Written by John C. Batzel
It happens every day. You hire someone who used to work for one of your main competitors. Perhaps you sought the person out and lured them away from their previous position. Or, they may have come to you looking for work. It may be a senior executive whose departure is heralded in the press, or a technical employee whose move goes largely unnoticed. What obligations do you have to your competitor as a result of the decision to hire one of their former employees? What liability may you be exposing yourself to should you fail to meet those obligations?
These are the kinds of questions that arise from the much publicized, ongoing lawsuit between Air Canada and WestJet Airlines Ltd., filed in the Ontario Court of Justice in April of this year (Bennett Jones LLP makes no comment regarding the truthfulness or accuracy of any statements or allegations made in this action). In its Statement of Claim, Air Canada alleges that WestJet illegally obtained confidential, proprietary information from a former employee of Canadian Airlines (which merged with Air Canada in 2000), and used that information in an attempt to drive Air Canada out of certain markets. In particular, the suit by Air Canada names as defendants WestJet, its former Vice-President of Strategic Planning (who is also a co-founder of the airline), and the former Canadian Airline's employee now employed by WestJet. The employee, a financial analyst with WestJet, received a severance package from Air Canada as part of the merger agreement between Air Canada and Canadian Airlines. The severance package enabled the employee to book two free flights per year on Air Canada until 2005, and provided him with access to a website through which he was able to book the flights and receive information on passenger traffic and load factors for all Air Canada flights. According to the Statement of Claim, Air Canada provided access to the website to former employees for the limited purpose of enabling those in receipt of travel privileges to book personal travel, and to determine when space is available and whether it is likely to remain available.
Under questioning from Air Canada's lawyers on discovery, the employee said that he gave his password to the Air Canada website to the Vice-President of Strategic Planning for WestJet in March, 2003, after the Vice-President visited his desk and saw the information on his computer screen. Soon after that, the employee sought and received a legal indemnity from WestJet for any personal liability associated with its use of the Air Canada website. Also on discovery, the Vice-President gave evidence that he began using the employee's password to access the Air Canada website each night and manually count the load factors. Soon after that, however, another WestJet employee was assigned the task of building software that would calculate Air Canada's load factors automatically. Using this software, Air Canada alleges that WestJet was able to access its website on 240,000 separate occasions between May, 2003 and March, 2004, and that it used the information gained to: identify and target Air Canada's most profitable routes, and adjust its schedules and pricing accordingly; plan expansion into new routes; and, adopt pricing strategies aimed at forcing Air Canada out of certain markets. By knowingly misappropriating confidential information, Air Canada alleges, WestJet has gained a valuable springboard in starting new routes and terminating other routes, both within Canada and the United States, avoiding costly and time-consuming mistakes.
Air Canada's lawsuit claims $220 million in damages against the Defendants, as well as other relief relating to the protection and retention of its confidential information. Since the claim was filed, the employee has been placed on a leave of absence, while the Vice-President of Strategic Planning resigned from WestJet in July, 2003, with the airline citing their mutual best interests in view of the ongoing scrutiny of his actions in relation to the lawsuit between Air Canada and WestJet. Air Canada has also argued in a written brief filed with the Court that it should infer that the misuse and dissemination of confidential information was extensive and included all the senior management of WestJet, including the CEO. For their part, the Defendants have denied that the information contained in the Air Canada website was confidential, or that they used any information belonging to Air Canada, and claim that any damages suffered by Air Canada are the result of its own mismanagement. WestJet also denies that the conduct of its Vice-President complained about by Air Canada was performed in his role as a vice-president and senior officer of the company. In addition, both WestJet and the Vice-President have counterclaimed against Air Canada seeking punitive damages of $5 million and other relief in relation to the alleged unlawful seizure by Air Canada investigators of their own confidential information found in the trash bins behind the Vice-President's house.
The dispute between Air Canada and WestJet demonstrates the problems that can arise where the former employee of a competitor possesses allegedly confidential information belonging to that competitor. Generally speaking, the law will impose a duty of good faith on such employees that prohibits them from using or disclosing any genuinely confidential information for a competitive purpose. This is true even where the employee has not signed a written confidentiality agreement with the former employer. Senior employees who stand in a fiduciary relationship to their former employer have a heightened duty not to directly solicit any customers of the former employer for a reasonable period of time, or make unfair use of any information gained in the course of their employment with the former employer. An employer who benefits from the breach of an employee's common law or fiduciary obligations owed to their former employer may be found vicariously liable for such a breach. An employer may also be found directly liable for inducing the breach of any obligations owed by an employee to their former employer. In view of the potential risks, employers should be cautious about using information of an arguably confidential nature in the possession of an employee who has previously worked for one of their competitors. At a minimum, employers in these circumstances should contact legal counsel and seek advice before requiring an employee to disclose any potentially confidential information, or using the information for any purpose. Employers should also seek advice before granting an indemnity to the former employee of a competitor regarding the use of any potentially confidential information. While the ability to acquire information about a competitor from the competitor's former employees may seem like an attractive opportunity at the outset, the risk of exploiting that opportunity can very quickly outstrip any rewards.