“Keep Your Hands Clean”: Ontario Superior Court rules that an unfairly terminated fiduciary may owe a lesser degree of post-employment fiduciary duties

Recently, in the case of Palumbo v. Quercia 2018 ONSC 503 (“Palumbo”), the Ontario Superior Court of Justice ruled that the restrictions on soliciting clients of a corporation will not be as strict for an unfairly terminated fiduciary. The decision affirms that a relevant consideration for the courts in determining the scope of post-employment fiduciary obligations will be whether an employee has been wrongfully discharged by his or her employer.

Background

The applicant, Mr. Palumbo, and the respondents, Mr. Quercia and Mr. Imhoff, were founders and equal shareholders of Boothworks Inc. (“Boothworks”). Boothworks is a trade show and event management company. Prior to dismissal from Boothworks, Mr. Palumbo was the primary contact for a client who alone represented over 50% of Boothworks' revenue. Mr. Paulumbo developed a relationship with this client over a lengthy period of time. The duration of this relationship preceded the founding of Boothworks by fourteen years.

Upon Mr. Paulumbo’s diagnosis of cancer, his two co-founders convened the first ever shareholder meeting without proper notice or the consent of Mr. Palumbo. The result of this meeting was his removal as a director. The two co-founders further removed him as an officer and purported to impose on him the terms of his future "employment" at their discretion.

Mr. Palumbo remained at Boothworks only for the duration of completing a critical project for a long-standing client. At the end of the project, the respondents purported to terminate Mr. Palumbo as an employee, for cause. When the two co-founders informed the client of Mr. Palumbo's departure, the client severed its relationship with Boothworks and awarded its business to Mr. Palumbo’s new business. As a result, over 50% of Boothworks historic revenue was lost.

Post termination, Mr. Palumbo commenced an application to purchase his share at the fair market value. A counter-application was commenced by the two co-founders alleging breach of fiduciary duty and seeking damages for the loss of their long-standing client.

The Ontario Superior Court Decision

The Superior Court of Justice allowed Mr. Palumbo’s application and dismissed the counter application. In doing so, the Court noted that Mr. Palumbo was treated in a high-handed and unfair manner. Specifically, with respect to the counter application, the court held that Mr. Palumbo did not solicit the client in question prior to the client severing its relationship with Boothworks. Regardless of this finding, there was no legal impediment to him doing so.

The Court reasoned that soliciting business from former clients may be deemed unfair depending upon the circumstances giving rise to the departure of the fiduciary. Nonetheless, the restrictions on soliciting clients of the corporation will not be as strict when a fiduciary is unfairly terminated by the corporation versus when the fiduciary leaves voluntarily to pursue this prospect.

The Court found that the personal nature of the relationship between Mr. Palumbo and the client, in combination with the circumstances leading up to Mr. Palumbo’s termination would not require restrictions on his ability to compete with Boothworks for the client’s future business post-departure.

Key Takeaways

The case of Palumbo is an important reminder that the circumstances surrounding termination is an important consideration, by the courts, in determining the scope of the employee’s post-employment fiduciary obligations. In the context of wrongfully dismissed fiduciaries, a fair and equitable determination is germane to the analysis.

Moreover, Palumbo appears to suggest a court will only require a fiduciary employee to serve the interests of the employer as long as the employer, as a beneficiary, maintains clean hands. Although employers are permitted to dismiss their fiduciary employees, both with and without cause, oppressive conduct during termination could result in a finding that the terminated employee owes minimal to no post-employment fiduciary obligations.

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