By Kyla Stott-Jess and Devin Crisanti
Post-employment restrictions can be tricky to enforce. But if drafted properly, they can be valuable. As one Alberta employer recently discovered in ADM Measurements Ltd. v. Bullet Electric LTD, relying on implied fiduciary duties to do the job of contractual restrictions can be a pricey gamble.
Background
The employer, ADM Measurements Ltd., was an electrical and instrumentation company servicing oilfield facilities throughout northern Alberta. ADM operated by hiring private contractors to do much of its work. In 1997, ADM entered into a verbal agreement with a particular contractor, Greg Young. Although the terms were never formalized, it was agreed that if he continued to work for ADM and grow the company, he would later have the right to buy ADM.
ADM and Young eventually had a falling out. ADM then informed him that he no longer had the right to buy the company. Then he left ADM and started a competing company, Bullet Electric. The rise of Bullet spelled the end of ADM in the geographic areas where the two companies were competing. Bullet profited, eventually driving ADM out of business.
ADM brought a lawsuit against Young. It alleged that he unlawfully competed with ADM, solicited its employees, and unjustly enriched his own company. All of this was said to be a breach of his fiduciary duty or duty of trust to ADM.
Judgment
The Alberta Court of Queens Bench rejected ADM’s claim. It ruled that Young owed ADM no fiduciary duty. The court stated that such duties would exist only if the relationship was one of employer-employee and then only in limited circumstances.
Young’s integration with the organization and his opportunity for profit meant that he was really an ADM employee, not a contractor. But he wasn’t in a fiduciary position. The court found no evidence that he undertook a duty to act in the best interests of the company.
In addition, despite the promise that he would one day be able to purchase ADM, the tight control wielded by ADM’s owner meant that Young didn’t have a significant and senior role with the organization. This lack of fiduciary duty proved to be a “bullet” to ADM’s claims. Adding insult to “bullet wound,” he was awarded over $175,000 in damages for his counterclaim regarding unpaid employee bonuses.
Takeaway points
This case demonstrates the importance of defining the terms of an employment agreement, including post-employment restrictions, explicitly through contract. These may include confidentiality and nonsolicitation obligations and, in limited circumstances, noncompetition agreements.
Had ADM entered into reasonable and enforceable restrictive covenants with its employees, it may have been able to recover damages when one of its former employees solicited its employees and customers. Given the limitations to common law fiduciary duties, restrictive covenants provide valuable protection to employers.