Punitive damages can flow both ways

Investment advisor ordered to pay $18,000, including $5,000 in punitive damages, after he resigned and used confidential company information to lure business to his new employer

The pages of Canadian Employment Law Today are often filled with stories of courts reaching into the deep pockets of employers to punish them for their behaviour. But occasionally a court will dip into the relatively shallow pockets of a worker to compensate his former employer for damages it suffered as a result of his actions.

A former investment advisor with Edward Jones in Alberta was recently ordered to pay the company more than $18,000 — including $5,000 in punitive damages — after he resigned and used confidential company information to lure business to his new employer.

Riley Klassen started working for Edward Jones on Sept. 24, 1998, in St. Albert, Alta. When he started he signed an employment agreement and began training to become an investment representative, a position he held until his resignation on Oct. 15, 2002. The employment agreement contained restrictions on the use of company property if he was fired or resigned and a non-solicitation clause, among others.

Edward Jones trained Klassen. They paid for his Canadian Securities course and other training so he could become registered to sell securities. It provided the branch office and paid a clerical assistant to staff that office.

Klassen started with no clients. For the first year he was paid a base salary of $24,000 plus commission. After that, he was paid on a straight commission basis. He was the only investment advisor for Edward Jones in St. Albert.

In the fall of 2002, Klassen was unhappy with what he saw as company restrictions upon his work. He said the research analysts were not up-to-date on the stocks in which he had an interest and, as a result, his clients were buying investments elsewhere.

After speaking with an investment advisor with Cartier Partners Securities Inc., Klassen decided that company might be a better fit for him.

Klassen made the decision to leave seven days before he gave his notice. During that time he printed a copy of his client list, as well as thousands of pages of contact sheet information relating to those clients. He added handwritten notes on the list outlining important details concerning each account, such as the spouse’s name and the approximate value. He took both the client list and the contact information with him when he left. He also took a list of potential clients.

After he faxed his resignation to Edward Jones on Oct. 15, he mailed a letter to his clients. It basically informed them he had resigned and taken a new job with Cartier. That letter turned out to be pivotal in the case against him. While Klassen denied the letter was intended to solicit his clients, the Alberta Court of Queen’s Bench disagreed.

Part of the letter stated: “After careful consideration it has become clear that my personal and professional values as well as the best interests of my clients would be better served with another investment firm.”

Another part stated: “I am excited to now be working with a premium, independent, entirely Canadian owned, full service investment firm.”

The court said those two statements are a clear invitation to the recipients, all clients of Edward Jones at the time, to move with him. The court said Klassen’s own evidence was that he hoped his clients would follow him, but he did not consider the letter to be solicitation.

But the court said the letter could have been phrased far more neutrally and Klassen had other options. He could have told Edward Jones he was leaving and sent the letter to them for their approval before mailing it out. Alternatively, he could have advertised his new position with Cartier Partners, inviting people to contact him if they were interested in having him manage their investments.

The court said it was satisfied Klassen breached the non-solicitation clause in his employment agreement. And he breached a confidentiality clause by taking the client list, photocopying it, entering some of it into his computer and calling Edwards Jones clients. The court pointed out that Klassen was free to use the skills he had required during his time with Edward Jones.

“He was not, however, free to compete unfairly with his former employer and to use confidential information against his former employer,” the court said. Klassen worked in a one-person office, and Edward Jones was left scrambling when he left. The company went into damage control immediately and brought in an experienced investment representative to maintain the business, but Klassen had a huge head start through his wrongdoing.

“Edward Jones commenced damage control as soon as it was aware it was competing with Mr. Klassen,” said the court. “But by this point, Mr. Klassen was halfway around the track — Edward Jones was still in the locker room.”

The court said he owed his employer a duty not to compete unfairly and not to use confidential information. He clearly breached that duty when he took that information. And that breach was taken to the next level when he retained photocopies of the client and prospect lists after returning the originals.

It ruled Klassen owed Edward Jones a fiduciary duty and he breached it through his actions after he resigned.

The court then turned its attention to quantifying damages. A total of 98 Edward Jones accounts, totaling nearly $3.4 million, transferred to Klassen at Cartier Partners within six months of his departure. That represented about 37 per cent of the total asset base held by Edward Jones in that St. Albert office on Oct. 15, 2002 when Klassen resigned. Klassen argued 10 per cent of that loss would have happened anyway as a result of clients switching to other investment advisors.

The court said that number was speculative, but accepted it. It also accepted a submission by Klassen that another 10 per cent, in the form of family and friends, would have followed him, leaving him responsible for the remaining 17 per cent. The court calculated those damages at $13,464.

Edward Jones also claimed punitive damages against Klassen. It pointed out that Klassen could not have thought it was appropriate to print the confidential information, take it with him and then, when asked to return it, make and keep photocopies for his own use.

The court agreed. It said that the $13,464 in damages it awarded was already significant for an individual to bear, but Klassen’s behaviour was so egregious it warranted additional punishment.

“I am satisfied that by not merely taking the client documentation, but by photocopying and retaining it (not to mention entering some of it onto his computer), while purporting to return the documentation through counsel, is a behaviour that must be condemned by this court,” it said. It tacked on an additional $5,000 in punitive damages for a total of $18,464.

For more information see:

Jones v. Klassen, 2006 CarswellAlta 31 (Alta. Q.B.)

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