Court reduces original award but confirms worker exploited confidential business knowledge
The Court of Appeal for Ontario recently dealt with an employment dispute involving a software developer who breached his fiduciary duties and confidentiality obligations to his former employer.
The case involved allegations that the worker copied proprietary software and used confidential information to compete directly with his previous company after leaving his position.
The worker appealed the substantial damages award on two main grounds. First, he argued that the trial judge had improperly drawn an adverse inference against him without sufficient evidence.
Second, he argued that certain claims against him were brought too late and should be dismissed under limitation period legislation.
The worker had been employed as a software developer and manager before leaving his position on 30 November 2012. However, he continued working as an independent contractor because the employer could not immediately replace him.
During this extended relationship, the worker maintained access to confidential information, including software, customer details, distributors, and sales data until May 2013.
After leaving his employment, the worker established his own company. The employer's primary allegation was that the worker and his company had copied proprietary software to create competing products and used confidential information to solicit distributors and clients. The trial judge found the worker liable for breach of fiduciary duty and breach of confidence.
The court determined that the worker was a key employee who owed significant fiduciary duties to his former employer. The trial judge found that he had breached these duties by "secretly taking business opportunities that would otherwise have been pursued by the [employer]."
The trial judge also found that the worker had "wrongfully exploited his confidential knowledge of areas in which the [employer's] business was most vulnerable to 'springboard' his start-up company into direct competition with the [employer], his former employer." This resulted in a damages award of $750,000 based on disgorgement of profits.
The case involved technical issues around software development that became central to establishing the worker's misconduct.
The worker had produced source code for his company's software that was predominantly written in one programming language called C#, whilst the original employer's software was written in a different programming language called Visual Basic. This discrepancy became crucial to the court's assessment of the worker's credibility.
Critical testimony came from another former employee who later joined the worker's company. This witness testified that the worker had originally written the software for his new company in Visual Basic, the same programming language used by the employer's system.
The witness further testified that the worker had tasked him with converting the source code from Visual Basic to C#. The trial judge found that this conversion was done partly to make the source code more flexible, but also "to cover [the worker's] tracks."
The employer's technical expert testified that the different programming languages made meaningful comparison between the two software systems impossible. This evidence became important in establishing that the worker had not provided complete disclosure during the legal proceedings, as required under court rules.
The trial judge drew an adverse inference against the worker based on his failure to produce complete documentation during the discovery process. This inference significantly impacted the court's assessment of the worker's credibility and supported findings of misconduct.
Based on the witness testimony, the trial judge found that "the original Visual Basic source code should have been available in the archive for production during discovery. Yet the software source code produced was almost entirely in C#."
The employer had raised concerns about incomplete disclosure well before the trial started. In October 2020, more than two and a half years prior to trial, the employer's legal counsel alleged that the source code produced during discovery was incomplete.
The appeals court noted that "[the workers] were on notice about the issue prior to the trial from the time of counsel's pre-trial correspondence."
The worker challenged both the evidence behind the adverse inference and claimed procedural unfairness, but the appeals court disagreed with both arguments. The employer continued raising the disclosure issue throughout the trial proceedings, including during questioning of key witnesses.
A significant portion of the appeal concerned whether certain claims were brought too late under limitation period laws. The employer had originally filed its claim in 2014, focusing primarily on the worker's conduct after leaving his employment.
In September 2020, the employer sought to amend its claim to add allegations relating to a specific customer opportunity involving events beginning in October 2012 when the worker was still employed.
The additional allegations suggested the worker had secretly contacted a client to secure development work for himself whilst still employed, effectively depriving his employer of a business opportunity.
The trial judge had failed to address the worker's limitation period defence to these additional allegations. The appeals court found this was an error, noting that "the reasons for judgment make no mention of the Limitations Act defence to the [additional] claim."
The appeals court determined that the additional claim constituted a new cause of action rather than merely additional facts supporting the original claims. Since the additional claim was discovered no later than 8 May 2013 but not added to the lawsuit until September 2020, it fell outside the two-year limitation period.
The court concluded that "because the [additional] claim was not added until September 2020, more than seven years after it was discovered, it was brought outside the two-year limitation period." This finding resulted in a reduction to the damages award.
The original damages award of $750,000 was calculated based on taking back the worker's profits from the misconduct.
The employer's expert had testified that total damages amounted to $989,942, comprising $684,582 in profit from selling competing software products and $305,360 in profit from the specific client contract. The trial judge had awarded approximately 75.76% of the expert's calculations.
The appeals court applied this same percentage reduction to determine the appropriate deduction for the time-barred portion. The damages were reduced by $231,340.74, bringing the final award to $518,659.26 plus interest.
The court also awarded the worker legal costs of the appeal in the agreed amount of $20,000. The worker succeeded partially on appeal, with the limitation period defence reducing the overall damages despite the court upholding findings of breach of fiduciary duty.
