Court overturns $190,000 award in case where employees resigned and went into competition with former employer
The British Columbia Court of Appeal has rejected a trial court’s ruling that handed an employer a six-figure award from three former employees who went into competition with it.
The case, Valley First Financial Services Ltd. v. Trach, concerns the duties of agents and employees who leave their employer to establish a competing business that draws upon the employer’s pool of customers.
Valley First, a credit union, provided an array of financial and insurance services throughout the Okanagan Valley. Until November 1999 Kevin Trach, Kathy Kanester and Candace Willis comprised the group benefits insurance department in Valley First’s Vernon office.
Trach was the salesman and Kanester and Willis were his administrative staff. As head of the group benefits insurance department, Trach reported to Valley First’s vice-president of subsidiary operations. The relationship between Trach and the vice-president deteriorated over time and in 1999 Trach opened negotiations to purchase the business of the department. It was contemplated that Kanester and Willis would go with the business.
During the negotiations the vice-president became concerned Trach might simply resign and take all of the group benefits business with him. Accordingly he arranged for Russell & Associates Ltd., a competitor doing business in Kelowna, to take over management of the department in the event Trach should leave. Their agreement included an option in favour of Russell & Associates to purchase the department’s business.
Negotiations broke down and on Nov. 15, 1999, Trach told Kanester and Willis he intended to leave and set up a competing brokerage business. They decided they would resign and join him. Consequently they each faxed a letter to Valley First that day giving notice of resignation effective Nov. 30.
On receiving the resignations the vice-president brought Russell & Associates Ltd. in to implement the contingency plan. The vice-president met with Trach the next morning, on Nov. 16. Trach told him he would be leaving to set up his own brokerage business commencing Dec. 1, 1999, and Kanester and Willis intended to join him.
Trach was told to leave the office and was escorted from the building. In the afternoon, the vice-president and a representative of Russell & Associates met with Kanester and Willis. He asked them to remain at work during their two-week notice period and to call customers of the group benefits department to assist Russell & Associates with the orderly transfer of business.
Kanester and Willis said they would continue with their usual duties but refused to contact customers. They said their intention to join Trach’s new business would place them in a conflict-of-interest if they were to promote Russell & Associates to customers. The vice-president told them to take their personal belongings and leave.
On Nov. 17 Kanester and Willis met with Trach and from their collective memory made a list of those they wished to inform of their departure from Valley First, including customers of the Valley First group benefits department.
Between Nov. 17 and Nov. 22 they telephoned about 90 per cent of Valley First’s group benefits customers and advised them they were no longer with Valley First and they planned to establish a new business by Dec. 1.
On Nov. 18 Valley First sent letters to Kanester and Willis acknowledging receipt of their letters of resignation effective Nov. 30, that they were no longer required to report to work, that their perquisites would continue until Nov. 30 and they would be paid their regular salaries until then. Each letter concluded with this paragraph:
“As you are considered to be employed by the credit union until the effective date of your resignation, we remind you of your obligation to comply with all existing policies, procedures and standards of behaviour expected from all employees of the Valley First Group of Companies. Specific reference is made to the confidentiality and nondisclosure agreement signed by you on March 27, 1996, a copy of which is enclosed for your information.”
They stopped calling former customers when they received the letters on Nov. 22. They did not return to work at Valley First.
On Dec. 8 Trach rented premises in Vernon and opened an office under the name Landing Insurance and Financial Services Group. He hired Kanester that day and Willis shortly thereafter.
Over the next two years, Landing Insurance generated nearly $380,000 in commissions, about 92 per cent of its total commissions revenue, from about 40 customers who formerly did business with Valley First. These customers represented a significant portion of Valley First’s group benefits insurance business.
In the original trial the judge found the non-competition and non-solicitation covenants the employees had signed at Valley First to be unenforceable because they were an unreasonable restraint of trade. He also dismissed any notion that they were fiduciary employees.
But the trial court did find the former employees had breached their common-law duties of fidelity and their contractual obligations under the nondisclosure agreements. He awarded damages to Valley First in the amount of $190,000.
The trial court relied heavily on the fact Kanester and Willis refused to call customers on behalf of Russell & Associates up until Nov. 30 when their resignations took effect in finding in favour of Valley First. It said refusing to do so was unreasonable and put Russell & Associates in a disadvantageous position and let Landing Insurance get a head start.
The Court of Appeal found the trial judge “misapprehended” the importance of this evidence. It found Russell & Associates could have started calling clients on Nov. 16, but it decided to postpone that action because it felt it more important to get an understanding of the files and to prepare letters to the clients. It found the trial judge was “clearly wrong” in concluding the failure of Kanester and Willis to assist in this regard created a head start and put Valley First at an unfair competitive disadvantage.
“It must be remembered that Ms. Kanester and Ms. Willis were administrative staff, both with Valley First and with Landing Insurance,” the Court of Appeal said. “It was Mr. Trach whose bonds with the customers induced them to leave Valley First and it was Mr. Trach’s business venture to which they delivered their custom. Valley First knew the risk they were running by engaging Mr. Trach as their face to their customers. They attempted to protect themselves with the non-competition and non-solicitation covenants, but they overreached and those covenants are not enforceable. Having fallen from that mount, they should not be permitted to ride to victory on the back of an ostensible breach of duty of loyalty and fidelity by two ordinary administrative staff members who played minor roles in the relevant events.”
