In Catch Engineering Services Partnership v Mai, 2023 ABKB 279 (Armstrong), Justice Armstrong of the Alberta Court of King’s Bench considered whether a former employee had breached his non-solicitation agreement, breached his obligations of confidentiality, breached the duty of good faith owed to his employer, and breached any fiduciary obligations to his employer when he left his employment and then joined another company in order to perform services to one of his former employer’s clients, CNRL.
Facts
The employer, Catch Engineering, had a contract with CNRL to provide engineers on various projects to CNRL in 2019. The employee, Mr. Mai, was hired by Catch specifically to perform contract services to CNRL in the role of Smart Plant Electrical (“SPEL”) Administrator, and this was disclosed to Mr. Mai prior to him signing his offer letter.
His offer letter from Catch contained a confidentiality clause. He was subsequently provided with a non-solicitation agreement that also contained a confidentiality clause and that prevented Mr. Mai from soliciting any customers of Catch 12 months. The clause stated:
During the term of this Agreement and for a period of twelve (12) months from the effective date of termination of employment, either by the Employee or CEP [Catch], the Employee shall not:
(a) intentionally act in any manner that is detrimental to the relations between CEP and CEP’s clients, suppliers, contractors, employees or others; and
(b) Directly or indirectly contact or solicit any customers of CEP or any of its subsidiaries or affiliates with whom he or she has dealt during the twelve (12) months prior to his or her termination, for the purpose of inviting, encouraging or requesting any CEP customer to transfer from CEP to the Employee or the Employee’s new employer, or to otherwise discontinue its patronage and business relationship with CEP,
and for a period of twenty-four (24) months from the effective date of termination of employment, either by Employee or CEP, the Employee shall not:
(c) solicit, induce, recruit or encourage any of CEP’s employee’s or contractors that existed before or after entering into this Agreement.
Upon learning that his services had already been promised to CNRL and Catch was committed, Mr. Mai re-negotiated the terms of his employment with Catch and was able to secure a pay increase. After securing the terms he wanted, he agreed to sign the offer letter and the non-solicitation agreement. The non-solicitation agreement stated that Mr. Mai could not contact or solicit any client of Catch whom he had worked with in the 12 months prior to his departure from the company for the purpose of engaging in work with them for a period of 12 months after his departure.
Mr. Mai was employed with Catch for approximately 11 months as an employee from February 2019 to January 3, 2020. During that period of time, he worked as a contractor for CNRL, and his contractor fees were paid by Catch. CNRL had agreed to pay an hourly rate of $120.00 to Mr. Mai for his services.
On December 16, 2019, Mr. Mai approached Catch about becoming an independent contractor for Catch instead of an employee, and they made a verbal agreement that Catch would pay Mr. Mai an hourly contractor rate of $60.00/hour.
However, on December 17, 2019, the day after the verbal agreement was reached, Mr. Mai issued his notice of resignation to Catch, stating his last day of employment would be January 3, 2020. Then that same day, while he was still employed with Catch, Mr. Mai reached out to his direct supervisor at CNRL and advised that he was leaving Catch. He inquired whether CNRL would still want to work with him if he was working for a different company.
On December 18, 2019, Catch’s President met with Mr. Mai and asked him to reconsider his resignation as it could harm the company’s relationship with CNRL. The President reminded Mr. Mai about his non-solicitation obligation, and Mr. Mai denied that he was considering working with CNRL after leaving Catch, which was false.
While still finishing his notice with Catch, Mr. Mai obtained new employment with Normatec on December 19, 2019, and advised CNRL of this so that they could continue to work with him through Normatec after he finished at Catch. He finished his employment with Catch on January 3, 2020, and he started his new position on January 6, 2020. Mr. Mai was then seconded through Normatec to CNRL to do the exact same SPEL Administrator role he had been doing for the company through Catch. CNRL then terminated its contract with Catch Engineering for a SPEL Administrator on the project that Mr. Mai had been seconded to.
The Lawsuit
Catch sued Mr. Mai and alleged that he had breached his non-solicitation agreement as well as the confidentiality clause in his offer letter. It also claimed that Mr. Mai had breached his duty of good faith, and that Mr. Mai had owed fiduciary duties to the company given his role at CNRL and that he had breached them.
Mr. Mai denied that the non-solicitation agreement was enforceable, and he denied that he had breached any other duties owed to Catch.
Analysis / Conclusion
- The Non-Solicitation Agreement
Justice Armstrong confirmed that restrictive covenants such as non-solicitation agreements are prima facie void as being contrary to public policy, but it can be justified where it is deemed to be reasonable based on the circumstances. The circumstances that must be taken into account are whether the non-solicitation clause is part of a commercial contract, such as the sale of a business, or whether it is part of an employment agreement; the parties’ bargaining powers and any potential imbalance must be considered; the restriction on an employee’s ability to use their knowledge, skills, and expertise to find alternate employment must also be weighed.
