Calculating Damages from Misappropriation of Confidential Information

March 18, 2012 - by: Thora Sigurdson 0 COMMENTS

By Thora Sigurdson

We all know that, where applicable, it’s important to take care in drafting confidentiality, noncompetition, and nonsolicitation terms in employment, contractor, and other agreements. A recent case in British Columbia, Cruise Connections Canada v. Cancellieri, reminds us of the value of having a “duty of good faith” clause. It also illustrates how damages for the future use of confidential information will be calculated.

Facts
In Cruise Connections, a number of sales representatives left Cruise Connections and started their own business. Before they left, the sales representatives copied the company’s customer database. The database contained information on customers’ names, contact information, past trips, preferences, and other valuable information.

The sales representatives set up their own business and actively attempted (often successfully) to transfer sales from Cruise Connections to their new venture and to generate new sales from Cruise Connections’ customers.

The sales representatives’ contracts with Cruise Connections had two provisions of note: (1) the obligation to operate honestly and in good faith and in a manner that wouldn’t harm the good will and reputation of Cruise Connections and (2) the obligation to hold confidential information in strict confidence. The contracts didn’t have noncompetition or nonsolicitation clauses.

Court’s findings
The British Columbia court found that the sales representatives had breached both the confidentiality and good-faith provisions of their contracts. The court confirmed that the duty of good faith is breached when a person acts out of self-interest, ill will or for a dishonest purpose, or acts in a way that causes “significant harm to the other [party] contrary to the original purposes or expectations of the parties.”

Further, even where a departing employee is not bound by a nonsolicitation clause, he or she will breach a contractual duty of good faith to the employer by taking a list of the employer’s customers for use after their employment has ceased.

This is not new law, but it is a reminder of the benefit of having a clear “duty of good faith” clause in appropriate agreements.

Calculating damages
Cruise Connections also provides a helpful review of the assessment of damages flowing from departing employees’ use of confidential information.

Cruise Connections advanced a claim for over $1.5 million for future losses. The court found that claim wasn’t supportable and awarded about $470,000 for future loss. The difference was in the assumptions.

  1. Baseline: The evidence showed that an average of 4.5 percent of Cruise Connections’ customers booked trips in any given year. The court accepted that as a starting point for the future loss claim.
  2. Retention rate: Cruise Connections argued that 100 percent of those clients would have stayed with Cruise Connections. The court disagreed. The sales representatives could have lawfully and probably successfully pursued some of those sales. A 60 percent retention rate was appropriate.
  3. Attrition rate: As there tended to be a personal relationship between a sales representative and his or her clients, it was likely that Cruise Connections would have lost some of its clients to the sales representatives over time even without them using confidential information. Cruise Connections argued for a 15 percent attrition rate. The court said a 25 percent attrition rate was appropriate.
  4. Duration of the loss: Cruise Connections argued that losses would continue for over seven years. The court said that three years was more appropriate – based on customer loyalty, mobility of sales agents in the industry, and the effect of competition.

What this all means
Takeaways for Canadian employers and counsel? Consider having a clear and strong “duty of good faith” in your employment contracts. This can limit solicitation even if there is no nonsolicitation provision. And carefully consider the types of evidence that will be required to support assumptions in a claim for future losses.

About Thora Sigurdson:
Thora Sigurdson practices in the area of employment law (non-union) and business immigration. In the employment area, Thora advises employers on hiring employees, privacy matters, disability management, decisions to terminate employment, severance packages and all other employment-related matters. Her immigration practice focuses on assisting employers bringing executives, senior managers and specially skilled workers into Canada from around the world. Thora has prepared and obtained temporary work permits under NAFTA, GATS and the Immigration and Refugee Protection Act, and applications for Labour Market Opinions from Human Resources and Skills Development Canada. Thora has presented papers and led seminars on employment law, human rights issues, and Canada immigration.
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