An Ontario Superior Court Ruling Wednesday barring former senior Cygnal Technologies senior executive James Taylor’s new company, Activo Inc. from unfairly competing with Cygnal for a year is only the latest example of IT companies on both sides of the border getting tough with former employees.
Taylor joined Cygnal when it acquired his company, Integrated Cable systems, for $17 million in August 2000, and served as a senior executive and director before leaving the company in March 2004 and the board of directors in September 2004.
Activo was founded by Taylor in March and both companies compete in similar spaces, providing infrastructure for voice, video and data services to enterprises.
The court ruled Taylor had a fiduciary responsibility to Cygnal. It said by keeping confidential documents when he left the company and forming a competitive firm just five months later the former Cygnal executive was competing unfairly.
The judge granted a 12-month injunction against Taylor from the date he left Cygnal’s board, set to expire Sept. 27.
A spokesperson for Cygnal wasn’t available for comment, but in a press release Cygnal’s president and CEO Gerald Hurlow expressed satisfaction with the judgment. “We are pleased the court has effectively halted the unfair competitive practices of a former employee,” said Hurlow. “We will continue to forcefully protect our legal rights in any similar situations that arise.
For his part, Taylor said he fulfilled all of his employment obligations, and while he accepts the court’s decision, he does wish it had gone differently. He added it hasn’t impacted his plans for Activo at all. “The court injunction was not to compete with Cygnal’s clients, and every business out there with more then one PC is a (potential) client, so business is alive and well and will continue,” said Taylor.
He adds he didn’t take documents with him when he left Cygnal. The documents in question were accumulated board documents collecting dust in his basement. “If I were ever in this situation again, I’d certainly return all that information immediately,” said Taylor. “It wasn’t information I looked at or used or did anything with.”
In another high profile case in the US that is still ongoing, Microsoft has been granted a temporary injunction to stop former executive Kai-Fu Lee from joining Google. The two companies are fierce rivals in the search engine arena, and Microsoft claims jumping-ship to competitor Google violates the non-compete clause of Lee’s contract.
There may have been more high profile cases of this type of late but John O’Reilly, a partner in the labour employment group with Toronto law firm Cassels Brock & Blackwell LLP, said the courts aren’t breaking any new ground in their rulings. However, it does seem companies are getting more aggressive about protecting their interests. “That’s particularly the case in the IT industry, where you have valuable talent in short supply,” said O’Reilly.
He notes there’s a difference between Canadian and US law. While a US court may enforce a non-competition clause, Canadian courts are very reluctant to do so. The exception is when company A acquires company B; the owner of company B has essentially been paid not to compete for a period of time.
What will be enforced though are non-solicitation clauses, which bar a former employee from soliciting his old clients for a reasonable period of time, usually six months.
O’Reilly said companies will often be aggressive with former employees around non-competition clauses not in the hope of stopping the person from competing, but to discourage others from jumping ship.
“I’m asked to write cease and desist letters for clients in these circumstances all the time, and I tell them at the end of the day we’re not going to win, it’s to send a message,” said O’Reilly. “If you know leaving Microsoft and going to Google means you’ll have to hire a lawyer, incur legal fees and fight an injunction, even if you’ll be successful in the end it’s not a very attractive proposition.
In the Cygnal case, O’Reilly said the court ruled that as a fiduciary employee Taylor had a greater responsibility to the company. “I think it arose solely because (Taylor) kept confidential information he was expected to turn over, and I don’t think that’s unusual reasoning by the judge,” said O’Reilly.
