Top 5 Civil Appeals from the Court of Appeal (March 2012)

Written with the assistance of Rivka Birkan and Andrew Carvajal

GasTOPS Ltd. v. Forsyth, 2012 ONCA 134 (Goudge, Juriansz and Rouleau, JJ.A.), March 1, 2012 Pye Bros. Fuels Ltd. v. Imperial Oil, 2012 ONCA 153 (Winkler C.J.O., Armstrong and LaForme JJ.A.), March 12, 2012 Hamilton (City) v. Metcalfe & Mansfield Corporation, 2012 ONCA 156 (Blair and LaForme JJ.A. and Benotto J. (ad hoc)), March 13, 2012 Dundas v. Zurich Canada, 2012 ONCA 181 (Cronk and Blair, JJ.A. and Strathy J. (ad hoc)), March 22, 2012 1540039 Ontario Limited v. Farmers' Mutual Insurance Company, 2012 ONCA 210 (Feldman and Hoy JJ.A. and Spence, J. (ad hoc)), March 30, 2012 1. GasTOPS Ltd. v. Forsyth, 2012 ONCA 134 (Goudge, Juriansz and Rouleau, JJ.A.), March 1, 2012

This decision, addressing various issues with respect to claims for breach of fiduciary duty, breach of confidence and breach of an employee's contract of employment, is of interest because of its review of the principles underlying the proper assessment of damages with respect to these causes of action. It is also interesting because of its discussion regarding the obligation on employees, particularly key employees, to give adequate notice of their departure where premature departure would leave their employer vulnerable to harm in the marketplace.

GasTOPS is a company involved with the design, development and application of computer software products that assessed machinery conditions for maintenance purposes for operators of gas turbine engines. This is a highly specialized niche industry with limited high value contract customers. GasTOPS' major focus was the military aviation market, and to some extent the commercial industrial and aviation markets. Up until October 1996, the four individual defendants were all senior employees of GasTOPS. They were considered the designers of the core programs within the family of GasTOPS' technology products. All were aware of the business opportunities GasTOPS was pursuing, including its future business plan and its strategic plan to acquire the U.S. Navy as a long term customer. Between October 7 and 10, 1996, the individual defendants resigned from GasTOPS, giving two weeks' notice of their departure. On October 15, 1996, they incorporated the defendant, MxI Technologies, and immediately began competing with GasTOPS. By November 1996, a number of former GasTOPS employees had joined MxI.

After a trial lasting 295 days, Granger J. found that the notice the individual defendants gave to GasTOPS was totally inadequate, that they knew this and that this was done with the intent of destroying GasTOPS' technology business. They also knew that their departures would leave the company unable to meet its existing contracts or continue to pursue business opportunities it had been pursuing. The trial judge also found that, subsequent to their departure, the defendants pursued virtually every existing and potential GasTOPS customer using the confidential business information they obtained while working at GasTOPS to form their marketing strategy and develop their technology, which was virtually identical to their former employer's. The impact of engaging in this behaviour was devastating to GasTOPS' revenues and highly beneficial to MxI.

The individual defendants were found liable for breach of fiduciary duty, breach of confidence and breach of their contract of employment. The trial judge also found MxI liable for breach of confidence. He awarded damages against the individual defendants equivalent to the profits earned by MxI from military contracts in its first 10 years of operation and ordered MxI to disgorge those profits. All defendants were ordered to pay $12,306,495 jointly and severally. The Court also awarded pre-judgment interest of $3,039,944, together with costs on a full indemnity basis of $4,252,920.24. The appeal and cross-appeal of the trial decision was dismissed.

The trial judge found that ten years was the time over which MxI earned profits in breach of its duty of confidence and the duration of the losses suffered by GasTOPS due to the breach of fiduciary duty by the four individual defendants. This period reflected the highly specialized nature of GasTOPS' business, the time required to develop and evolve its products and the useful life of the confidential information taken from the company. The appellants attacked this finding as one that "was motivated in large part by a desire to punish" not "measured and proportional" and "well beyond the temporal limits for claims of breach of fiduciary duty".

In rejecting the appellants' argument, the Court noted that this finding deserved appellate deference. First, the ten-year accounting period was an integral component of the remedies ordered by the trial judge for breach of confidence and breach of fiduciary duty. Both the order for disgorgement of profits by MxI and the award of equitable compensation against the individual appellants were equitable remedies. Equitable remedies are always subject to the discretion of the court and the exercise of judicial discretion at trial deserves deference on appeal.

Second, it was clear from the trial judge's reasons that the selection of the ten-year accounting period was a very fact-driven exercise. As a result, it was deserving of appellate deference in the absence of a palpable and overriding factual error. The Court rejected the appellants' arguments that the ten-year period was well in excess of the temporal limits set by the case law relating to the claims in issue, and was done to punish the defendants. Since the trial judge did not assess the accounting period for each cause of action separately, but decided on this period as part of the remedy for the combined effect of all the appellants' breaches, the Court could not compare this situation to cases where individual breaches had occurred. In this case, the trial judge's conclusion was "reasonable in the circumstances that were before him".

The trial judge held that the individual defendants' failure to provide GasTOPS with reasonable notice of their intention to resign "positioned the defendants as an alternative to GasTOPS' existing and prospective customers' software needs." In reaching this conclusion, he emphasized the "extremely vulnerable position" GasTOPS was in as a result of the failure to give adequate notice. While the remedy for this breach was part of the ten-year accounting period discussed above, Granger J. suggested that a notice period of 10-12 months would have been appropriate on the facts of the case.

The Court, while appearing to acknowledge the inadequacy of the two week notice period given, declined to endorse the trial judge's conclusions with respect to the length of notice that would have been appropriate or the factors that should be considered in determining what would have been appropriate. Because the trial judge did not separately quantify the damage award flowing from the failure to give proper notice, and it played no part in his calculation of the accounting period, "it was unnecessary to consider the length of notice that should have been given." By neither endorsing nor critiquing the trial judge's analysis of what is appropriate notice by an employee or the factors that should be considered when a claim for lack of adequate notice is pursued against an employee, the Court left this issue for consideration in another case.

The Court held that the trial judge's finding that Cass and Vandenberg owed GasTOPS a fiduciary duty, and breached that duty, must be given significant deference on appeal. Trial determinations in these areas should not be interfered with unless an appellate court is satisfied that the trial judge made a "material and identifiable error of law or a clear and identifiable error of fact in his appreciation of the evidence".

Granger J. undertook a detailed review of Cass' and Vandenberg's roles at GasTOPS. He concluded that they "were responsible for developing a significant commercial component of GasTOPS' business, and achieved that through the use of sensitive technological information that they helped develop and...