Sales reps must pay former employer $130,000 for breach of fiduciary duty

Brothers started own business and solicited former employer’s customers, including while one brother was still employed with the company

An Ontario company has been awarded more than $130,000 from two former employees who went into business for themselves and solicited its customers, the Ontario Superior Court of Justice has ruled.

Jason Reia was hired as a commissioned sales representative in 1995 by Computer Enhancement Corporation (CEC), a vendor of memory products for computers in Mississauga, Ont. CEC didn’t manufacture parts, but rather served as a broker or middleman for its customers.

Jason had autonomy in putting together his own sales deals, with some terms such as credit limits approved by CEC’s owner. He wasn’t involved in management meetings or have any employees reporting to him. Over time, Jason became the “face of CEC” and was the only person at the company that most of his customers dealt with.

Jason Reia didn’t sign an employment contract when he was hired, but was asked to sign a non-competition and non-solicitation agreement on Jan. 3, 1996. The agreement stipulated that exclusive product knowledge and information that he gained during his employment with CEC would not be used to the detriment of the company or disclosed to a third party. He was also required to avoid being directly or indirectly engaged with a competitor of CEC or solicit any customers or clients of CEC for six months following the termination of his employment.

Jason’s younger brother Jeffrey began working as an inside salesman for CEC in April 2000, assisting Jason and two other CEC sales representatives. He signed the same non-competition and non-solicitation agreement as Jason.

In 2005, Jeffrey and his wife registered an unincorporated business called JC Options. The business was registered in his wife’s name, but Jeffrey operated it. Jeffrey began bidding on contracts with CEC customers while still employed as a salesperson with CEC, using his inside knowledge to underbid CEC. He was able to secure six contracts using this practice between 2005 and 2009.

In early 2009, CEC lost a sale to one of its major customers and learned that JC Options won the bid. It found out Jeffrey Reia operated JC Options and fired him on Feb. 15. Jeffrey continued to compete with CEC with his own company after that.

Jason continued with CEC for a little while after his brother was fired, but decided to leave CEC and go into business with Jeffrey at JC Options. Before he quit, they incorporated JC Options with the two brothers as directors. CEC filed a claim against JC Options for damages and an injunction, and Jason formally quit his CEC position.

CEC filed another claim against the Reia brothers for violating the non-competition/non-solicitation agreements they had with the company, both during and after they left their employment with CEC. It was successful in obtaining a court order on April 9 for the Reias to stop soliciting CEC clients.

Former employees’ business focused mainly on employer’s customers

Jeffrey Reia argued he didn’t solicit CEC customers until after his employment with the company was terminated, but rather they called him asking for bids, to which he responded. Jason initially claimed he took a few months off after leaving CEC, though he later said he called his former CEC customers soon after he left and asked them to do business with JC Options but stopped this practice after the court order. However, they both acknowledged after the April 9 court order CEC clients continued to contact them and their company only submitted bids in response to their calls.

During the first six months after Jason left CEC, more than 95 per cent of JC Options’ business was with former customers of CEC which they had contacted or been contacted by.

The court found that given the brothers’ admitted intention to go into business together, it was unlikely they didn’t have any discussions about it before they incorporated JC Options after Jeffrey was dismissed by CEC. Therefore, they worked together submitting bids for their own company while Jason was still employed with CEC, and they didn’t need any customer lists from CEC because they already knew who the customers were. It didn’t matter whether they contacted the customers or the customers contacted them, the brothers were well aware that they were customers with whom CEC had an ongoing business relationship, said the court.

The court found Jason’s non-competition/non-solicitation agreement wasn’t enforceable, as it was signed several months after he started working for CEC and he received no consideration for what amounted to a change in his employment contract.

Unlike Jason’s agreement, the court found Jeffrey received consideration for his, as he signed it as a term of employment when he started in April 2000. However, the non-competition provision was unreasonable and unenforceable since it was unreasonable to demand he not use his skills for six months following his termination of employment. He didn’t take any confidential information with him, only the skills he developed with CEC, said the court. In addition, the requirement that he not act “intentionally in any manner that is detrimental to CEC’s relations with its customers” was vague and ambiguous, said the court.

However, the court found Jeffrey’s non-solicitation clause was enforceable, since it merely prohibited him from soliciting CEC customers for six months — a reasonable limitation, according to the court. This clause was in effect until the April 9 court order, which took over at that point.

Top sales representative owed fiduciary duty

The court also found Jason owed a fiduciary duty to CEC from when his brother was fired on Feb. 15, 2009, until he left on March 27 of that year, as he was still an employee. As a top sales representative, he was a key employee of CEC and several customers dealt only with him. He had considerable autonomy on his sales deals and deal with a large number of CEC customers over his 14 years with CEC. As a result, he also owed a fiduciary duty to CEC for the two weeks between his resignation and when the court order took over, said the court.

The court determined Jason and Jeffrey Reia both violated their fiduciary duties — and Jeffrey his non-solicitation agreement — after Jeffrey was dismissed by CEC. It also found they assisted each other to breach their fiduciary duties.

As for the period following the court order, the court determined JC Options only submitted bids in response to calls from clients and no soliciting was done by the two brothers.

Jason and Jeffrey Reia — and their company, JC Options — were ordered to pay CEC damages for lost profits that went towards JC Options’ profits between Jeffrey’s dismissal and the court order as a result of their solicitation of CEC customers. This amounted to damages worth $132,581.

For more information see:

Computer Enhancement Corp. v. J.C. Options, 2016 CarswellOnt 952 (Ont. S.C.J.).

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