Employees took client list with them when they quit and went after former employer’s customers
Two former funeral home employees must pay their former employer almost $300,000 after taking a client list and starting up a competing business, the British Columbia Supreme Court has ruled.
The Graham Funeral Home was for many years the only funeral home in the town of Oliver, B.C., and it was owned by Service Corporation International (SCI), an international provider of funeral services. John Nunes was hired in 1982 when his father-in-law owned the business. In 1991, Nunes’ father-in-law sold the funeral home to a corporation that eventually merged with SCI and Nunes became Graham’s manager.
Nunes hoped to buy Graham after his father-in-law sold it, and he and Daryn Pottinger, Graham’s funeral director and only other full-time employee, teamed up to try to purchase the funeral home. In January 2007, they made an offer of $422,000 to SCI. SCI was aware that if the bid was unsuccessful, Nunes would likely leave to start up a competing business.
Employees left to start own business after failed purchase bid
After some back-and-forth discussion, Nunes and Pottinger upped their offer to $1 million in April 2008, but SCI rejected the offer. On Sept. 16, 2008, Nunes and Pottinger, along with several other staff members, resigned their positions. Two weeks later, on Oct. 1, Nunes and Pottinger opened Nunes-Pottinger Funeral Service and Crematorium (NP), employing the other employees who had left Graham.
For several months previous, during the negotiations, Nunes had instructed a Graham employee to make copies of Graham’s list of clients who had purchased pre-need contracts — contracts between customers and insurance companies that select a funeral home. More than 200 of Graham’s 300 pre-need contracts were copied. When NP opened for business, it advertised that it could help people transfer their pre-arranged funeral policies easily to NP. They also emphasized their local ownership and that they had left Graham because they were “uncomfortable with their pricing.”
In the first few months that NP was open for business, 208 pre-need contracts were transferred from Graham to NP. SCI became aware that NP was sending packages to Graham clients that had transfer forms ready to complete and a cover letter thanking them for their interest in transferring. In March 2009, SCI demanded NP return its files. Nunes denied NP had any Graham documents, but later returned them after a court order. All of the files contained a transfer form.
SCI sued Nunes, Pottinger and NP for breach of contractual and fiduciary duties, stealing confidential information, negative false advertising and directing business to NP while still employed at Graham.
Find out what is the penalty for misleading advertising in Canada in this article.
Misuse of confidential client list
The court said some transfers could be expected since Nunes and Pottinger were well-known in the community and people would have been aware of the new business. However, the court found it was unlikely such a large number of transfers would have taken place in such a short time without some solicitation using the client lists from Graham, particularly since a normal transfer requires customers to take the time to find and obtain the necessary information. By sending the packages containing contract information and transfer forms to people on Graham’s client list, Nunes and Pottinger breached their duty not to misuse confidential information obtained from their former employer, said the court.
The court disagreed with SCI’s claim that NP’s unfairly negative advertising when it opened cost Graham future pre-need contract business, as the evidence showed Graham’s market share was fairly constant over the next couple of years. Though less than before, this could be chalked up to “normal and fair competition,” said the court. However, Nunes admitted that shortly before he quit his job at Graham, he delayed the sale of at least three contracts so he could refer them to NP and Graham didn’t sell any during NP’s first three months of business in late 2008. The court found Graham could reasonably have been expected to sell nine pre-need contracts during that time, based on its market share in 2009 and 2010.
The court found it was likely that, without NP’s solicitation, only about half of the clients from Graham’s list would have transferred to NP. The difference in the number of those that actually transferred meant NP’s misuse of Graham’s confidential client list resulted in a loss of business of about $263,000 for Graham, plus another $14,800 for the contracts it lost from Nunes’ delaying sales and more than $2,000 for unnecessary expenses Nunes racked up. NP was ordered to pay a total of $280,285 to SCI.
SCI also asked for punitive damages against Nunes, Pottinger and NP, but the court found that the award for Graham’s loss of business from pre-need contracts already amounted to about two years of NP’s net after-tax profit, which was “sufficient to meet the objectives of retribution, deterrence and denunciation.” However, the court felt the actions of Nunes in particular made him personally liable for $10,000 in punitive damages.
For more information see:
•Service Corp. International (Canada) Ltd. v. Nunes-Pottinger Funeral Service & Crematorium Ltd., 2012 CarswellBC 1100 (B.C. S.C.).
