Archive for March, 2015

Competing After Employment (Part 1)

– 

By Richard Stobbe

A key employee departs. The employer, worried that confidential information has leaked out of the company, scrambles to respond. After a frenzied period of preparation, the employer starts a lawsuit and seeks an injunction against the ex-employee.

In these two recent Canadian cases, those same basic facts apply but with very different results. First, let’s look at the BC case decided in December 2014 (JTT Electronics Ltd. v. Farmer, 2014 BCSC 2413). In that case, the employer sued the ex-employee and the employee countered with an argument that the employer could not actually identify the confidential info it sought to protect.

The Court agreed, noting: “The need to identify with some reasonable degree of specificity what a plaintiff asserts is confidential or proprietary serves three important and related functions.” To summarize:

  1. It enables the ex-employee to respond to the lawsuit, and to bring into question whether the purported confidential information is actually confidential or whether it is information that is in the public domain.
  2. If the employer can establish that specific information in its possession is confidential, and the remaining elements of an injunction are made out, the ex-employee can understand (by virtue of the court order) what it is that he or she can or cannot do.
  3. Unless there is a “reasonable level of precision or definition”, it is difficult or impossible for the court to enforce the order.

Because the employer could not describe the confidential information with enough specificity and detail, the order was not granted.

Next, the non-solicitation and non-competition clauses which purportedly bound the ex-employee were, by the court’s analysis, “undefined”, “ambiguous”, “overly broad”, since they appeared to impose a worldwide ban which imposed a “blanket prohibition of unlimited geographic scope on any post-employment competition” by the ex-employee. On that basis, the Court refused to grant an order to enforce these restrictive covenants. 

Lessons for business?

  • “Confidential information” is broadly understood to be “anything that is valuable because it is secret to the company.” But in the case of an injunction application, courts will require a clear, specific definition of what exactly constitutes confidential information in this case, as it relates to this company and this ex-employee. While the definition in the underlying agreement – for example, a confidentiality agreement, non-disclosure agreement, employment agreement or even a shareholders agreement – is likely to remain broad, the specificity must come into play at the point where the court order is sought.
  • Ensure that non-competition restrictions are carefully drafted, are reasonable in their scope, and consistently use defined terms. For example, in this case, the defined term “Business” was given a particular meaning in one section, but the seemingly generic term “business” was used in another section. This caused the court to question why the two terms would be different, and merely added to the court’s finding of ambiguity.

 

Calgary – 07:00 MST

No comments

What Happens When a Franchise Agreement Ends, Part Two: Cancellation

By Richard Stobbe 

In some cases, a franchise relationship ends after many years of business. At the point of termination, the parties must wrestle with a number of issues, including customers, inventory, and (as we reviewed in Part 1) the impact of any post-termination restrictive covenants.

In other cases, however, the franchise relationship barely gets off the ground. Remember, Section 13 of the Alberta Franchises Act states that, if a franchisor fails to give a prospective franchisee a complete “disclosure document,” then the franchisee may rescind (or cancel) the franchise agreement and end the relationship. However, the franchisee must send the cancellation within certain time limits: either 60 days after receiving the disclosure document, or within 2 years after the franchisee is granted the franchise, whichever occurs first.

A failure to give complete disclosure allows the franchisee to cancel. So what does it mean to give complete disclosure?

Under the Act, a franchisor must make a number of disclosures, including (but not limited to):

  • Basic information about the name and address of the franchisor and the length of time the franchisor has operated the business;
  • The names of the directors, general partners and officers of the franchisor who will have management responsibilities;
  • Details on convictions for the previous 10 years relating to the franchisor and its associates, and any of the directors, general partners and officers of the franchisor;
  • Lawsuits or pending lawsuits involving misrepresentation, and unfair or deceptive acts or practices;
  • Details of any bankruptcy or insolvency proceedings, voluntary or otherwise;
  • The names, mailing addresses and phone numbers of all existing franchisees presently operating an outlet in Alberta under the same trade name as the franchise being offered, and the addresses and phone numbers of those outlets; and
  • Financial statements of the franchisor, among other information.

If proper disclosure is not made, a franchisee may cancel and recover any net losses incurred in acquiring, setting up and operating the franchised business.

In 1448244 Alberta Inc. v. Asian Concepts Franchising Corporation, 2013 ABQB 221 (CanLII), an Alberta court reviewed a franchisee’s claim that it did not receive proper disclosure. Specifically, the franchisee alleged that the disclosure document was deficient and therefore not ‘substantially complete’ within the meaning of the Act because the document was signed by only one director. The Regulations are clear that a disclosure document must include a certificate that is to be signed by at least two officers or directors of the franchisor. The fundamental question: Does the lack of two signatures to the disclosure document provided by the franchisor mean that it is not ‘substantially complete’ within the meaning of the Act?

Described another way: the substance of the disclosure document itself was not challenged in this case. The only complaint was that the certificate, which accompanies the disclosure document, was only signed by one, instead of two, directors.

The Alberta Court of Appeal reviewed this situation in 2008 in the Hi Hotel case. In that case, the certificate accompanying the disclosure document contained no signatures, and was therefore found not to be “substantially complete” within the requirements of the Act. In the Asian Concepts decision, the Court concluded that a disclosure document with only one signature was deficient, since it deprived the franchisee of a potential cause of action against a second signatory to the disclosure document. This finding opened the door for the franchisee to recover losses incurred in acquiring, setting up and operating the franchised business. The Court confirmed: “…the lack of misrepresentation, or the lack of reliance on representations, are irrelevant to the issue at hand. What matters is whether the disclosure document which was provided was substantially complete or not. And when the statute requires two signatories responsible for and liable for the required disclosure, yet only one is provided, the disclosure statement cannot be said to be ‘substantially complete.’ This is plain and obvious.”

What are the lessons? Franchisors in Alberta should take care to ensure that the disclosure document follows the strict requirements of the Act and Regulations, both as to form and substance. Seemingly minor gaps in compliance can result in serious consequences for the franchisor. Franchisees, on the other hand, will be reviewing compliance with a careful eye in situations where the franchisee wishes to extricate itself and end the relationship. Of course, both parties should always seek appropriate legal advice when entering into and concluding franchising relationships in Alberta.

No comments