Law Times

Law Times • June 4, 2012 ees, who are in a position to aff ect substan- tive interests of their employer, as fi duciaries and fi nd them liable for as much as $20 mil- lion in damages, as exemplifi ed by the legal saga of GasTOPS Ltd. v. Forsyth. GasTOPS broadened the law of fi duciary duty to provide former employers with protection against disloyal "key employees" who are neither executives nor senior management. Th e truncated version of the facts of the gation upon them to act in the best interests of their employer, at all times, even if they're not fi duciaries. Th e court may classify departing employ- T GasTOPS offers lessons for employees and employers COMMENT he law expects much of employees. Not only does it require them to serve their employer honestly and faithfully, it places an implied obli- merely technical employees when he noted that "even highly skilled technical employees may be found to be fi duciary employees if they are crucial to the direction and guid- ance of the company. case, which spanned 10 years of litigation, was tried over 295 days, amassed 70,000 pages of exhibits, cost $4.2 million, and pro- duced a 668-page judgment, are as follows: since 1979, GasTOPS has been an industry leader in the area of the condition-based maintenance of jet engines. It occupied a specialized niche with few clients that each generated signifi cant revenues. In October 1996, four of its key employees resigned on two weeks' notice to set up in competition. Shortly thereaſt er, they orchestrated the exodus of a number of other Gas- TOPS employees who joined their new company, MxI Technologies Ltd. Despite their written assurances to the contrary, the defendants pursued virtually every ex- isting and potential GasTOPS customer. Using the "very special" confi dential tech- nical information they obtained while at GasTOPS, they off ered customers a seam- less transition to MxI and the next itera- tion of GasTOPS' products. Th e harm to GasTOPS was immediate and signifi cant. At trial, the judge found the four personal eration that these two defendants were responsible for developing a signifi cant commercial compo- nent of GasTOPS' business, privy to its sales strategies and contrac- tual relations between the compa- ny and its existing and potential customers, and performing their responsibilities with little supervi- sion, the judge was of the opinion they were "key employees" and, as such, owed fi duciary duties to their employer. In addition, the judge found " In consid- Labour Pains Chsherbinin Nikolay the defendants had breached their em- ployment contracts and fi duciary duties by giving two weeks' notice of resignation, knowing the other employees would fol- low, with devastating eff ects on GasTOPS. Th e situation leſt the company unable to fulfi l its existing contracts or continue to pursue the business opportunities it had been cultivating. In the judge' the defendants were under an obligation to provide GasTOPS with "at least" 10 months' notice. Aſt er a very lengthy trial, the judge ordered MxI to disgorge the profi ts it earned over its fi rst 10 years — about $12 million — and found the four personal defendants severally and jointly liable in the same amount. Finally, he or- dered prejudgment interest of about $3 million and full indemnity costs of more than $4 million. On s opinion, lenged the disgorgement period. Th e appeal court upheld the trial judge' appeal, defendants to be fi duciaries. He dismissed the two defendants' claim that they were the defendants chal- the 10-year accounting period as "entirely reasonable" because it "refl ected the highly specialized nature of GasTOPS' business, s use of the time required to develop and evolve its suite of products, and the useful life of the confi dential information taken from it." In coming to its conclusion, it was "of impor- tance" to the court that MxI en- gaged in "much more" than un- fair competition within a highly specialized market. In addition, the court viewed the very com- mercial success the defendants enjoyed, which stemmed from the misuse of confi dential in- formation they appropriated, as supportive of the 10-year ac- counting period. In dealing with the failure length of reasonable notice that should have suffi ced because the trial judge didn't assess separately and quantify the dam- age award. Instead, it stated: "Suffi ce it to say that we should not be taken to agree with the 10-12 months suggested by the trial judge or the factors he considered in reaching that period. to provide reasonable notice of resignation, the court found it unnecessary to consider the issue may be viewed from two perspec- tives. First, it could be seen as reinforcing the notion of fairness by requiring "key employees" to refl ect on the impact their hasty departure would have on their em- ployer. Alternatively, the court' Th e court's passivity on this important " be seen as disapproving the imposition of a lengthy period of common law notice of resignation on departing employees. Th is is consistent with the Supreme Court of Can- ada decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., a case with similar facts to GasTOPS, in which virtu- ally all of the investment advisers leſt their employer without notice. In RBC, the top court upheld the trial judge' s passivity could 2-1/2 weeks' notice of resignation should have suffi ced, which the judge calculated by taking into account "the eff ect on RBC of the simultaneous departure of virtually the entire staff of the branch" and the cul- ture of the industry. Contrasting the 2-1/2 weeks' notice with the remarkably unusual 10 months recommended in GasTOPS, it becomes clear that the small size and highly specialized nature of the industry was key to the court' law industry standard. In light of GasTOPS, employers and s preference over the common employees should beware of the following practical considerations: • Although there is no single litmus test for assessing a fi duciary relationship, the job function and the responsibili- ties are more determinant of the issue than the title an employee