Category Archives: Cases

Weekly post on cases.

The Latest on Termination of Employment for Insubordination

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The recent case of Smith v. Diversity Technologies Corporation provides some interesting insights into several employment law issues and principally that of termination for insubordination.

Mr. Smith was a sales manager for the defendant Diversity Technologies Corporation (“Diversity”). He had a record of being an exemplary employee. He had been employed by a company called Drillwell for 16 years before it was sold to Diversity and he worked at Diversity another four years until he was fired on October 14, 2011.

Diversity alleged that Smith had been terminated for just cause for insubordination. Smith had been the primary contact for a particular client which, by September 2011, owed Diversity about $100,000. At that point, Smith’s immediate superior instructed him to make sales to that customer in future only if they were paid for immediately by cash or credit card. Subsequently, his superior told him that no sales should be made to that customer at all because Diversity was going to be suing the customer to recover the debt.

Nevertheless, Mr. Smith did take an order from the customer of just over $1,000 without telling his superior. He accepted a cheque from the customer to pay for the order.

When this behavior was discovered by Diversity, Smith was fired.

Smith had entered into an employment contract providing for termination by the employer upon payment of one year’s salary which in this case was $100,000. In fact, Smith obtained comparable employment within a matter of weeks and the Court found that he had suffered no loss.

Not surprisingly, Smith put forward a different version of events relating to his instructions concerning that customer. He denied that he had willfully disobeyed his employer or that he had been insubordinate in any way.

Smith made a claim for the $100,000 severance payment and moved for summary judgment. Diversity insisted that Smith had been fired for cause and at worst, it was entitled to a trial to decide the case.

The motions judge had no difficulty dealing with the matter without requiring a trial. The judge considered that even though the versions of the story told by both sides were different, he was in an excellent position to rule on the matter even accepting Diversity’s version of the events, given the law relating to termination for insubordination.

On the facts of cases in which insubordination was held to constitute just cause for immediate termination, the Court noted that employers have the right to determine how business is to be conducted and employees are obliged to follow those instructions. Where an employee fails to follow lawful orders of his employer, he will be found to have disregarded an essential condition of his employment and this constitutes cause for immediate termination.

However, as this case demonstrates, the issue is not necessarily quite so clear cut. In this case, the Court considered that prior to the incident in question, Smith’s conduct as an employee had been beyond reproach. The amount in issue was trifling, particularly in comparison to the amount of the customer’s outstanding account. Because it was paid for immediately, the additional order did not increase the debt. Given Smith’s length of service and impeccable record, Diversity should have met with Smith, pointed out that his actions were in violation of the new company policy relating to this customer, and provided him with a properly-documented written warning. In proper context, his actions could not be considered as amounting to willful disobedience or insubordination.

The Court concluded by indicating that even if Smith’s conduct could be described as insubordinate, “it was not of a magnitude sufficient to justify termination.” Had Smith continued this behavior, Diversity would have had grounds for termination but in this case, its actions in terminating Smith’s employment were not justified.

On the question of damages, it was clear that Smith had mitigated his damages completely. However, given the terms of his employment agreement, Diversity was ordered to pay Smith $100,000 representing the amount payable under the employment contract.

This case demonstrates that before an employer terminates an employee without notice for insubordination, the employer must consider the context of the insubordinate act. An employer cannot simply seize on one instance of an act which might be considered insubordinate in some technical way to justify terminating the employment of an employee of long standing who has an otherwise unblemished record.

The Latest on Employment Contracts that Require Employees to Give Notice of Termination

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The recent case of BlackBerry Limited v Marineau-Mes provides a useful insight into the often murky area of the obligations of an employee to provide notice of his intention to resign.

In this case, the employee was a Senior Vice President of BlackBerry Limited.

In the fall of 2013, he accepted a promotion to Executive Vice President in charge of about 3,000 employees. He signed an employment contract for his new position.

Among other things, the contract provided that he could resign at any time on six months’ prior written notice. The contract provided that during the notice period, he would continue to provide active service to the extent required by BlackBerry.

