GEA Refrigeration Inc. v Chang et al., 2020 BCCA 361 – The BC Court of Appeal provides guidance on remedies available for breach of confidence by former employees in the high-tech industrial marketplace

Overview

On December 14, 2020, the British Columbia Court of Appeal issued reasons for judgment in GEA Refrigeration Inc. v Chang et al, 2020 BCCA 361. Singleton Reynolds represented the successful Respondent, GEA Refrigeration Inc (“GEA”) both at the trial and the appeal in this action.

This case provides important guidance about the remedies available to those employers whose confidential business information is misappropriated by former employees to develop competing products. The legal issues in this case had not received significant prior judicial review by BC Courts. However, BC may see an increase in breach of confidence litigation in the high-tech marketplace as the growth of Vancouver’s technology sectors rebound from the economic and workplace disruption caused by COVID-19.

Facts

GEA is a leading manufacturer of industrial hygienic freezers. GEA’s success is based on the use of unique engineering features that distinguish  its freezers from those of its competitors. The misappropriation of GEA’s confidential engineering drawings (the “GEA Drawings”) by its former employees was the subject of this litigation.

In April 2010, Messers, Chang and Lai, two GEA employees, incorporated FPS Food Process Solutions (“FPS”), intending to compete with GEA in the industrial hygienic freezer market. In the summer of 2010, Mr. Chen, another former employee of GEA, joined FPS and brought with him GEA Drawings, which he had illegally obtained and copied.

FPS used the GEA Drawings to engineer and manufacture its own industrial hygienic freezers. The misappropriation of GEA Drawings allowed FPS to quickly produce virtually identical freezers, without engaging in any substantive research or product development.

The Trial

Following a 59-day trial, the Trial Judge found that FPS had possessed the GEA Drawings and relied on them to produce the FPS freezers.

The Trial Judge then considered whether FPS’s reliance on the GEA Drawings in the engineering and production of FPS’s freezers satisfied the test for the tort of breach of confidence. That test, as set out in Lac Minerals Ltd. v International Corona Resources Ltd., [1989] 2 SCR 574, requires a plaintiff to prove:

1. that the information conveyed to the Defendant is confidential;
2. the information was communicated in confidence; and
3. the information was used for an improper purpose.

The Trial Judge found that all three of the above criteria were satisfied.

Having found FPS and the Appellant Employees liable for breach of confidence, the Trial Judge determined that the appropriate remedy would be to have FPS disgorge the profits it had obtained through the misuse of the confidential information in GEA’s Drawings.

The quantification of GEA’s damages was based upon a consideration of the springboard doctrine. The Trial Judge found that FPS’s misuse of GEA’s confidential engineering information gave it a “springboard” to unfairly launch itself into a competitive market. This allowed FPS to compete with GEA at an earlier date than would have been otherwise possible. In fashioning a remedy, the Trial Judge estimated the “springboard period”; that being the amount of time that it would have otherwise taken for FPS to enter the hygienic freezer market legally, either through the development of its own freezer or by legally reverse engineering the GEA freezer.

The Trial Judge determined that FPS’s breach of confidence provided it with a 4-year springboard, and ordered that FPS be disgorged of $7.1 million in damages, the equivalent  to its profits for the years 2011-2014.  The Trial Judge also made an alternative calculation of damages totaling $3.6 million against the Defendant Employees for their individual wrongdoing. Additionally, Messers Chang and Lai were ordered to pay $75,000 in punitive damages. Lastly, the defendants were ordered to pay GEA’s costs on a special costs basis for their disreputable conduct during the litigation, which the Trial Judge found to be deserving of rebuke.

The Appeal

On appeal to the British Columbia Court of Appeal, FPS and the Appellant Employees (collectively, the “Appellants”) argued that the Trial Judge made various errors underlying her determination that FPS used the GEA Drawings to produce its freezers. The Court of Appeal disagreed, holding that the Trial Judge’s factual findings did not disclose any appealable errors.

Interestingly, in the Court of Appeal’s opinion the use of the GEA Drawings was not central to the question of whether the Appellants were liable for breach of confidence. The Court wrote, in obiter, that the Appellants were guilty of breach of confidence even if they had relied only on their memories in appropriating GEA’s confidential engineering information, and in the absence of any reliance on the GEA Drawings. According to the BC Court of Appeal, the tort of breach of confidence protects confidential information, regardless of the manner by which it is misappropriated.

The Court also considered the appeal of the quantum of damages awarded at trial. The Appellants argued that that the springboard period should have commenced on the expiry of the Appellant Employees’ non-compete agreements in June 2010. The Appellants argued that they should be entitled to compete with GEA in the hygienic freezer market. Such a holding have resulted in the earlier commencement of the springboard period, and a reduction in the amount of profits disgorged.

The Court of Appeal rejected this argument, holding that the springboard doctrine is independent from the law of non-solicitation clauses, writing:

[146] … Even in the case of fiduciary employees, the length of time for non-solicitation is not based on an estimate of the amount of time needed to research and develop anything, nor have the cases suggested that the time period for non-solicitation is based on how long it would take to cultivate new clients. Rather, what is at issue in these employment law cases is a question of balancing the interests of an employer in retaining their clients with the rights of an employee to continue to work in their industry…

Instead, the Court followed Cadbury Schweppes Inc v FBI Foods Ltd., [1999] 1 SCR 142, and held:

[149]    In my view, Cadbury stands for the proposition that the springboard period commences (at least in cases not involving fiduciary relationships) when the wrongdoer breaches a confidence by misusing information in a way that is capable of causing damage to the victim of that breach. In Cadbury, that date corresponded with the competing product’s entry onto the market, as there was no misuse of information that could damage the Plaintiff’s interests until that occurred.  

The Court of Appeal found that FPS’s entry into the freezer market occurred in January 2011, when Messers Chang and Lai attended a trade show for the purposes of marketing an FPS freezer. The Court also refused to disturb the Trial Judge’s estimation of the length of the springboard period, holding that it was reasonable in light of the evidence available to the Court at trial.

The Impacts of This Decision

In dismissing the appeal, the Court of Appeal affirmed the appropriateness of the disgorgement remedy in cases of breach of confidence, even in a case involving non-fiduciary employees.

Perhaps more importantly, the Court provided direction on the application of the springboard doctrine, which previously had not been widely considered by British Columbia courts.

Vancouver is a growing hub for high-tech start ups, as well as technology giants such as Microsoft and Amazon. The growth of the technology industry in Vancouver, coupled with economic upheaval and increase in employee turnover caused by the current COVID-19 pandemic may trigger litigation over breaches of confidence or other economic torts as employees move from one high-tech employer to another.

Moreover, the Court’s obiter opinion that the tort of breach of confidence may be made out where an employee relies on their memory alone to misappropriate confidential information may broaden the tort beyond the fact scenarios in this particular case.

For this reason, employees in the high-tech sector should be cautious about the risks of using confidential information or processes learned in their previous employment, even if they are not relying on illegally obtained confidential materials as was the case in GEA Refrigeration Inc.

For their part, employers can look to rely on breach of confidence remedy to ensure that their valuable confidential information is not unfairly misappropriated by former employees who leave to start competitive businesses.

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