chief technical officer when he quit his other job, said the court.
Since there was an oral contract in place, the written contract signed in October 2016 was a modification of the employment agreement and required fresh consideration, said the court. As a result, the court found that the written contract was unenforceable.
This highlights a common problem with small startup companies when they’re trying to recruit talent, particularly in the technology sector, says Johnson.
“This is always the conundrum – the proverbial cart’s put before the horse and the employer just wants to get the talent, they try to get them into the fold, but they don't document it adequately,” he says. “They plunk a contract down at some point after that with the terms, but you can't come along after the fact and then expect this stuff to be held to be enforceable in court - you've got to do all of that before the hiring process and put consideration in place for them to be binding terms.”
Restrictive covenants unenforceable
The court also determined that the non-competition and non-solicitation clauses were unenforceable because they were too broad. Skycope did not develop or market anything other than anti-drone defence products, so the prohibition of any activity related to the internet of things would unfairly limit Jia’s employment opportunities. In addition, essentially barring him from the industry in all of North America and China was also too expansive, the court said.
“[Courts] start from the position that [restrictive covenants] are not enforceable unless the employer can show that they're reasonably necessary to protect the company's best interests and that they're tailored to be as minimally intrusive on the employee as possible,” says Johnson.
However, the court noted that employees have confidentiality obligations in their employment contracts and they can’t misuse confidential information to the detriment of the party who conveyed the information. The court found that the Skycope code for its anti-drone technology and market research that Liu and Jia conducted for Skycope was confidential information.
The court also found that the evidence indicated that Jia and the other former employees misused Skycope’s confidential information to further the interests of Bluvec to compete with Skycope in anti-drone technology. Expert evidence revealed that “at least some of the source code provided by Bluvec was electronically copied from Skycope.” Expert analysis also posited that Bluvec’s development of its own code was too quick to have occurred independently.
Confidential information
The confidentiality issue was essentially about fairness and using such information as a “springboard advantage,” according to Johnson.
“You can't use inside information from one company to put yourself further ahead in the marketplace without risking a finding like this,” he says. “Probably 80 to 90 percent of employers’ concern in the tech industry is breach of confidence, so we're seeing these claims come up more often.”
“I love the treatment here because where they are bound to confidence, we can get at it two ways,” adds Johnson. “We can get at it through contractual obligations or through the common law [duty of confidentiality], but we're going to hold you to fairness - you can't just rip off a bunch of information from the former employer and get a nine-month jump on the market than what you would have had if you went into business for yourself otherwise.”
In addition, the court found that Jia, as the chief technical officer and his involvement with Skycope’s initial research, was a fiduciary employee of Skycope. He was second in command, was responsible for leading the technical team, and was involved in fundraising with potential customers, making him indispensable to Skycope and the company vulnerable to his actions, the court said.
Fiduciary employees are obligated to not use confidential information to compete with their former employer. The court found that Jia did this and therefore breached his fiduciary duty to Skycope.
As for Jia’s counterclaim that he was wrongfully dismissed, the court found no evidence that there was a reasonable notice termination provision in the original oral employment contract. As a result, Skycope owed him the statutory minimum of two weeks’ pay in lieu of notice along with repayment of the loan.
Damages for breach
The court noted that Skycope’s losses related to its competitive advantage, as Bluvec was able to bring its product to market faster with the information from Skycope. Although it was difficult to quantify the damages, the court calculated that Bluvec’s misuse of the Skycope code gave it a “head start of nine months.” The only evidence of Bluevec’s financial gain during this time was a contract to develop a “direction-finding function” for $800,000, which Skycope alleged was based on its code. The court found this amount to be sufficient for damages suffered from the breach of confidentiality.
Jia, Bluvec, and the employees who followed Jia to Bluvec were jointly and severally for $800,000 in general damages for breach of confidentiality in their employment contracts, while Skycope was ordered to pay Jia $12,475 for his loan and two weeks’ pay in lieu of notice, plus the equivalent of a 30-per-cent interest in Skycope at the date of his termination of employment.
The case is a good illustration of how things can go sideways in tech startups when the parties are focused on the end product and let employment-related elements slip through the cracks, says Johnson.
“Rarely do you see all of these things coming together in one case, but these are very common issues for those of us in workplace practice,” he says. “People are trying to be more competitive, get people to buy in, and get them tethered to the company, but make sure you know what you're giving away and what you're giving someone, and protect your information.”
