APPEAL COURT UPHOLDS FINDING OF HARASSMENT BUT CUTS PUNITIVE DAMAGES AWARDED TO WRONGFULLY DISMISSED EMPLOYEE

Upholding an award of general damages (24 months' salary) to an employee suffering from chronic fatigue syndrome, who was denied accommodation, harassed and then fired, the Ontario Court of Appeal nonetheless reduced punitive damages from $500,000 to $100,000, on the ground that the employer had not acted as badly as the trial judge had found. Details below.

POST-EMPLOYMENT RESTRICTIONS IN JOB CONTRACT VALID BUT TOO LONG-LASTING, JUDGE RULES

Finding that an employee was justifiably dismissed for cause, a British Columbia judge has ruled that a post-employment non-competition covenant in his employment contract that prohibited him from working in the same industry anywhere in the B.C. Lower Mainland was enforceable, even though its five-year term was too long. In accordance with a provision of the covenant that permitted a court to declare what was reasonable, the judge "read down" the restriction to apply for only two years. Details below.

APPEAL COURT UPHOLDS FINDING OF HARASSMENT BUT CUTS PUNITIVE DAMAGES AWARDED TO WRONGFULLY DISMISSED EMPLOYEE

The Facts:

Kevin Keays was employed by Honda Canada since 1986, initially on the production line for 20 months and then in the quality engineering department. A dedicated and conscientious employee, Keays began suffering from chronic fatigue syndrome shortly after being hired, although this disability was not diagnosed until 1997. His health problem caused frequent absences that resulted in negative performance assessments despite glowing reports for most of his work categories.

Keays' health deteriorated to the point where he was off on disability from October 1996 until December 1998. However, his long-term disability benefits were then cut off because his doctor's diagnosis of chronic fatigue syndrome could not be supported by "objective medical evidence," and he was forced to return to full-time work. Required to undergo disciplinary "coaching" for his repeated absences and subjected by the employer to various harassing tactics, Keays was finally ordered by Honda, in March 2000, to meet with a company doctor who had previously threatened to have him returned to the production line, even though his physical condition precluded such work. When Keays refused to do so without an explanation of the purpose and parameters of the meeting, he was fired.

Suffering a post-traumatic disorder for three to four months, Keays was unable to work thereafter, and eventually qualified for a total disability pension from CPP. He sued in the Ontario Superior Court for damages.

The Trial Judge's Decision:

In a March 17, 2005 decision, Ontario Superior Court Judge John McIsaac awarded Keays damages in lieu of notice totaling 15 months' pay, plus 9 months' so-called Wallace damages for bad faith on the part of Honda. He was also scathing in his criticism of the employer, holding that "[t]he subterfuge practiced by everyone associated with Honda in attempting to intimidate [Keays] to seeing their occupational medicine specialist should make the blood boil of any right-thinking individual. This scheme was nothing less than a conspiracy to insinuate [this company doctor] into [Keays'] long-established medical relationship with his own doctors and, hopefully, to exclude them from any participation in advocating for his ... rights." 

Finding that "Honda committed a litany of acts of discrimination and harassment in relation to [Keays'] attempts to resolve his accommodation difficulties," McIsaac referred to the decision of the Supreme Court of Canada in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595 and concluded that "[a]s Binnie, J. stated in Whiten ..., a 'large whack' is required to 'wake up a wealthy and powerful defendant to its responsibilities'." To that end, he awarded Keays punitive damages of $500,000 against Honda. In a separate decision on costs, McIsaac awarded Keays the costs of the litigation on a "substantial indemnity" basis, meaning that the costs of the proceeding ($610,000), which involved a 29-day trial, were fully rather than partially covered. In addition, he awarded a 25 per cent premium, amounting to $155,000, for Keays' lawyer in recognition of the fact that the lawyer had handled the case without any certainty of ever being paid.

The Ontario Court of Appeal's Decision:

Delivering the September 29 majority decision of a three-member panel of the Court of Appeal, Justice Marc Rosenberg found that the trial judge had based the magnitude of the punitive damages award on a number of findings of fact that were not supported by the evidence.
Rosenberg held that McIsaac had no factual basis for finding that Honda's misconduct was "planned and deliberate and formed a protracted corporate conspiracy." The trial judge's statement that Honda's "outrageous conduct has persisted over a period of five years without a hint of modification of their position that Mr. Keays was the one in the wrong" amounted to "a palpable and overriding error," Rosenberg ruled, because "this case concerns a period of seven months not five years." The Court of Appeal judge also took issue with the trial judge's finding that "Honda ran amok as a result of their blind insistence on production 'efficiency'," holding that "I see nothing in this record to show that [Honda] 'ran amok'....[T]he record does not support this grave allegation of corporate malfeasance leveled at [Honda] by the trial judge."

