Toronto Employment and Labour Law Blog: Damages for Jumping Ship

John Smith (not his real name) was CEO of a large multinational corporation head quartered in Canada. Internal politics and pressure from the board of directors of the company made it attractive for John to leave the company with a significant severance package. Part of that severance package was allocated as consideration for his signing a non-compete agreement on his departure. His lawyer advised him that it was against his interest to sign such a clause since the severance was owed to him in any case. Nonetheless, John decided that since he had no intention of re-entering that particular industry there was no harm in signing a non-compete agreement. This particular non-compete agreement was enforceable because it was based on additional sums that were allocated to him because he was prepared to sign the non-compete provisions. Contrary to his lawyer’s advice he signed off and took the money.

Less than 6 months later John Smith was offered the position of Chief Executive Officer at a competing multinational in Canada. He approached the same lawyer who had advised him not to sign the non-compete agreement and told his lawyer that he expected that his former employer would not move to enforce that agreement. His lawyer disagreed. Nonetheless, John Smith joined the competing corporation at a salary that exceeded the generous salary that he had been paid at his former employer.

As soon as it was known that he was now CEO of the competing organization his former employer initiated a major law suit for damages. They claimed that not only was he in breach of the contract and accordingly owed his former employer the money they had paid him for severance and for signing the non-compete agreement but that he had taken the leading client with him to his new position in breach of his non-solicitation agreement as well.

So John Smith was faced with a very substantial claim for damages for breach of contract and breach of the non-compete and non-solicitation agreements in the amount of $5 million dollars. That was not the end of it. His former employer corporation then sued his new employer for $10 million dollars for inducing him to breach his contract, and for the loss of the business that moved over to that new employer. Accordingly a law suit was commenced against John Smith for $5 million dollars and against his new employer for $10 million dollars in damages for breach of contract and inducing breach of contract.

Since John Smith did not have an employment contract and only signed the non-compete agreement and non-solicitation agreement on his departure he could have avoided millions of dollars in this law suit merely by following his legal advice and signing nothing on departure. It was an expensive lesson. The case settled at the courtroom door after months of wrangling and significant legal fees.

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