“Only Following Orders” No Defence: B.C. Court of Appeal Holds Employees Personally Liable for Their Participation in Breach of Technology License

In the case of XY, LLC v. Zhu, 2013 BCCA 352¸ the B.C. Court of Appeal has confirmed that employees of a company can be personally liable for the breach of a technology license agreement by their employer. The Court held that employees who continue to carry out low level tasks even after they become aware of their employer’s dishonest conduct may avoid liability; employees  who knowingly assist their employer in carrying out a fraud can be personally liable for the damages caused by the company’s conduct.

The plaintiff XY, LLC was formed to bring to market technology that makes it possible to separate X and Y chromosomes in bovine sperm in order to allow sex-selection in calves. In 2004, XY licensed this technology to JingJing Genetic Inc. (JingJing). JingJing was to use the technology to export calf embryos produced in Canada to cattle farms located in China. Under the terms of the license agreement, JingJing was to pay XY a royalty based on the number of embryos and amount of sperm it sold in China. 

 

The trial judge found JingJing had violated the terms of the license agreement in different ways, including by materially underreporting the number of embryos it produced and sold in China as well as selling products in breach of the agreement.

The plaintiff sued not only JingJing but also two of its employees, Ms. Jin Tang and Ms. Selen Zhou, as well as Mr. Jesse Zhu, the controlling mind of JingJing. By the time of trial, JingJing had declared bankruptcy, so the plaintiff’s claims against these personal defendants were important for the plaintiff’s ability to recover damages for its losses from JingJing’s breach of the license agreement.

The trial judge found the personal defendants liable for the deceit committed by JingJing and also liable for the tort of conspiracy, resulting in their personal liability to the plaintiff for $8.5 million in damages.

The B.C. Court of Appeal upheld the finding of the trial judge that the personal defendants had participated in the fraud committed by the company, including through their roles in the preparation of false records and reports sent to the plaintiff and in the misuse of the confidential information provided under the license agreement. The Court held that they “not only acted in concert to carry out unlawful acts that would injure the plaintiff” but “assisted in planning how best to go about it”.

The personal defendants argued that their status as employees of JingJing, and the fact that they were acting within the course of their employment with JingJing, shielded them from liability for their conduct. The Court of Appeal rejected this argument and confirmed that it is the law in Canada that as long as employees of a corporation have been proven to have acted in a way that constitutes a tort they can be held personally liable notwithstanding that they were acting in the best interests, and on the instructions, of their employer.

The two personal defendants who were merely employees of JingJing (as distinct from Mr. Jesse Zhu who was found to be the controlling mind of the company) also argued that they were “only following orders” and “could not be expected to refuse to carry out the scheme apparently devised by their boss”. The Court of Appeal held that although there can be circumstances where an employee should not be held responsible for the fraudulent conduct of his or her employer, the conduct of the employees in this case rendered them personally responsible.  The Court stated:

[…] the employee who simply carries on the job she has always done, notwithstanding that her typing or bookkeeping may assist in a fraud, should not without more be regarded as a fraudster (or conspirator) herself…Here, however, the trial judge found that Ms. Zhou and Ms. Tang went beyond mere bookkeeping or ‘typing’ lab reports at Mr. Zhu’s instructions Both defendants actively assisted in devising how best to deceive XY. (at paras. 79-80)

This case therefore confirms that technology rights-holders may have a number of potential targets from whom they can seek to recover losses they suffer due to a misuse of their technology in circumstances where the company they contracted with is without assets. It is also a cautionary tale for employees who find themselves caught up in a dishonest scheme conceived by their employer.

employees license agreement litigation technology

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