By the time he signed the contract in October 2013, he had already begun discussions with Apple Inc. about a new job. About a month after signing the contract, he had some discussions with BlackBerry’s newly appointed Chief Executive Officer which he did not find satisfactory, because the discussions included the notion that his role might ultimately be narrower in scope than originally contemplated.

One month later, in December 2013, Apple offered him a senior management position and he gave BlackBerry written notice of his resignation. He advised BlackBerry that he intended to join Apple in California in about two months.

This led to a dispute as to whether or not he was obliged to provide BlackBerry with six months’ notice of his resignation as required by the contract, thereby making himself available to assist with his transition out of the company for that period of time. BlackBerry brought an Application to the Court for an Order to that effect. The employee took the position that the contract was not valid and enforceable.

There is an abundance of case law around the question of reasonable notice of termination when an employer makes the decision to fire an employee. There is much less case law relating to the extent to which employees are obliged to give reasonable notice of resignation. That may be why BlackBerry insisted on a specific contractual term requiring six months’ notice in the event that this senior employee wished to resign.

The problem is that these concepts are not simply the opposite sides of the same coin. It is generally open to an employer that does not wish the terminated employee to actually work through his notice period, to provide the terminated employee with pay in lieu of reasonable notice. On the other hand, where the employee is resigning, the employer may well need the employee to continue to work through the notice period, or to at least make himself available so that there can be an orderly transition of that employee’s duties to a replacement. A payment of money by the resigning employee to the employer to take the place of that notice period simply won’t address the problem that the employer may be facing, particularly where the resigning employee is a member of senior management or has other specific knowledge or training that the replacement employee will not have.

In this case, the employee argued firstly that even if the contract was valid, he was free to leave during the notice period and BlackBerry’s remedy was an action for damages if any. The Court had no difficulty rejecting that argument.

The employee raised a number of other minor arguments but the other major point he tried to make was that the six month notice period was the equivalent of a non-competition covenant which was unreasonable and therefore unenforceable.

The Court did not accept that submission either. The Court found BlackBerry’s argument that it was necessary to have the employee available, and that the notice period was one of the tools allowing it to achieve that end, to be quite reasonable. Furthermore, given that the employee knew all along that he was expected to remain available to perform duties to BlackBerry during the notice period, and that these services would be necessary for his transition out of the company, the Court rejected the argument that the notice period was the equivalent of a non-competition clause. Finally and in any event, the Court observed that while the notice period did have some aspects of a non-competition agreement, it is the law in Ontario that reasonable competition clauses are enforceable. The Court found this clause to be eminently reasonable.

In the result, the Court found that BlackBerry was entitled to a declaration that the contract was binding and that the employee was required to provide six months’ prior written notice of resignation.

In my experience, employees sometimes seem to think that if they choose to resign, they will be able to do so without any particular regard for their obligation to provide reasonable notice. That may be true for some. However, where an employer is careful enough to require a specific notice period in an employment agreement, this case is a reminder that employees signing such employment agreements must take those clauses seriously.

Furthermore, for those perspective employers interested in hiring senior employees, it may well be prudent to question the perspective recruit as to any obligation that individual may have to provide reasonable notice of resignation to his or her former employer.

Privacy Rights, Copyright Holders’ Rights, and the Internet

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A recent decision of the Federal Court of Canada in a motion brought by Voltage Pictures LLC in a copyright infringement case provides an interesting insight into the way in which the Court will balance privacy rights, on the one hand, and the rights of copyright holders on the other hand.

Voltage owns the copyright in a number of popular movies, including The Hurt Locker.  In this case, Voltage had a complaint about the unauthorized copying and distribution of its movies by about 2,000 subscribers of an Internet Service Provider (ISP) known as TekSavvy Solutions Inc.  Since Voltage knew that the activity was going on but did not know the names and addresses of the subscribers involved in it, Voltage brought a motion to the Court for what is referred to as a Norwich Order.  This is an order that requires people who are not parties to a lawsuit to be made to either provide information or attend for an examination for discovery.  This order was sought against TekSavvy, to force it to provide the names and addresses of these 2,000 subscribers to Voltage so that Voltage could sue them.

