Protecting the Information Behind the Brand

Part 2 of a Blog Series – Departing Employees

Read Part 1: Confidential Information.

Franchise systems typically derive much of their value from information - the systems, processes, data, know-how and relationships that distinguish them in the marketplace. This blog series explores how Canadian law protects those intangible business interests, where the limits of that protection lie, and what franchisors can do - proactively and reactively - to safeguard them.

When Sotos LLP assists franchisors in designing or refining their franchise systems, we offer a tailored audit of their intellectual property to ensure it’s properly protected. This proactive service helps identify potential vulnerabilities and establish safeguards, supporting the long-term value and success of our clients’ systems.

Why Confidential Information Matters When Employees Leave

People are central to the success of any franchise system. Employees and executives operate the network, recruit and support franchisees, safeguard financial performance, identify growth opportunities, and contribute to long-term strategic planning. In doing so, they are routinely entrusted with some of the system’s most valuable intangible assets.

Inevitably, personnel move on. When they do, they may join a competing system or establish a competing business of their own. For franchisors, the issue is not employee mobility pe se, but whether former personnel are using confidential information obtained during their employment to gain an unfair competitive advantage.

While contractual tools such as confidentiality and restrictive covenants play an important role in protecting franchisors’ legitimate proprietary interests in these circumstances, they are not the whole story. Canadian law imposes obligations on departing employees even in the absence of, or beyond the scope of, written agreements.

This second post in the series examines how those legal principles operate in the context of departing employees and what they mean for franchisors seeking to protect confidential information and other intangible business interests.

Fiduciary and Non-Fiduciary Employees: What Is the Difference?

Prior to discussing the restrictions on departing employees, it is important to understand the distinction between fiduciary and non-fiduciary employees as this distinction can affect the nature and scope of the protection available to franchisors.

Broadly speaking, fiduciary employees are individuals who are entrusted with a high degree of authority, control, power, or influence to make decisions on behalf of the employer in a way that may materially affect the business and leave the employer particularly vulnerable following the employee’s departure. While these employees often have official titles that include director, officer, or senior executive/management roles, courts have consistently held that the nature of the relationship rather than the employee’s title governs the analysis.

There are three principal criteria for determining whether a fiduciary relationship exists:

1. whether the employee has discretionary power;
2. whether the employee can unilaterally exercise that power to affect the employer’s interests; and
3. whether the employer is vulnerable to or at the mercy of the employee’s exercise of that power.

In contrast, non-fiduciary employees, sometimes referred to as “ordinary” or “mere” employees, generally do not have the authority or power to direct or significantly influence the employer’s decision making or interests.

Restrictions on Non-Fiduciaries

When it comes to the restrictions on non-fiduciary employees, the law seeks to balance protecting the legitimate business interests of the employer with preserving the employee’s ability to obtain other employment.

Generally speaking, upon leaving their employment, non-fiduciaries are free to compete with their former employer, work for competitors, and subject to applicable contractual restrictions and other legal limitations, solicit former clients, so long as they do not breach post-employment contractual clauses or misuse confidential information/disclose trade secrets.

With respect to confidential information obtained during their tenure, non-fiduciary employees also have an ongoing obligation not to use, disclose, or take such information. This obligation survives termination of the employment relationship. However, confidential information does not include the general skills and knowledge acquired by the employee while working for the former employer.

This distinction can be particularly important for franchisors. An employee may leave with valuable experience in franchise recruitment, franchisee relations, operations, or marketing. That general experience and skill is not necessarily proprietary to the franchisor. The analysis may be different, however, where the employee takes or uses confidential information such as franchisee data, prospective franchisee lists, system performance information, expansion plans, pricing information, proprietary processes, or other information that is not generally known or readily available.

Another constraint on departing non-fiduciary employees is what is known as the “springboard” doctrine. In a nutshell, employees cannot use confidential information as a “springboard” or head start in the marketplace to gain an unfair competitive advantage. Where an employer believes that a former employee is leveraging confidential information to accelerate a competing business, the employer may seek injunctive relief.

The SCC’s decision in RBC Dominion Securities Inc v Merrill Lynch Canada Inc., reinforces these principles. The case ultimately confirmed that ordinary (non-fiduciary) employees do not owe a general post-employment duty of loyalty; however, they must not misuse their former employer’s confidential information.

In this case, nearly all of the investment advisors at RBC left and joined Merrill Lynch in a move coordinated by the branch manager. None of the employees were bound by a restrictive covenant, nor were they considered to be fiduciaries. RBC sued its former employees and Merrill Lynch, alleging breach of fiduciary duty, breach of implied contractual terms to not compete, and misuse of confidential information.