Rosenberg noted that the $500,000 punitive damages award was on the same scale as the $1 million award in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 592 and the $800,000 award in Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130, although "[p]unitive damage awards in other wrongful dismissal cases have been far more modest even in the face of serious misconduct such as slander of the employee. The awards in such cases have been in the range of $15,000 to $50,000 and, rarely, up to $75,000."

Finding Whiten to be the most reasonable comparator because it, like the present case, dealt with a breach of contract, Rosenberg considered that "[t]wo factors stand out when comparing the two cases. First, in Whiten there was a two-year period of escalating misconduct up to the trial. Here the misconduct was for no more than seven months and is largely focused on the events of March [2000] .... Second, in Whiten, the defendant persisted in its course of conduct, based on a theory that the plaintiff deliberately set the fire, in the face of repeated findings from its own experts and advisors that the fire was accidental. Binnie J. described the defendant's attitude to the plaintiffs at para. 4 as "harsh and unreasoning opposition" and an attempt to "exploit a family in crisis". That is not the case here. [Honda] had advice, albeit wrong and based on incomplete information, that caused it to question [Keays'] disability and it had, for almost a year, accommodated his absences."

Rosenberg acknowledged that "[b]earing in mind the trial judge's findings that can be supported by the evidence, and in particular the findings that the conduct by [Honda] was planned and deliberate and designed to intimidate and ultimately terminate the employment of a particularly vulnerable employee and that [Honda] was aware of its continuing duty to accommodate, an award in excess of those awarded in other wrongful dismissal cases is appropriate." However, he ruled that "given the compensatory damages awarded, especially the Wallace damages, and that there were no special factors requiring deterrence such as a pattern of abuse or the kind of conduct found in Whiten, as well as the relatively short duration of the misconduct, in my view, an award of no more than $100,000 can be justified."

While the Court was split 2-1 on whether to reduce the punitive damages award, with Justice Stephen Goudge dissenting in support of a $500,000 amount, the rest of the trial judge's award was sustained, with the exception of the 25 per cent premium on costs awarded to Keays' lawyer, which was halved.

Comment:

Determining what is the "rationally" appropriate amount of punitive damages in any given case is, by its nature, not an easy task. Two judges may come to radically different conclusions in this regard when dealing with the same set of facts. Thus, in his dissenting opinion agreeing with the $500,000 amount awarded by the trial judge as punitive damages in the present case, Court of Appeal Judge Stephen Goudge concluded that, "while I would not have awarded that sum, it is not so disproportionate as to exceed the bounds of rationality."

Case Name: Keays v. Honda Canada Inc.
Court: Ontario Court of Appeal
Judges: Marc Rosenberg and Kathryn Feldman, Stephen Goudge dissenting in part
Citation: [2006] O.J. No. 3891 (QL)
Date: September 29, 2006 
Full Text: http://www.lancasterhouse.com/decisions/2006/sep/OCA-Keays.pdf

POST-EMPLOYMENT RESTRICTIONS IN JOB CONTRACT VALID BUT TOO LONG-LASTING, JUDGE RULES

The Facts:

After working as an inside salesperson for Vancouver residential and commercial painting company Prostar Painting and Restoration Ltd. since March 2003, Ron Jones was fired on September 25, 2004 because the employer found that he was slacking off and refusing to work the hours expected of him.

Under his indefinite-term employment contract, Jones was to work from 6:30 a.m. to 4:30 p.m. from April through October of each year, and from 9:00 a.m. to 5:00 p.m. from November through March.

The employment agreement contained a non-competition clause which provided that Jones was not to compete with Prostar or be employed by a business similar to it "anywhere within the Lower Mainland of British Columbia" for a period of five years after the end of his employment with the company.

The post-employment restrictive covenant also stated that "... it being the intent of this provision that if the foregoing covenant is found to be unreasonable to any extent by a court of competent jurisdiction adjudicating upon the validity of the covenant, whether as to the scope of the restriction, the area of the restriction or the duration of the restriction, then such restriction shall be reduced to that which is in fact declared reasonable by such court, or a subsequent court of competent jurisdiction, requested to make such a declaration."

While Jones had previously been a valued and successful employee, the president of Prostar noticed a change in his performance and work routine beginning in January 2004. He began to leave work early, between noon and 2:00 p.m., and appeared to be distracted, unfocused and inattentive, failing to follow up with his paperwork. Despite a series of meetings in which Jones promised to improve his performance, such improvement never happened.