The Court of Appeal set aside the trial court’s decision and dismissed the action.
The British Columbia Court of Appeal has rejected a trial court’s ruling that handed an employer a six-figure award from three former employees who went into competition with it.
The case, Valley First Financial Services Ltd. v. Trach, concerns the duties of agents and employees who leave their employer to establish a competing business that draws upon the employer’s pool of customers.
Valley First, a credit union, provided an array of financial and insurance services throughout the Okanagan Valley. Until November 1999 Kevin Trach, Kathy Kanester and Candace Willis comprised the group benefits insurance department in Valley First’s Vernon office.
Trach was the salesman and Kanester and Willis were his administrative staff. As head of the group benefits insurance department, Trach reported to Valley First’s vice-president of subsidiary operations. The relationship between Trach and the vice-president deteriorated over time and in 1999 Trach opened negotiations to purchase the business of the department. It was contemplated that Kanester and Willis would go with the business.
During the negotiations the vice-president became concerned Trach might simply resign and take all of the group benefits business with him. Accordingly he arranged for Russell & Associates Ltd., a competitor doing business in Kelowna, to take over management of the department in the event Trach should leave. Their agreement included an option in favour of Russell & Associates to purchase the department’s business.
Negotiations broke down and on Nov. 15, 1999, Trach told Kanester and Willis he intended to leave and set up a competing brokerage business. They decided they would resign and join him. Consequently they each faxed a letter to Valley First that day giving notice of resignation effective Nov. 30.
On receiving the resignations the vice-president brought Russell & Associates Ltd. in to implement the contingency plan. The vice-president met with Trach the next morning, on Nov. 16. Trach told him he would be leaving to set up his own brokerage business commencing Dec. 1, 1999, and Kanester and Willis intended to join him.
Trach was told to leave the office and was escorted from the building. In the afternoon, the vice-president and a representative of Russell & Associates met with Kanester and Willis. He asked them to remain at work during their two-week notice period and to call customers of the group benefits department to assist Russell & Associates with the orderly transfer of business.
Kanester and Willis said they would continue with their usual duties but refused to contact customers. They said their intention to join Trach’s new business would place them in a conflict-of-interest if they were to promote Russell & Associates to customers. The vice-president told them to take their personal belongings and leave.
On Nov. 17 Kanester and Willis met with Trach and from their collective memory made a list of those they wished to inform of their departure from Valley First, including customers of the Valley First group benefits department.
Between Nov. 17 and Nov. 22 they telephoned about 90 per cent of Valley First’s group benefits customers and advised them they were no longer with Valley First and they planned to establish a new business by Dec. 1.
On Nov. 18 Valley First sent letters to Kanester and Willis acknowledging receipt of their letters of resignation effective Nov. 30, that they were no longer required to report to work, that their perquisites would continue until Nov. 30 and they would be paid their regular salaries until then. Each letter concluded with this paragraph:
“As you are considered to be employed by the credit union until the effective date of your resignation, we remind you of your obligation to comply with all existing policies, procedures and standards of behaviour expected from all employees of the Valley First Group of Companies. Specific reference is made to the confidentiality and nondisclosure agreement signed by you on March 27, 1996, a copy of which is enclosed for your information.”
They stopped calling former customers when they received the letters on Nov. 22. They did not return to work at Valley First.
On Dec. 8 Trach rented premises in Vernon and opened an office under the name Landing Insurance and Financial Services Group. He hired Kanester that day and Willis shortly thereafter.
Over the next two years, Landing Insurance generated nearly $380,000 in commissions, about 92 per cent of its total commissions revenue, from about 40 customers who formerly did business with Valley First. These customers represented a significant portion of Valley First’s group benefits insurance business.
In the original trial the judge found the non-competition and non-solicitation covenants the employees had signed at Valley First to be unenforceable because they were an unreasonable restraint of trade. He also dismissed any notion that they were fiduciary employees.
But the trial court did find the former employees had breached their common-law duties of fidelity and their contractual obligations under the nondisclosure agreements. He awarded damages to Valley First in the amount of $190,000.
The trial court relied heavily on the fact Kanester and Willis refused to call customers on behalf of Russell & Associates up until Nov. 30 when their resignations took effect in finding in favour of Valley First. It said refusing to do so was unreasonable and put Russell & Associates in a disadvantageous position and let Landing Insurance get a head start.
The Court of Appeal found the trial judge “misapprehended” the importance of this evidence. It found Russell & Associates could have started calling clients on Nov. 16, but it decided to postpone that action because it felt it more important to get an understanding of the files and to prepare letters to the clients. It found the trial judge was “clearly wrong” in concluding the failure of Kanester and Willis to assist in this regard created a head start and put Valley First at an unfair competitive disadvantage.
“It must be remembered that Ms. Kanester and Ms. Willis were administrative staff, both with Valley First and with Landing Insurance,” the Court of Appeal said. “It was Mr. Trach whose bonds with the customers induced them to leave Valley First and it was Mr. Trach’s business venture to which they delivered their custom. Valley First knew the risk they were running by engaging Mr. Trach as their face to their customers. They attempted to protect themselves with the non-competition and non-solicitation covenants, but they overreached and those covenants are not enforceable. Having fallen from that mount, they should not be permitted to ride to victory on the back of an ostensible breach of duty of loyalty and fidelity by two ordinary administrative staff members who played minor roles in the relevant events.”
The Court of Appeal set aside the trial court’s decision and dismissed the action.