Justice Armstrong further confirmed that for a restrictive covenant in an employment agreement to be enforceable it must be: (a) narrowly focused on protecting a legitimate business interest; (b) it must be clear and unambiguous; and (c) considering all the circumstances, it must be fair and reasonable.
He found that Catch had a legitimate business interest to protect, specifically, its business model whereby it provides skilled workers to companies like CNRL who need contractors. Justice Armstrong viewed Catch’s client relationships as being integral to its business model, and he found that it was reasonable that it take steps to protect those relationships from being appropriated by its employees. The business model requires that Catch’s employees become more or less embedded in its client’s business, and if the employees were able to solicit clients to leave Catch and obtain services from a new company, it would destroy the business.
Next, Justice Armstrong concluded that the non-solicitation clause was narrowly focused to protect only Catch’s legitimate interests, and it did not otherwise interfere with an employee’s ability to use their skills and knowledge to gain employment elsewhere, as the clause did not contain any non-competition provisions. Additionally, the clause was only focused on the clients whom an employee had had contact with in the 12 months prior to their departure from the company, and only for a period of 12 months. Mr. Mai tried to argue that the fact that there were no geographic boundaries to the non-solicitation clause made it unenforceable. However, Justice Armstrong found that the lack of geographic scope was irrelevant because with the new availability of remote work, a client could be located anywhere, and a geographic boundary would be rendered meaningless.
The language was found to be clear and unambiguous. Justice Armstrong also deemed the agreement to be reasonable in all the circumstances as there was no restriction of Mr. Mai’s ability to use his skills and knowledge to get employment in the industry in general, and there had been no power imbalance because Mr. Mai had been able to negotiate terms with Catch, and he had actually been able to use the company’s own vulnerable position (as he was aware his services had already been contracted to CNRL) to his advantage.
- The Non-Solicitation Clause and Confidentiality Agreement were Breached
Justice Armstrong found that Mr. Mai had breached his non-solicitation clause because minutes after he issued his resignation notice to Catch on December 17, 2019, he emailed his supervisor at CNRL and asked if it would be possible to continue working for CNRL through another agency. This email was viewed as a clear request to CNRL to have it transfer its contract involving Mr. Mai from Catch to another third party entity. It was a clear invitation to leave Catch and it was a breach of the non-solicitation agreement.
Days later, on December 19, 2019, Mr. Mai had secured employment with Normatec, and he emailed his supervisor at CNRL and asked him to make the necessary arrangements with his new employer so that he could continue working with the company. This was also viewed as a further breach of the non-solicitation agreement.
“Confidential Information” was broadly defined in the employment agreement as including information that belonged to Catch, and information belonging to its clients that an employee had obtained through their employment with Catch pertaining to the company’s business, dealings, methods of operations, and the affairs of the company and its clients.
Justice Armstrong found that in the recruitment process Mr. Mai was given information about CNRL and the time-sensitive work that CNRL required. He used that information to re-negotiate better salary terms. Justice Armstrong found that this was a use of confidential information that did not breach the terms of the employment agreement per se, but he found that it showed Mr. Mai’s willingness to exploit Catch’s vulnerability for his own gain.
Justice Armstrong found that Mr. Mai did use confidential information about the project he was working on and the time-sensitivity of that project when he planned to solicit CNRL’s business away from Catch.
Mr. Mai had also received a performance evaluation during his employment with Catch which provided him with positive feedback about his performance. Justice Armstrong found that this information also constituted confidential information that was provided to Mr. Mai to aid in him completing his work duties, but instead he used that information to solicit CNRL’s contract work away from Catch.
Justice Armstrong acknowledged that the use of confidential information by Mr. Mai was difficult to isolate from the breach of the non-solicitation agreement, but he concluded that it was nevertheless used as part of the plan to solicit CNRL’s business away from Catch and that a separate breach had in fact occurred.
Often in employment cases there is discussion at length of the duty of good faith by the employer toward the employee, but Justice Armstrong confirmed that the duty of good faith extends to all contracts and requires that all parties perform their duties honestly. He cited with approval the Court’s decision in Altam Holdings Ltd v Lazette (2009 ABQB 458 at para 125) where it was held that the employee has a general duty of good faith to their employer, as well as a duty not to appropriate the employer’s trade secrets, customer lists, and other confidential information obtained in the course of the employment to the detriment of the employer at any point before or after the employment relationship ends.