Becoming suspicious that Jones might be working for a competitor or even starting up his own business, Prostar hired a private investigation firm to conduct surveillance on him and determine what was going on. An investigator who struck up a conversation with Jones in a restaurant learned from him that he was not involved in any competitive activity as the employer had feared, but that he had in fact lost interest in his work because he had become deeply religious, no longer cared about material things, and intended to focus on his spiritual development while doing the minimum that was necessary at work to keep the employer happy.

Based on this information, the company president met again with Jones and asked him whether he was prepared to improve his work performance and attendance to comply with his employment contract. When Jones replied that he was happy with the status quo and would not change his work habits or work the required hours, Prostar fired him for cause.

Jones initiated an action in B.C. Supreme Court, alleging wrongful dismissal and also seeking to have the restrictive covenant declared invalid so that he would be free to work as a salesperson in the painting field.

The Decision:

British Columbia Supreme Court Judge Nancy Morrison rejected Jones' wrongful dismissal claim, ruling simply that "there is nothing to contradict the evidence of [the employer] with regard to the circumstances of dismissal" and that "I agree with [Prostar] that Mr. Jones was dismissed for cause."

Turning to the issue of the non-competition clause, Judge Morrison cited the decision of the Supreme Court of Canada in Elsley v. J.G. Collins Insurance Agencies, [1978] 2 S.C.R. 916, observing that "[a] restrictive covenant in restraint of trade is generally unenforceable as being against public policy, unless the covenant protects a legitimate proprietary interest of the employer; the restraint is fair and reasonable between the parties and in the public interest with respect to the nature of the prohibited activities and the length of time and geographic area over which it will operate; and the terms of the restraint are clear and certain."

However, relying on the more recent decision of the Supreme Court of Canada in Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249, as applied by the B.C. Court of Appeal in ACS Public Sector Solutions Inc. v. Courthouse Technologies Ltd., [2005] B.C.J. No. 2656 (QL), Morrison stated that "[i]f a non-competition clause is overly broad or otherwise unreasonable, the court may find the clause entirely unenforceable or, where the circumstances permit, the court may choose to sever or read down its terms to 'cure the illegality while remaining otherwise as close as possible to the intentions of the parties expressed in the agreement'."

In the case of the agreement between Jones and Prostar, Morrison found that "[w]hile the geographic area covered by the non-competition clause is quite broad, [Jones] is not prevented from working as a sales representative in the Lower Mainland; he is merely prevented from acting in that capacity within the painting industry. I am satisfied that the clause is reasonable between the parties and in the public interest if it is read down to operate for a period of two years from the date of termination, rather than five years."

Judge Morrison concluded that "there are no grounds to strike out the restrictive covenant clause, but there are grounds, on the basis of fairness, to restrict the non-competition clause to a time period of two years, rather than five years. Reading down is particularly appropriate in this case because that is what the parties expressly agreed should occur in the event that the non-competition clause was found to be unreasonable. It is clear that the defendant has a proprietary interest that it was determined to protect. To strike the clause altogether would be to create a substantially different bargain from that reached by the parties."

Comment:

Canadian courts have in the past been reluctant to "read down" restrictive covenants, particularly in employment as opposed to commercial contracts, rather than simply strike them in their entirety if a provision is overly broad. As the Manitoba Court of Queen's Bench held in Andico Manufacturing Ltd. v. Duguid (1983), 24 Man. R. (2d) 77, "[t]he plaintiff argued that the court should, in effect, 'read down' the restrictive covenant as having application only to customers of the plaintiff. In my opinion, however, the validity of the restrictive covenant must be determined by the actual covenant itself, not by what the plaintiff is now prepared to claim." While the Supreme Court of Canada in Transport North American Express Inc. broke new ground when it endorsed the power of the courts to "read down interest provisions to be just within the legal limit," that case involved neither a restrictive covenant nor an employment contract, but rather a commercial credit agreement in which the interest rate exceeded what was permissible under the Criminal Code. However, in the ACS Public Sector Solutions decision on which the judge in the present case relied, the B.C. Court of Appeal ruled that the Supreme Court's Transport North American Express holding on the appropriateness of reading down "applies to any illegal contract provision, whether by common law or statute" and applied it in reading down a post-employment restriction on competition in an individual's consulting contract.

Case Name: Jones v. Prostar Painting and Restoration Ltd.
Court: British Columbia Supreme Court
Judge: Nancy Morrison
Citation: [2006] B.C.J. No. 1556 (QL)
Date: July 5, 2006
Full Text:  http://www.lancasterhouse.com/decisions/2006/july/BCSC-Jones.pdf

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