Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
In Tar Heel Investments Inc. v. H.L. Staebler Co. Ltd., 2022 ONCA 842, a business alleged that its former employee sold two books of business to a subsequent employer. The Superior Court of Justice (SCJ) found that the employee was entitled to sell one of the books of business because she owned it, but committed the tort of conversion when she sold the second book of business. On appeal, the Court of Appeal for Ontario (OCA) set aside the SCJ’s decision and ordered a new trial, expressing a number of concerns about the SCJ’s decision, including its finding that the employee owned the second book of business; the fact that the SCJ viewed the case through the lens of the tort of conversion despite judicial inconsistency regarding whether the tort applies to intangible property; the relatively few reasons the SCJ gave for finding that the employee did not owe a fiduciary duty to the former employer; and the fact that the SCJ declined to make findings on various other causes of action.
While working at a brokerage firm prior to her employment with PDI (Tar Heel Investments was the corporate successor to PDI), the employee developed a book of business. She subsequently brought a number of clients with her when she joined PDI. While working at PDI for several years, the employee developed a second book of business augmented by PDI’s principal. In 2015, unhappy with the sale of PDI to another entity, the employee sold a combined book of business to the defendant, Staebler, and commenced employment with them.
Among other things, the lower court determined:
- The employee was entitled to sell the first book to Staebler because she never sold it to PDI and “by default” she continued to own it; however, because she never owned the second book of business, she committed the tort of conversion by selling it.
- The other claims “come around full circle to the act or omissions making up the conversion”; however, the employee did not owe PDI a fiduciary duty because to find otherwise was inconsistent with PDI’s position that she was an employee. Furthermore, she was not sufficiently senior in management to have fiduciary duties.
- 90% of the clients listed in the books of business followed the employee to Staebler within two years, although it was unclear how much this was attributable to the sale of the books versus client loyalty to the employee.
- As the books were comingled at Staebler, it was difficult to separate them to calculate damages. Accordingly, they were calculated based on the value of the second book at the time of the conversion, and the employee and Staebler were held jointly and severally liable for those damages.
Focus on ownership
The OCA found that there were several problems with the lower court’s conclusion that the first book belonged to the employee “[b]y default”, which led to the SCJ’s finding that the employee was entitled to sell it to Staebler. The OCA highlighted a number of deficiencies in the lower court’s decision focused on ownership, including that the court did not address the basis of the employee’s ownership of the book, assumed the employee owned the book when she joined PDI, and did not make any findings concerning what the book included when the employee commenced working for PDI and what it included when she later sold it to Staebler.
The OCA also noted that the finding that the employee did not work under a broker support network (BSN) model suggested that clients of the entity the employee had previously worked for had a client relationship with PDI rather than with the employee, and that the first book evolved as additions and changes were made to it when the employee joined PDI.
Conversion not established
The OCA found that the trial judge’s focus on ownership of the book of business caused him to view the case through the lens of the tort of conversion, “despite the nature of the property in question”. Noting, among other things, that the tort of conversion “involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession”, the OCA found that the courts have been inconsistent regarding whether the tort of conversion applies to intangible property—such as the information in a book of business. The OCA noted that, “There is no authoritative guidance from this court on the issue” and stated that because the trial judge did not address the matter, it could not do so.
The OCA concluded that, “Even assuming that the tort of conversion could apply to intangible things, such as a book of business, the trial judge did not make the findings necessary to support the application of the tort in this case” and stated simply that “[s]elling that which one does not own constitutes the tort of conversion.” The OCA emphasized that “information is unlike chattel property” and normally in cases involving conversion, an owner is deprived of the use of a chattel because it is taken by another. Here, the information that was found to have been converted remained in the possession of PDI; it had been copied and provided to Staebler. Although Staebler’s use of the information may have harmed PDI’s business, the information remained with PDI while it was used by Staebler. Accordingly, the trial judge’s findings were “not adequate to support the conclusion that conversion of the [second] book had occurred”.
The fiduciary claim
Noting that the trial judge gave relatively few reasons for finding that the employee did not owe a fiduciary duty to the respondent, the OCA concluded that there were difficulties with the analysis that led to this finding. Since the OCA intended to send the matter back for a new trial, it left it up to the judge at that trial to determine whether a fiduciary duty was owed by the employee.
The other causes of action
The OCA recalled the trial judge’s statement that the other causes of action “[u]ltimately … come around full circle to the act or omissions making up the conversion” and found that he erroneously declined to address them, emphasizing that they did not depend on the conversion claim and required separate findings.
The OCA remarked that the trial judge’s finding that 90% of PDI’s clients listed in the books of business followed the employee to Staebler appeared to support PDI’s claim that its clients were stolen by the employee and Staebler; however, the OCA noted that the trial judge made no findings as to whether or to what extent the loss was attributable to any of the other causes of action, the components of the other causes of action required findings unique to them, and it was possible that different findings would be made with respect to the two books.
Finally, the OCA stated that because the trial judge declined to make findings on the various causes of action, it was left in a difficult position on appeal; it could not make the required findings due to the state of the record. Accordingly, the OCA determined that it had no alternative but to order a new trial, allow the appeal, and set aside the SCJ’s decision.
Bottom Line for Employers
It is not uncommon for an employer to discover that their business has been damaged by the loss of clients because a former employee sold their book of business to another entity, often their new employer, a competing business. In Tar Heel Investments, the OCA reminds employers that, because of the nature of the property involved, a court may not award them damages from a former employee and/or the purchasing business if the basis of their claim is that the tort of conversion was committed. As the OCA noted, courts have been inconsistent about whether the tort of conversion applies to intangible things, such as a book of business, and there is no authoritative guidance from the OCA on this issue. Moreover, the OCA stressed that in cases involving conversion, an owner is deprived of the use of a chattel that is taken by another and “information is unlike chattel property”. Finally, the OCA stated that even if the tort of conversion could apply to “intangible things” such as “information”, the tort would not apply if the information remained in the owner’s possession, with only a copy provided to the other entity, as was the case here.
It is possible that an employer that has a book of business sold by a former employee to another entity may be entitled to damages from the employee and/or the purchasing business if its claim is based on one or more other causes of action, including, for example, some of those included here: breach of contract, breach of confidence, and breach of fiduciary duty. The OCA’s decision in Tar Heel Investments provides no guidance on how successful an employer might be in making such claims; the OCA left it up to the judge at the new trial to determine whether a fiduciary duty was owed by the employee and could not make any findings on the other causes of action due to the state of the record. The decision of the court at the new trial will be of interest with respect to all of the employer’s claims.