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Honesty is always best company policy. Employees must disclose conflicting side business

Date: December 14, 2005
Author: Howard Levitt
Publication: National Post

A few years before being fired, Gary Fraser had serious problems in his personal life — his wife left him, he was losing weight, his nerves were shot and it was apparent he was unhappy. Like many bosses would, Paul Richards, president of ProScience, tried to give his employee a break.

But that all changed when Richards learned Fraser was considering going into business for himself. When confronted, Fraser admitted to putting out feelers but denied he had plans to leave.

Then, while attending an industry convention, Fraser was offered the opportunity to sell a new line of fireplace parts. ProScience sells specialized glass used in fireplaces, so he knew the industry. Fraser kept the offer a secret, taking the Canadian distributorship for himself. Soon he was selling the new products to people he knew. With only a handful of major fireplace firms nationwide, many of Fraser’s sales prospects were customers of ProScience’s.

Fraser ran his company out of the apartment of Sue Gomes, a ProScience employee Fraser had hired a few years earlier. After Fraser’s wife left him, he began sharing an apartment with her.

Gomes and Fraser secured a $100,000 business loan. On the day the loan came through, Gomes quit her job at ProScience, purportedly unhappy with her pay. Before leaving, she downloaded product information and price lists from her computer, and handed the disk to Fraser. At trial, he denied using this confidential information, claiming he threw the disk in the glove compartment of his car because he was rushing to the dentist.

The Court was unconvinced, particularly when the evidence showed an exact across-the-board reduction on all competitive products. The Court ruled the ProScience information had been used by Fraser and Gomes to undercut their former employer.

When Richards informed Fraser that he had heard rumours Fraser had a business and Gomes was working for him, Fraser denied it. After learning more about the side business, including the solicitation of ProScience customers, Richards fired Fraser without notice.

The Court concluded Fraser did not act honestly or in his employer’s best interest. Despite being a senior executive, he let his personal interests prevail over his employer’s. Not only did he accept an opportunity he should have disclosed to his employer, but he also lied when confronted, all in the pursuit of profits for himself. The court found this cause for dismissal. Moreover, ProScience was successful in its counterclaim based on Fraser’s breach of duties.

All employees have a duty of good faith to their employer. Opportunities they encounter as result of their work must be offered to the employer. Even then, no employee can surreptitiously run a business in their employer’s field without disclosing it.

Here are some ways businesses can protect themselves against competition from employees:

INVESTIGATE SUSPICIOUS CONDUCT Although concerned about Fraser’s conduct, Richards initially gave him the benefit of the doubt. But, while ProScience won in court, Fraser was permitted to continue his new business. ProScience could have terminated him earlier and suffered less.

DEMAND UNWAVERING LOYALTY Employers are legally entitled to it. The duty to avoid self-interest requires key employees to avoid putting themselves in a position where their own interests, including side businesses, detract from their ability to work fully for their employer’s benefit.

SECURE COMPANY INFORMATION ProScience proved Fraser and Gomes had effectively copied price lists, which they misappropriated. Especially when they have suspicions, employers should do everything possible to protect sensitive customer and price information.

OBTAIN APPROPRIATE LEGAL ADVICE Despite ProScience’s success on their counterclaim, they only recovered a small fraction of the profits Fraser earned in his new business. They may have won more with an appropriate employment agreement in place or by taking more aggressive action earlier.

Howard Levitt is senior partner of Levitt & Grosman, employment and labour lawyers. He practises employment law in eight provinces and is author of The Law of Hiring in Canada, soon to be released.