TekSavvy took no position on the motion.  However, by order of the Court, the Samuelson-Glushko Canadian Internet Policy and Public Interest Clinic (CIPPIC) intervened to provide arguments and evidence to help the Court by putting the dispute into an appropriate context.

Essentially, the CIPPIC took the position that Voltage’s true intentions were not motivated by concerns about copyright infringement.  Rather, Voltage was interested mainly in intimidating individuals into quick settlements by issuing demand letters and threatening litigation.  The CIPPIC argued that most individuals put into that position would make payments whether they were involved in unauthorized copying and distribution or not.

The CIPPIC also insisted that TekSavvy should not be required to release any information because this would infringe on the privacy rights of its subscribers and might affect the scope of protection offered to anonymous on-line activity.  Furthermore, this type of order might serve as a precedent for the Court to order information about whistle-blowers and other confidential sources of documents made public in the public interest.

The case involved the need to strike the right balance between competing interests.  The Court had to determine whether or not this was something more than a fishing expedition on the part of Voltage, and particularly whether there was a real prospect of these subscribers having been involved in an improper activity.  As the Court said, “privacy considerations should not be a shield for wrongdoing” provided, of course, that the protection of copyright is the sole motivating factor supporting the request for the order.

In the result, the Court decided that Voltage’s rights as a copyright holder outweighed the privacy interests of the subscribers, and the order was granted.

This case has very important ramifications for copyright owners as well as those breaching the rights of copyright owners on the internet by improperly downloading movies and other forms of entertainment on the assumption that their identities will never be disclosed.  As this case demonstrates, such individuals cannot assume that they will remain anonymous and immune from having to account for their actions.

The Further Development of Ontario’s Summary Judgment Rule

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Several weeks ago, I posted an article about the decision of the Supreme Court of Canada in Hryniak v. Mauldin, et al., and indicated that in my view this case represented a momentous shift in Ontario’s law on summary judgment.

Further cases released since that time have confirmed my view. I believe that we are approaching a point at which summary judgment motions will become the norm and trials the exception.

The most recent pronouncement in this regard, released several days ago, is the decision of Mr. Justice Corbett in Sweda Farms v. Egg Farmers of Ontario. In that case, a factually complex claim in which the plaintiff alleged that it had been the victim of a conspiracy, that it had suffered losses as a result of the misuse of confidential information, that it had been the victim of violations of the Federal Competition Act, and that it was entitled to damages for both breach of contract and unjust enrichment would never, under the old regime, have been considered a candidate for a summary judgment ruling in favour of either party and on any basis.

However, that is no longer the case.

Leaving the facts aside, the important part of the decision for our purposes has to do with the manner in which Justice Corbett analysed the results of the Hryniak case. In his view, that case:

“… provides a basis for a sort of reverse engineering of this motion, one that may be of great use in summary judgment motions in general. The Supreme Court of Canada is clear that the motions court should ask itself why it should not grant summary judgment”
[emphasis added]

The Court goes on to say that where the motion fails, the Court’s answer to that question “will become an agenda for the case up to its final disposition, in most cases, by the judge who presided on the motion for summary judgment.”

In the past, motion court judges have looked at voluminous motion records, raised their eyebrows and wondered how it could ever be possible to conclude, on the basis of such a significant amount of evidence, that the outcome of a case was beyond doubt. It is clear that this is no longer a relevant consideration. As the Court in this case said, “summary judgment motions come in all shapes and sizes, and this is recognized in the Supreme Court of Canada’s emphasis on ‘proportionality’ as a controlling principle for summary judgment motions. This principle does not mean that large complicated cases must go to trial while small single issue cases should not.” At the end of the day, a judgment will be rendered if it can be done fairly and justly without a trial, and a formal trial is no longer to be “the yardstick by which the requirements of fairness and justice are measured.”

To reiterate a sentiment that I expressed previously, the consequences of this new regime for litigants cannot be understated. While summary judgment motions were once the exception, it appears to me that they will now become commonplace. At the same time, of course, this will mean that the evidence that will be required either to prove a claim, or to prove that a claim has no merit, will now have to be generated at a very early stage in the proceeding rather than later in the process and usually after the completion of examinations for discovery and the exchange of undertakings.

