Stealing staff, contract costly for one firm

Restrictive covenants and contract staff

Background

Outsourcing creates an entirely different employment relationship. Courts have recognized the difference in the relationship between an employee and an outsourcing company and the more traditional relationship between employers and employees.

Outsourcing relationships are often determined by a contract. The employees are considered to be contract employees and work for the client of the employer at the client’s site and under the client’s supervision and direction.

A recent Ontario Superior Court decision where an employer was awarded more than $170,000 after a competitor stole two employees and a contract from the federal government away from it, offers a glimpse into how courts are handling restrictive covenants and non-competition clauses when it comes to outsourced staff.

The case: Calian Technology v. Frederickson

Calian Technology Ltd. is a temporary staffing and outsourcing firm that specializes in technology-related services. It filed a lawsuit after two of its employees — Melvin Frederickson and Andrzej Poluchowski — helped a competitor secure a contract and subsequently went to work for the new competitor.

Frederickson and Poluchowski were employees of Calian on a contract with the Department of National Defence in Ottawa. The contract was scheduled to end in mid-2000. On July 26, 2000, the federal government put out a request for proposal (RFP) to essentially continue the kinds of services which were provided by Calian through Frederickson and Poluchowski.

Calian submitted a proposal and offered the services of Frederickson and Poluchowski who, as contract employees of Calian, were the incumbent individuals working on the previous contract.

Unknown to Calian, Ian Martin Ltd. also submitted a bid in response to the same RFP and, with the consent of Frederickson and Poluchowski, also offered the services of these two individuals. Martin was the successful bidder and secured the contract with a bid of $396,120, which was $2,803.20 less than Calian’s bid. Frederickson and Poluchowski resigned from Calian and continued working on the new contract as employees of Martin.

Calian claimed Frederickson was in breach of a letter of agreement signed by him with Calian in which he agreed not to submit his resumé to any other party or to work with any other party on a bid for this new contract.

Calian also claimed Frederickson and Poluchowski disclosed confidential information that allowed Martin to successfully bid on the contract and, in doing so, breached their obligations as employees of Calian. It said Martin and one of its employees encouraged the pair to disclose such information and to breach their duties and obligations to Calian.

There were three primary issues before the court:

1. Did Frederickson and Poluchowski breach the exclusivity clause in their respective letters of intent? The court found Poluchowski did not sign a letter of intent with Calian in 2000 just before the contract came up for renewal, and therefore was not bound by it. But Frederickson did sign such a letter.

Frederickson argued the letter should not be enforced because the exclusivity clause in it was an unreasonable restriction imposed on him. But the court disagreed.

“Calian has a legitimate property interest which it is entitled to protect, being its relationship with that particular client on that contract,” said Justice Panet in the decision. “It is reasonable for Calian to seek to protect that business relationship by negotiating with its current employee, who Calian promised to employ on a future contract, to refrain from offering his services to another competitor on that new contract.

“Indeed, if an employer cannot protect itself by way of a restrictive covenant in these circumstances, it is difficult to envisage any circumstances in which an employer would be entitled to protect itself with respect to a current employee.”

Frederickson also said he was not aware of the clause when he signed the contract. But the court dismissed that because failure to read a contract before signing it is not a legally acceptable basis for refusing to abide by it, as stated in Ontario Ltd. v. Cornell Engineering Co.

Justice Panet also noted that Frederickson’s letter of intent was a brief, straightforward letter dealing with salary and the employment relationship. There was an obvious reference to the exclusive arrangement, he said.

Frederickson’s last attempt to have the letter quashed came in the form of his argument that there was no consideration given to him for signing it. But the j court said there was, in the form of a promise of continued employment and the settling of compensation had the contract been awarded to Calian.

Therefore Frederickson breached the provisions of the letter of intent by submitting his resume and making his services available to Martin.

2. Did Frederickson and Poluchowski breach their obligations of confidentiality owed to Calian by reason of their employment? The pair submitted resumes to Martin which, on its own, would not normally constitute a breach because the resumes are the property of Frederickson and Poluchowski and are not the property of or confidential to Calian.

But Frederickson’s resume contained additional information that was added by Calian to assist it with the RFP. His resume contained cross-referenced information to demonstrate compliance with the requirements in the RFP. That work was completed by Calian with input from Frederickson.

Therefore the court found Frederickson and Poluchowski did breach their obligations of confidentiality when it delivered the documents to Martin.

3. Did Martin knowingly participate in and benefit from the breaches of confidentiality by Frederickson and Poluchowski? The court said the documents delivered to Martin went “far beyond what could reasonably have been expected to be the resumes.” The documents were sent over on Sept. 7, 2000, and the final date for submission for proposals was Sept. 13. No one in Martin’s Ottawa office had the expertise required to assemble the technical part of the proposal.

Therefore the court found Martin used the information in the documents provided by Frederickson and Poluchowski in its own bid.

“Martin knowingly participated in the breaches of confidentiality by Frederickson and Poluchowski and this enabled it to assemble the technical proposal of the bid,” wrote Justice Paten.

“Martin must have been aware that Calian was the only other competitor on this RFP. That knowledge must have been of assistance to Martin in preparation for this bid.”

The court found that without the breaches by Frederickson and Poluchowski, Martin could not have been awarded the contract and it would have gone to Calian.

In these circumstances, Calian is entitled to an award of damages equal to the value to Calian of the lost contracts, the court said. Calian’s gross margin, as calculated on the bid, amounted to 23.61 per cent.

Based on its estimated revenue of $182,963 for each year and a total salary cost, including benefits, for these two individuals for each year of $139,773, Calian was looking to recover its lost profit of $43,190 per year for a total of $172,760 over four years. The court awarded that amount.

For more information see:

Calian Technology Ltd. v. Frederickson, 2004 CarswellOnt 971 (Ont. S.C.J.)

Ontario Ltd. v. Cornell Engineering Co., 2001 CarswellOnt 1290, 8 C.C.E.L. (3d) 169 (Ont. C.A.)

Case of note

Adga Systems International Ltd. v. Valcom Ltd., 1992 CarswellOnt 1023 (Ont. Gen. Div.)

Adga maintained security systems through its employees at federal penitentiaries across the country under a contract with Correction Services Canada (CSC). On expiry of the contract, CSC issued a request for proposals for further services.

The defendant, Valcom, wishing to bid on the renewal contract, raided Alga, enticed its employees away and CSC indicated its intent to award the renewal contract to Valcom.

The employment contract between Adga and the existing employees allowed Adga to change the terms of employment at its discretion and employees were terminated once the contract with CSC was completed.

There was a restrictive covenant in the employment contract which provided that for a period of three months after the end of the assignment, the employee would not accept employment with CSC directly or indirectly and would not offer services to CSC or apply for employment while an employee of Adga.

Adga sought an injunction against Viacom to restrain it from employing any of its employees for a period of three months. Justice Chadwick concluded that, given the prohibition, employees of Adga would not be able to work for a competitor for a period of three months. He concluded that in view of the very nature of their occupation, if someone else such as the defendant obtained the contract, this provision would require that the employee would have to sit at home for three months. He therefore concluded the covenant was unreasonable in those circumstances and dismissed the application for injunction.


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