Common Law Confidentiality Duties – A Case Study

Eventually, an employment relationship comes to an end. As an employee, you may ask, what can I take with me? Can I take the documents or work product I created? On the flipside, as an employer, you may want to ensure the employee cannot take property or confidential information without legal recourse.

In the recent Superior Court decision, Titus v. Hack, 2024 ONSC 3666, the Court considered these issues. In this case, the Court found that a former employee, who was long-tenured and resigned, had breached his duties of fidelity, loyalty and good faith when he copied business records, deleted them from the employer's computers and shared copies with the employer's competitor. However, despite this, the Court did not award damages for his breach.

Why?

Let's take a closer look at this case.

Background facts

• The Defendant, Wayne Hack, was a long-tenured employee of Titus. Although he had the title of Vice President, he worked primarily as a salesman under the close supervision, direction and control of Titus' owner.
• The Plaintiff, Titus, is a small family-run business specializing in steel products.
• While Hack was employed with Titus, and with Titus' consent, Hack began a side business that he operated as a sole proprietorship, Dynamic Steel. This was later sold to Titus.
• Hack resigned from his Vice President position in 2016. Prior to and upon his resignation, Hack made a copy of Titus' business records, deleted them from Titus' computers, kept a copy, and shared them with his competitive business, even when he said he had returned the records.
• Titus later discovered that Hack's work computer system was missing a number of files and confronted Hack. At that time, Hack simply indicated that he had backed up the system to avoid computer or system failures and consequently returned a USB stick with Titus' files.
• At trial, while Hack would not admit to taking Titus' business records, the record was clear that he downloaded them, purported to return them when confronted, but still retained a copy.

Litigation

At trial, the Court addressed 6 main issues:

• Whether Hack was a fiduciary;
• If Hack was a fiduciary, did he breach any fiduciary duties by competing with Titus or soliciting customers after he resigned and if so, what were the damages;
• Whether Hack breached his employment duties of good faith, loyalty and fidelity by competing;
• Whether Hack breached his employment duties of good faith, fidelity and loyalty by misappropriating Titus' business documents and sharing them with his competitive business and whether he committed the tort of conversion by misappropriating Titus' business documents;
• Whether Hack misappropriated confidential business documents; and
• Whether Hack committed wilful misconduct or was his conduct grossly negligent in respect of two of Titus' clients prior to his resignation.

For the purposes of this blog, we will focus only on (i) fiduciary duties, (ii) the duty of good faith, loyalty and fidelity, and (iii) the tort of breach of confidence.

Fiduciary duty and the duty of good faith, loyalty and fidelity

The Court started by considering Hack's common law obligations to Titus.

The Court affirmed that all employers and employees owe each other the duty of good faith and fidelity from the beginning to the end of the employment relationship. Employees owe their employers the duty of loyalty as well. Certain key employees may also owe their employer a fiduciary duty which goes beyond the duty of loyalty and requires the employee to have the company/employer's best interest in mind in their conduct.

To determine whether Hack owed the company any fiduciary obligations, the Court used the "key employee" test from Imperial Sheet Metal Ltd. et al. v. Landry and Gray Metal Products Inc., 2007 NBCA 51:

1. Whether the employee is integral and indispensable to the management team that guides the employer's business affairs;
2. Whether the employee is necessarily involved in the decision-making process; and
3. Whether the employee has broad access to confidential information that if disclosed would significantly impair the competitive advantages that the former employer enjoyed.

In this case, the Court found that although Hack did have a senior title, he did not owe the employer a fiduciary duty as he was more of a salesperson than a key or indispensable employee. Accordingly, the Court found Hack did not owe fiduciary duties to Titus, nor breach them by his actions.

There were, however, issues with him taking Titus' files. Interestingly, while the Court found that Hack did remove files belonging to Titus, the Court made a distinction on timing of removal. Here, the Court found that keeping employer files while he was still an employee (a.k.a. during employment) was for Hack to "take preparatory steps", and thus did not amount to breach of the duties of good faith and loyalty that he owed during the then active employment relationship. On the flipside, keeping employer files and such related conduct following his resignation (a.k.a. post-employment) was a breach of his post-employment obligations. On that basis, he was found to have breached his duties of fidelity, loyalty and good faith and also committed a tort of conversion.

The tort of breach of confidence

Another key issue was whether, by removing the company documents, Hack breached confidentiality.

Given there were no contractual confidentiality obligations, the Court had to consider whether Hack had a common law duty to preserve Titus' confidential information, and if so, whether he breached that obligation.

In order to establish the common law tort of breach of confidence, the employer must establish the following:

1. The document must have a quality of confidence;
2. The document must have been imparted to the employee in circumstances importing an obligation of confidence;
3. The document must have been used in an unauthorized manner; and
4. The employer must prove that the use of the confidential information by the employee caused the employer losses.

In this case, while Titus was able to establish part 1 and 2 of the test for two of the documents that Hack had removed, Titus failed to produce any evidence showcasing that the information was actually misused by Hack in a manner that did or could have been used to cause a loss to the company. Thus, part 3 and 4 of the test were not satisfied.

Essentially, Titus did not produce evidence that it suffered any damages as a result of the two confidential documents being taken by Hack. As a result, the Court only ordered Hack to return the business records in his possession. Hack did not have to pay any damages to Titus for the misappropriation of the documents.

Takeaways

This case serves as a good reminder of the challenges and nuances of managing employee relationships and confidential information.

For employers, there are both legal and practical considerations at play when deciding how to handle confidentiality issues:

• From a legal perspective: Employers are encouraged to implement well-written contracts with confidentiality and return of property provisions. This may not only help prevent issues like this from arising but also provide employers with a stronger foundation to pursue legal recourse if company property or documents are misused. We recommend speaking with an employment lawyer to help draft and enforce such agreements.
• From a practical perspective: Employers should be mindful that even with contractual and common law obligations, employee turnover brings with it the risk of company property or confidential information being lost. Employers are encouraged to:
  • Implement safeguards within their workplaces to limit the amount of confidential information which is shared even amongst employees. Employers may only want to provide employees with access to the confidential information they require to perform their role.
  • Implement routine and reasonable monitoring of company networks and devices to check for leaks or misuse of confidential information or company property.
  • Nurture positive and respectful relationships with employees. While this may not eliminate all risk, employees may be less likely to take active steps to harm the business when treated with respect.
  • Consider which confidential information is truly critical vs. not. As this case shows, not all breaches of confidentiality will result in the employer being awarded damages. Carefully consider the importance of the confidential information and speak with legal counsel before pursuing legal action.

For employees, while this case shows that the former employee was not penalized with damages despite the breach of his duties, he did have to invest time and resources (such as legal fees!) to defend against the claim, which could have been avoided. Exercise caution when exiting from a workplace and avoid taking documents or information that contain information that is or potentially is confidential or proprietary. If you are not sure about your obligations post-employment or whether a restrictive covenant is binding on you, speak with an employment lawyer! We are here to assist.