Court Ruling Sheds Light on Fiduciary Status

Financial Post: 10 Feb 2015.  All rights reserved.

Some real-life legal scenarios are so outlandish they resemble a plot for a madcap caper film or a gripping novel about revenge.

In one thrilling episode of Mad Men the ad agency’s top management successfully conspired to jump ship and start a rival agency, over just one giddy weekend in 1963. (They supposedly evaded their employment contracts by inviting a co-conspirator to fire them, expecting he’d then be fired, too.) But in Canada, in 2015, Don Draper would be successfully sued for “breach of fiduciary duty.”

A fiduciary is a person who the law requires to place another person’s interests ahead of even their own. Common examples of such relationships include trustee-beneficiary, agent-principal and certain categories of employees.

The vast majority of employees are not fiduciaries. On the other end, corporate directors and top officers automatically are fiduciaries.

A fiduciary employee cannot quit and immediately begin soliciting the firm’s clients. Rather, they must wait a “reasonable” time before doing so. This makes the fact of fiduciary status critical if the employee’s contract lacks an enforceable non-solicitation clause. An employee can be a fiduciary with or without a valid employment contract.

A departing fiduciary is also not allowed to lassoo or hijack a “maturing” business opportunity and would be ordered to disgorge any profits. Essentially, they can’t use confidential information or exploit the relationships they developed while employed. However, subject to contractual constraints, a fiduciary is free to “fairly” compete with his former employer.

Every worker, fiduciary or not, owes their employer a duty of good faith and loyalty, regardless of whether they have a contract stipulating that. That general duty lasts until the end of her employment.

By contrast, a fiduciary duty continues for a “reasonable” time after a fiduciary quits or is fired with just cause. However, a fiduciary’s duties, in some cases, may instantly end if fired without legal cause when no severance is provided. An employer should take this into account when contemplating firing a top executive if uncertain about having adequate cause.

Courts will impose fiduciary liability on even low-level workers who assist a true fiduciary in breaching their duties. So, if the Mad Men example was transposed to contemporary Canada, the firm’s office manager, Joan, would also be on the hook for the full damages, jointly with her cohorts.

What about a lone wolf who isn’t a top dog? The fiduciary status of an employee who lacks a corner office depends on the particular facts. Courts won’t be misled by a job title. Instead, they will weigh a variety of factors to determine whether someone truly is a “key” employee. The most important factor is whether both parties must have known that the company would be unusually “vulnerable” to the employee’s predations if he or she ended up going rogue.

Courts tend to make all-or-nothing decisions as to whether a particular employee is a fiduciary. There is no half pregnant, half cause or, until now, half fiduciary. But an intriguing new Ontario Superior Court decision may be the vanguard of a new approach, where a person may be considered a fiduciary for certain limited purposes.

In August, 2014, Justice David Price considered a messy situation. A safety consulting firm, Training Services, had ended its arrangements with an associate, Frank Keegan, who then continued to provide safety training to its clients.

Although Keegan was never an employee, Training Services was almost his sole source of work. He thus was a “dependent contractor” who would have been owed reasonable notice or severance if Training Services had lacked legal cause to terminate. (Training Services had cause.)

The court found that the restrictive covenants in Keegan’s contract were unenforceable because they were ambiguous and overbroad. Unless the employee is deemed to be a fiduciary, that normally connotes the end of any argument as to whether they can openly solicit and compete. The novel part of this decision was about fiduciary duties.

The Supreme Court of Canada has said that the existence and scope of a fiduciary duty “will depend upon the reasonable expectations of the parties.” Justice Price concluded that, although Keegan was not a general-purpose fiduciary, he had a limited fiduciary duty not to compete by training those clients (or former clients) whose names he had obtained as result of Training Services having provided him a confidential customer list based on the agreement that he not later solicit those customers.

Therefore, like a full fiduciary, he was prohibited from soliciting them and had to pay Training Services all of his profits for doing so, a judgment that survived his bankruptcy. What is interesting is that, despite finding the restrictive covenants unenforceable, the court saw them as important evidence of what duration of fiduciary protection was reasonable (in this case, two years).

Time will tell if this case remains an outlier or heralds a new broadening of fiduciary status.