Accordingly, and at its most basic, it now appears that the expense to which litigants can expect to be put near the outset of a matter is going to increase very substantially. At one time, intensive trial preparation commenced within the weeks preceding a scheduled trial. At that point, the meters began running almost continuously and the costs to a litigant of getting ready for trial began to mount. However, up to that point, the extent to which litigants were put to expense depended not only on the complexity of a matter but also on the willingness of counsel to expend the time necessary to prepare every minute aspect of a case any sooner than he or she had to do so.

This may no longer be the case. Even though summary judgment motions generally take place early on in a proceeding, and often before examinations for discovery, it is clear that the motions court will require a full evidentiary record in order to deal with a matter. In the Sweda Farms case, the Court found that the plaintiff had failed to provide it with sufficient hard evidence to justify its position. It asserted that it would be calling nearly 100 witnesses at trial but as at the date of the motion, it was found not to be able to put forward sufficient evidence to justify its position.

Accordingly, Sweda‘s claim was dismissed summarily. This is not withstanding the fact that as Courts have noted in the past, conspiracy claims by their very nature involve investigation and the generating of evidence usually not known to a plaintiff until after the completion of the discovery process.

Looking at the situation from a different perspective, I have for many years lamented the fact that pressure on litigants and their counsel to settle cases, relentless as it has been, has made it exceedingly difficult for parties and their lawyers wishing to go to trial to actually do so. This may have significant advantages for a number of litigants, who should be taking a serious look at settlement early on. However, a reduction in the number of matters going to trial does have some negative repercussions.

Firstly, while much of the law governing citizens of Ontario are contained in statutes, as much or more is reflected in jurisprudence. The fewer the number of matters that go to trial, the less guidance that becomes available to us all as to what our rights and obligations are, as society evolves.

Secondly, I am becoming increasingly aware of young and perhaps not so young lawyers in this province who wish to become proficient advocates, having fewer and fewer opportunities to actually go to trial and learn how to advocate. Fewer trials means fewer opportunities for professional growth. As a result, when matters ultimately do go to trial, to the extent that this ever happens, litigants are not as well represented as they might otherwise have been.

In my view, these trends will now be accelerated as a result of the change in the law of summary judgment. One can only hope that the positives will outweigh the negatives over the long haul.

The Latest on Restrictive Covenants in Partnership Agreements

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The recent decision of the Court of Appeal in Greenaway vs Sovran brings forward an interesting point about the enforceability of a restrictive covenant in a partnership agreement involving only two partners.

In this case, the parties were partners with each other in an accounting practice that operated for over 20 years. They carried on practice in two separate locations, each partner working out of a different city in Ontario. There were no other partners.  The partnership agreement was poorly drafted, having been prepared without legal advice by one of the parties based on a precedent that he had obtained at a conference in the United   States (I pause to note that in my experience, this type of thing happens with alarming frequency – even among professionals).

The agreement contained a covenant providing that where a party withdraws from the partnership, that party will suffer a reduction in his capital account by 500% of the average fees billed by the firm to clients who transfer their files to him within the following 24 months. The Court characterized this as a “restrictive covenant”.

In this case, Greenaway gave notice to Sovran that Greenaway would be retiring from the partnership.  He subsequently provided a further notice confirming that he was retiring from the firm, and giving notice of his intention to dissolve the partnership as of the date of his retirement.

The date came and went.  Both parties continued to provide accounting services to what were essentially former clients of their partnership.

Sovran took the position that Greenaway was subject to the restrictive covenant, so that his capital account now reduced by $1 million given the number of clients who transferred their files to him after the dissolution of the firm. Greenaway took the opposite position and the matter was dealt with by way of Application.

Greenaway took the position that the dissolution of the partnership prevented Sovran from trying to enforce any covenant against him. Sovran responded by pointing to a clause in the agreement stating that the “interest of the firm should take precedence over the interest of an individual,” suggesting that this meant that there was in contemplation a continuing business entity following the departure of a partner which would be entitled to the protections contained in the restrictive language in the agreement.  The Application judge found that Greenaway had indeed withdrawn from the partnership triggering the clause in the agreement that reduced his capital account.