holds. • Employees terminating their employ- ment may be liable for the failure to give reasonable notice and for breach of specifi c residual duties. In the absence of a contractual provision regarding notice, prudent employees should act reasonably and off er their employer an option to discuss the possibility of extending their eff ective date of resig- nation. Such a proactive approach to resignation may shield departing em- ployees from liability and provide a de- fence to their employer' • Post-employment use of confi dential information misappropriated from the previous employer as a springboard to commercial success can be a costly gamble for both former employees and their new employers. notice of termination of employment was insuffi cient. LT s fi nding that Nikolay Chsherbinin is an employment lawyer in Toronto. He can be reached at 416-907-2587, nc@nclaw.ca or nclaw.ca. A primer on calculating personal consumption rates by income level u SPEAKER'S CORNER BY CARA BROWN For Law Times C inverse of personal consumption rates is dependency rates. For instance, if the personal consumption rate is 10 per cent, this implies that the family' rate is 90 per cent. Adding the two together gives the family' proportion of family income needed by the surviving family members to maintain their standard of living once the decedent' s total before-tax income. Th e dependency is the is the most important element in a fatality case aſt er de- veloping the aſt er-tax income profi les for the decedent, survivor, and possible new or hypothetical partner. In 2004, I published personal consumption rates based on Statistics Canada's survey of household Th e determination of the personal consumption rate s personal consumption is subtracted. To explain, I will fi rst introduce a bit of math. Th e anadian courts have begun consider- ing a refi ned approach to personal con- sumption rates for the purpose of determin- ing dependency losses in fatality cases. s dependency that families' spending is dictated by available resources through money income. Th us, it is not surprising to fi nd that when we try to account for the portion of family in- come that the decedent consumed — and is now saved — it varies according to how much income the family had prior to the death. Th is is not a novel concept. It has been recognized since John Maynard Keynes, a famous economist, commented that "the fundamental psycho- logical law, upon which we are entitled to depend with great confi dence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on average, to in- crease their consumption as their income increases, but not by as much as the increase in their income. spending data for 2000, which were tabulated not only by family size but also by family income level, in the Journal of Forensic Economics. From research conduct- ed in the past year, we have derived personal consump- tion rates from data combined from the 2007 and 2008 Canadian surveys of household spending. Constructing personal consumption rates by fam- ily size and family income level is a refi nement that was long overdue. Prior to that time, when quantum experts calculated them, Canadian dependency awards were based on rates that fl uctuated only by family size. Th e economics literature, specifi cally on consumption and savings behaviour, has established in no uncertain terms income that the decedent consumed but is no longer needed and given that the surviving family members require the same standard of living they enjoyed be- fore the decedent' Since we are describing the portion of the family " of family income is variable. It represents money the decedent consumed and that the family no longer re- quires to maintain its standard of living. Immediately, we can see that this variable portion s passing, we know that this portion that we have to subtract in the form of the personal consumption rate cannot include fi xed expenses be- cause these would not vary with the decedent' ing or, even if they did, the family still needs the en- tire expenditure for the fi xed item. For instance, the surviving family members require the pre-incident dwelling they resided in and even though we could attribute a share to the decedent, we cannot reduce s pass- www.lawtimesnews.com the shelter expenses for it because doing so would violate the legal concept of maintaining the fam- ily' personal consumption rates in fatality cases. When we look at Canadian statistical data for 2007, we s standard of living. Th is concept underlies many of the decisions undertaken to derive see that households with income of $20,000 to $39,999 spend $4,656 on food, equal to 15 per cent of total ex- penditure. When we compare households with an in- come above $100,000, they spend $9,400 on food, equal to seven per cent of their expenditure. So we see that the higher-income household spends more on food in dollar terms but less as a percentage of total expenditure. In Fullowka v. Royal Oak Ventures Inc., the Northwest Territories Supreme Court accepted my personal con- sumption rates by income level. In a British Columbia case, the court adopted a 10-per-cent personal consumption rate for a party who was an ophthalmologist and earned in excess of $1 million per year prior to dying. A personal consumption rate of 10 per cent in this case is exactly in ac- cordance with my calculations for damages for households with before-tax income in excess of $200,000. In a recent Ontario case, Johnson v. Milton (Town), the judge determined the decedent would have earned US$71,287 per year but was not persuaded that this level of income was a high income level such that the personal consumption rate should be adjusted. Calculating personal consumption rates not only by family size but also by income level is something U.S. forensic economists have done for decades. It' only now that Canadian courts are considering it. LT s Cara Brown is principal at Brown Economic Consulting Inc., a fi rm that specializes in the quantifi cation of damages. She regularly testifi es in the courts. s claim that the PAGE 7

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