Justice Armstrong found that Mr. Mai had breached his duty of good faith because he had lied to the President about considering working for CNRL after his employment, and because he had engaged in a “calculated course of action designed to benefit himself at the expense of his employer”. It was clear to Justice Armstrong that Mr. Mai went far beyond simply looking for alternate employment while serving out his resignation period.
Finally, Justice Armstrong stated that employees who are seconded to the clients of their employers are uniquely situated to harm their employer’s interests, as they are treated like employees of the client and become integral to their business. This unique arrangement does not override an employee’s duty of good faith to their actual employer, meaning that they must be honest, perform their work faithfully to their employer, and not act in a way that is against their employer’s interest. It was evident that Mr. Mai’s conduct amounted to a flagrant breach of his duty of good faith.
While Catch Engineering claimed that Mr. Mai was a fiduciary because of his role at CNRL and the company’s vulnerability that his role at CNRL created for Catch, Justice Armstrong held that fiduciary duties only typically apply to key employees. He defined a key employee as being
“one who is an integral part of the management team with responsibility for guiding the business affairs of the employer. They must have decision making responsibilities and have access to confidential information, the disclosure of which would significantly impair the competitive advantage of the employer.”
It was clear that Catch was in a vulnerable position given the close relationship Mr. Mai had with CNRL, but that was not unique to Mr. Mai: Catch’s business model was that relationships of dependence and reliance would be built between its employees who were seconded to its clients. Mr. Mai was not the only Catch employee who had been seconded to CNRL, and Mr. Mai had no responsibility for managing the contractual relationship between Catch and CNRL. While Mr. Mai did owe a duty of good faith, he simply did not have the management responsibilities or control within Catch necessary to make him a fiduciary of the organization.
Justice Armstrong acknowledged that calculating damages in breach of contract cases can be difficult, as often there are many variables at play that impact the profits and losses a company experiences. That said, he also stated that just because the damages could not be calculated with anything approaching mathematical accuracy did not mean that Mr. Mai should not be required to pay damages for his breaches.
The total amount of profit Catch lost as a result of Mr. Mai’s breaches in 2019 was approximately $37,872.00.
The total amount of profit Catch lost in 2020 as a result of Mr. Mai’s breach on the 2020 contract was $49,940.00.
The non-solicitation agreement would have expired in January 2021, and if Mr. Mai had not taken steps to solicit CNRL away from the company, Catch would have found a replacement SPEL Administrator and its relationship with Catch would have been repaired and strengthened. As a result, Justice Armstrong found that Catch suffered profit losses in 2021 and 2022 as a result of Mr. Mai’s breaches and their impacts on its relationship with CNRL. After applying contingency factors of 25% and 50% to 2021 and 2022 respectively, he concluded that the damages associated with the lost profits in 2021 and 2022 totalled $37,440.00 and $24,960.00, respectively.
My Take
The Catch Engineering decision is important for counsel on both sides of the employment bar.
For employee counsel, it provides an important reminder that employees also owe a duty of good faith to their employers. It is also clear that Justice Armstrong found Mr. Mai’s conduct to be too shrewd and that the way in which he inverted the traditional imbalance of bargaining power in the workplace and exploited the company’s weakness, and that he had no sympathy for him as a defendant. Had Mr. Mai not been as aggressive in his negotiations or blatantly lied to the President of the company, it is possible that Justice Armstrong could have viewed some of his later conduct in a different light.
This case is also helpful for employee counsel in that it provides a clear example of what is actual solicitation: Mr. Mai sent not one, but two emails to CNRL essentially asking them to re-employ him using another company, which would result in business being taken away from Catch Engineering. These conversations were always initiated by him to CNRL, in writing no less. This case would likely not have been as clear cut had CNRL heard of the news of Mr. Mai’s resignation, and then approached him directly during his resignation notice period.
For employer counsel, this case provides a clear reminder of an employer’s obligations to prove the necessity of a restrictive covenant. Employers often like to insert a suite of restrictive covenant clauses into contracts to scare employees, but ultimately they must be justified. Non-Solicitation clauses are typically more justifiable than non-competition clauses, but they must still be demonstrated as being necessary to protect legitimate business interests, and also reasonable under all the circumstances.
Further, this case also provides a clear statement on what constitutes a fiduciary in the workplace. Often, lawsuits are filed alleging that employees who have no authority and no management of the company’s affairs are fiduciaries simply because an employer dislikes that an employee has done or something that they perceive as being harmful. Justice Armstrong’s clarification on this topic is important: an employer being vulnerable and exposed by the self-interested actions of an employee does not, without more, create fiduciary obligations.