The Court of Appeal disagreed. As far as the Court of Appeal was concerned, the agreement between the parties was intended to apply to multiparty partnerships and not a partnership of two. Greenaway’s withdrawal coincided with the dissolution of this two-member firm at which point, according to the Court of Appeal, the firm ceased to exist and the parties were free to pursue their own practices without any reduction in Greenaway’s capital account. There was no contractual term preventing them from doing so and if either had wished to include a specific term permitting one partner to prohibit the other from competing, which could have been done. In the absence of such a provision, the Court felt that it was reasonable to conclude that the partners should be limited to their common law and statutory rights in the event of dissolution and nothing more. Otherwise, an unhappy partner would have to choose between remaining handcuffed to the other partner or quitting the partnership and, for practical purposes, leaving the entire business to the other partner.

This is an important case for partnerships involving no more than two partners. It demonstrates the care that must be taken in drafting any provisions in an agreement intended to govern the relationship between the parties if the partnership is dissolved. If proper care is not taken, the parties run the risk that upon the dissolution of the partnership, covenants of a restrictive nature contained in their agreement may be unenforceable.

The Latest on Punitive Damages in Wrongful Dismissal Cases

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The recent decision of the Ontario Court of Appeal in The Estate of Pate v. The Corporation of the Township of Galway-Cavendish and Harvey provides interesting insights into the current state of the law on awards of punitive damages in wrongful dismissal cases.  The rather tragic facts of the case also provide useful guidance to employers inclined to take a heavy-handed approach with terminated employees.

Pate was employed as a building inspector for the defendant Township for almost 10 years until March 1999 when he was fired. The Township claimed that it had uncovered discrepancies regarding building permit fees for which Pate was responsible.  Pate was never provided with particulars of these allegations, but the chief building official told Pate that if Pate resigned, the Township would not contact the police.  Pate refused to resign.

After the termination, the chief building official turned some information over to the police.  The investigating officers were reluctant to lay charges but the Township exerted pressure on the higher-ups in the police organization and charges were laid.  Pate had to go through a four-day criminal trial before being acquitted in 2002.  He then sued for damages for wrongful dismissal and malicious prosecution and requested punitive damages.

Unfortunately for Pate, the criminal proceedings were the subject of considerable media coverage.  According to the Court, he remained in the public spotlight from the date of his dismissal in 1999 until his acquittal in 2002.  He never obtained another job in the municipal field again and he died in 2011.

The question as to whether or not Pate had been wrongfully dismissed was never really an issue.  The Township acknowledged its liability for this early on and paid Pate damages equivalent to 12 months’ pay based on a negotiated agreement.  The interesting aspect of the case had to do with the claim for punitive damages.

Punitive damages have always been available in both tort and contract cases in Ontario.  Historically, however, they have been very difficult to obtain.  The tests employed by the Court have included words such as “malicious” and “high handed”.  Historically, such damages have rarely been awarded in straight business disputes.  They seem to be awarded much more frequently in two types of cases: claims against insurance companies and wrongful dismissal cases.

An award of punitive damages is unlike any other type of award.  Other awards are intended to compensate an injured party for losses suffered because of the wrongful conduct of the defendant.  Punitive damages do not involve any aspect of compensation.  Instead, they are meant to punish the wrongdoer for behaviour of which the Court strongly disapproves.  In the words used in the jurisprudence, the objectives of awards of punitive damages are “retribution, deterrence, and denunciation”.

This means that the amount to be awarded for punitive damages, if any, is conditioned on two factors.  The first factor, of course, involves the question of just how bad the defendant’s conduct actually was.  The second factor has to do with the defendant’s financial means.  After all, if the point of the award is to deter a party from repeating this type of conduct, an award of $100,000 may be very meaningful (and have a high deterrent value) to a middle class individual but completely meaningless to a major multi-national corporation.  In the latter case, a much larger award may be appropriate.