The SCC ultimately affirmed that there is a clear distinction between fiduciary employees and non-fiduciary employees. For non-fiduciary employees, the implied duty of good faith gives rise to liability for competition during employment and for the improper use of confidential information. The SCC cautioned against expanding this duty to impose an obligation on non-fiduciary employees to actively protect the employer’s interests after the employment relationship has ended and deemed that such extension would constitute a “significant reformulation and extension of how courts have interpreted and applied a non-fiduciary employee’s implied duty of good faith”.

The takeaway for franchisors is clear: While non-fiduciary employees may generally leave and join a competing business, they cannot take the system’s confidential information with them or use it to gain an unfair advantage post-employment.

Restrictions on Fiduciaries

Fiduciary employees, on the other hand, are subject to more stringent obligations.

One of the primary constraints on departed fiduciary employees is that they cannot appropriate maturing business opportunities that the employer was actively pursuing prior to the employee’s departure (i.e., fiduciary employees cannot resign and then seize an opportunity that properly belonged to the employer). The scope and duration of this obligation depend on the circumstances, including whether the opportunity remained sufficiently connected to the fiduciary’s former role at the time of the alleged appropriation.

Fiduciary employees are also subject to greater restrictions on competition and solicitation, even in the absence of a written agreement. The scope and duration of any such obligations are fact-dependent. Courts may consider factors such as the nature of the fiduciary relationship, the employee’s responsibilities, the circumstances of the departure, and the time reasonably required for the employer to protect its legitimate interests.

For franchisors, this can be particularly important where a senior employee has had significant influence over franchisee relationships, system operations, strategic planning, or business opportunities. The departure of such an individual may raise issues that go beyond the misuse of confidential information.

Proactive Protective Measures for Franchisors

Practically speaking, franchisors should take steps to understand the roles within their organizations, identify the information that requires protection, and ensure that appropriate contractual and operational safeguards are in place.

1. Identifying fiduciary roles: Franchisors should first determine which employees are likely to be characterized as fiduciaries. This analysis should focus on the employee’s responsibilities and level of influence, rather than just their job title. Individuals who exercise significant discretion over franchisee relationships, oversee system operations, control important business opportunities, or play a meaningful role in strategic decision making are more likely to fall within this category.
2. Implementing contractual protections: While the law imposes certain obligations, carefully drafted confidentiality clauses, non-solicitation provisions, and where appropriate and legally enforceable, non-competition clauses, can help to provide greater protection to franchisors in the event of an employee departure.

These agreements should be tailored to the employee’s role and the interests the franchisor is seeking to protect. Overly broad restrictions may be difficult to enforce, while properly targeted provisions can help clarify the parties’ expectations from the outset.

3. Clarifying intellectual property ownership: Franchisors should ensure that there is a clear understanding surrounding the ownership of intellectual property created by employees. As a general rule, works developed in the course of employment typically belong to the employer, particularly where the employee was engaged to create the work. This principle is codified in Section 13(3) of the Copyright Act, RSC, 1985, c C-42.
4. Considering the risk to employers: The risks do not end with departing employees. A new employer or competitor that knowingly receives or benefits from the misuse of confidential information may also be exposed to liability or other legal consequences.

Accordingly, where a departing employee joins a competitor, franchisors should consider not only what the employee may have taken or disclosed, but also whether confidential information may have been communicated to or used by the new employer.

How We Can Help

Protecting a franchise system’s confidential information and other intangible business interests requires more than identifying which employees may be fiduciaries. Franchisors should consider how information and intellectual property are created, accessed, protected, and transferred throughout the organization, as well as the contractual and legal protections that may apply when key personnel leave.

At Sotos LLP, we assist franchisors in developing and implementing comprehensive strategies to protect these interests. If you have questions about protecting your confidential information or would like assistance assessing your current protective framework, Sotos LLP regularly advises franchisors on these issues and would be pleased to assist.

About the Authors

Daniel Hamson is a partner in the Litigation Department at Sotos LLP. His practice focuses on franchise, commercial and corporate disputes, including matters involving confidential information and intellectual property. He assists clients with dispute resolution through litigation, arbitration, mediation and negotiation, including urgent injunction proceedings. Daniel can be reached directly at 416.572.7303 or dhamson@sotos.ca.

Daniel has been recognized for his litigation work and industry expertise. He is listed as “Ones to Watch” in Best Lawyers in Canada and has been named a “Lawyer to Watch” in the Canadian Legal LEXPERT Directory, as well as in the LEXPERT Canada’s Leading Litigation Lawyers. He is also recognized as “Recommended” in Lexology Index: Canada (formerly Who’s Who Legal).

Bailee Kleinhandler is an associate in the Corporate and Commercial Group at Sotos LLP. Her practice includes corporate and franchise law. She provides general corporate and business law advice and assists clients with negotiating, drafting and reviewing agreements. Bailee can be reached directly at 416.572.7311or bkleinhandler@sotos.ca.