British Columbia Court of Appeal upholds significant award for loss of confidential information by former employees

In GEA Refrigeration Canada Inc. v. Chang, the British Columbia Court of Appeal upheld a decision awarding disgorgement of profits for breach of confidence by former employees of the Company. This decision provides important insight regarding the range of damages courts will award in circumstances involving the misuse of confidential information.

Background

The plaintiff and respondent on appeal, GEA Refrigeration Canada Inc. (GEA), is a designer and manufacturer of specialized freezers. GEA’s specialized freezers have unique design features that it claims provide it with a competitive advantage. GEA maintains the confidentiality of the implementation of their design features, including the protection of engineering drawings created and utilized internally by employees during the building and assembly of components of GEA’s specialized freezers. 

The defendant and appellant, FPS Food Process Solutions Corporation (FPS), is a direct competitor of GEA and was founded by GEA former employees. The individual defendants and appellants are former GEA employees who either held senior management executive positions at GEA or positions as mechanical engineers involved in the drafting of engineering drawings and designs related to GEA’s specialized freezers. These individuals were contractually bound to maintain confidentiality over information belonging to GEA, including GEA’s engineering drawings, and to prevent each from entering into competition with GEA for a period of time following the termination of their employment with GEA.

In the proceeding, GEA alleged that the defendants improperly used GEA’s confidential information to design a competitive product for FPS. GEA alleged that the appellants accessed engineering drawings of GEA’s specialized freezers and used GEA’s drawings and designs while developing FPS’s competing freezers.

Decision of the Supreme Court of British Columbia

Breach of Confidence

The trial judged found that the appellants misused GEA’s confidential information for the following reasons:

1. The information conveyed was confidential: The court found that GEA engineering drawings were not distributed to customers or any individuals outside of the company, GEA did not disclose how it implements its design features in its products, and the manner of implementation could not be entirely ascertained by examining the finished product. The trial judge also noted that GEA’s competitive advantage in the industry was derived from the unique design features of its freezers and as a result, GEA carefully guarded information pertaining to how its unique design features were implemented in its products.
2. The information was communicated in confidence: The court found that GEA emphasized to its employees that the documents disclosed to FPS by the individual defendants were confidential and circulated only for the limited purpose of the employees’ employment with GEA.
3. The information was used for an improper purpose: the trial judge was satisfied that GEA’s confidential information was misused by FPS in the design and manufacture of FPS’s competing products. Particularly, the trial judge determined that a former employee of GEA took copies of GEA’s engineering drawings and utilized the drawings while designing and building the competing products at FPS.

Remedy awarded

The trial judge held that FPS received an unfair “head start” or “springboard” into the market and competition with GEA through its misuse of GEA’s confidential information. As such, the trial judge required FPS disgorge the profits it realized over four years of its operations, in the amount of CA$7,131,087. The trial judge also found the individual defendants jointly and severally liable with FPS in the amount of CA$3,630,000 on the basis that their breaches of confidence resulted in GEA losing specific contracts to FPS that it would have otherwise obtained.

The trial judge awarded punitive damages in the amount of CA$75,000 each against two individual defendants for breaching non-solicitation obligations by recruiting a GEA employee and the implied duties of good faith, loyalty and fidelity in contract employment, by taking steps to form FPS while employed by GEA.

Decision of the British Columbia Court of Appeal

The British Columbia Court of Appeal dismissed the appeal. The court found it was reasonable for the trial judge to infer that FPS used GEA engineering drawings while designing its competitive industrial freezer products. The Court of Appeal also held that the trial judge’s use of the springboard doctrine was appropriate and that the trial judge did not err by determining the duration of the springboard period was four years. The court concluded that there was adequate evidence supporting the trial judge’s assessment of damages against the individual appellants. The court also declined to interfere with the trial judge’s findings that one of the individual defendants breached his non-solicitation obligations and that another individual defendant breached his implied duties of fidelity to GEA. 

Implications

This case serves as reminder that Canadian courts recognize the value of protected confidential information and the implications of former employees misusing it. This should act as a deterrent for former employees from breaching their common law and contractual obligations while leaving their employers. Organizations should develop and implement structures and protocols to protect valuable confidential information. These protections can include limiting the individuals that have access to proprietary information, marking information confidential, and ensuring employees with access to such information are contractually bound to prevent unauthorized use or disclosure.

In addition to implementing structures and protocols that protect the company’s confidential information, it is important that businesses that hire employees with access to confidential information ensure that they understand and operate in accordance with any post-employment obligations placed on current or future employees.

For more information on the best practices for protecting your company’s confidential information and understanding post-employment obligations, consider contacting a member of the Dentons’ Technology New Media and IP Litigation group and the Dentons’ Employment and Labour group.