In this case, the conduct of the Township went well beyond its urging the police to take action.  The Court also found that the Township had uncovered evidence in the course of its own investigation that was in Pate’s favour.  The Township deliberately refrained from sharing that information with the police.  That fact demonstrated the type of malice that justified not only an award of punitive damages but also an award of damages for malicious prosecution.

At the trial level, Pate was awarded punitive damages of $25,000.  Pate appealed to the Court of Appeal, arguing that this figure was too low.  The Court of Appeal sent the case back to the trial judge for a new trial on the issue.  After the re-trial, the trial judge increased the award of punitive damages from $25,000 to $550,000.  The Township then appealed that decision.

On appeal before three Court of Appeal judges, one of the judges saw nothing wrong with the new figure.  The other two judges disagreed, although not significantly, and reduced the award to $450,000.

While there has always been a wide range of punitive damages in wrongful dismissal cases, there has been a low average award of about $25,000 in most cases although some have exceeded that by a considerable amount.  In other cases of breach of contract, misrepresentation or other such torts, the average has been about $50,000.  In cases involving the denial of insurance claims, much higher amounts have been awarded; in one case that was ultimately decided by the Supreme Court of Canada, $1 million was awarded.

In this case, considering the blameworthiness of the misconduct, Pate’s vulnerability, the harm caused to him, the total amounts awarded to him and the warrant for punishment, the Court had no difficulty determining that the award should be towards the high end of the spectrum.

Employers are typically in the driver’s seat in these matters.  Employees tend to be vulnerable and there are many employers who cling to the idea that they can act with impunity in terminating employment.  While it is true that as a general principle, subject to the existence of an employment agreement, an employer can terminate employment at will (provided that the employer provides reasonable notice or pay in lieu of notice), that does not mean that an employer can behave in an outrageous manner.  Employers failing to appreciate this may well find themselves on the wrong end of a substantial punitive damages award.

Ontario Franchise Legislation – Tough Times for Franchisors

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As any Ontario franchisor will tell you, the last few years have not been a walk in the park for owners of franchise systems. The current legislation in Ontario, known as the Arthur Wishart Act (Franchise Disclosure), 2000, has very strict rules about the type of disclosure that a franchisor (one who grants a franchise) must make to a perspective franchisee (one who is granted a franchise).  While that is fair and understandable, the Act also contains provisions which impose a significant penalty or disadvantage on a franchisor for even the most technical violation.

As an example, if the disclosure material contains the slightest deficiency, a franchisee can operate its business for up to two years before deciding whether or not to terminate the franchise agreement.

If the franchisee decides to terminate on that basis, it is entitled to receive back from the franchisor all of the money paid to the franchisor for the franchise rights including any money paid for equipment purchased for use in the business. Obviously, that equipment has to be returned.

The recent case of 2189205 Ontario Inc. v. Springdale Pizza Depot Limited deals with the question of the franchisor’s obligation to re-purchase equipment when the equipment itself is in poor condition.

In this case, the franchisor was ordered to pay compensation to the franchisee in a substantial amount for certain supplies and equipment payable upon the return of that equipment.

The franchisee had kept almost all of these items in storage in a barn in rural Ontario since 2009. It was now prepared to deliver this material to the franchisor in exchange for payment.

The franchisor argued that the franchisee was “unable” to return the supplies and equipment because of their poor condition given that they had been in storage for almost five years. The franchisor argued that the poor condition was at least partially as a result of what it alleged was improper removal and storage by the franchisee.

The Court ruled in favour of the franchisee. It determined that under the legislation, equipment has to be repurchased regardless of its condition. The Court considered that the legislation is remedial in nature and contains no duty on a franchisee to mitigate its damages. As a franchisee is entitled to be made whole, and as there was no evidence in this case of any deliberate acts of damage to the equipment by the franchisee, it was entitled to repayment of the entire purchase price. Its condition was irrelevant.

The legislation is indeed remedial in nature. It came into force as a result of an enormous amount of abuse heaped on unwitting and vulnerable franchisees by unscrupulous franchisors. However, cases like this must make one wonder as to whether or not the legislation simply goes too far.