- June 2, 2023
- Posted by: azimi
- Category: Employment Relationships and Intangible Property
Uncertainty Over Role of Intangible Property in Conversion Claims
Conversion is the legal term of art for a tort – civil cause of action – whereby a person takes, uses or destroys property belonging to another.
In the case of Tar Heel Investments Inc. v. HL Staebler Co. Ltd., conversion was one of the causes of action pled; what made it somewhat unique was that the property alleged converted was an intangible piece of property called a book of business.
A book of business is a list of customers that a salesperson or business has, which, as a whole, is held to have a particular value to the business.
This case was litigated up to the Ontario Court of Appeal. At the trial level, the defendant was held liable in damages for converting the first of two books of business. The defendant appealed the finding of liability and the respondent cross-appealed in relation to the second book.
The context is the transportation insurance industry. The defendant (LA), while working at company KA, developed the first book of business. When KA was acquired by the plaintiff PDI, she brought her clients over to it. At PDI she developed further clients which led to a second book of business. When PDI was later acquired by JB, which led to consequences that made her want to leave PDI, she combined both of her books of business and sold them to S, with whom she commenced employment. Ninety percent of her clients moved with her to S in the next few years.
The plaintiff’s lawsuit was for conversion but it also contained other claims such as breach of contract, breach of confidentiality and breach of fiduciary duty.
The trial judge’s main findings of fact were as follows. Since PDI paid LA a salary, benefits and expenses, the relationship between them was one of employment and not a broker support network. PDI and LA negotiated about the sale of the first book, but couldn’t agree on a price. Since LA never sold it to PDI, she continued to own it and was entitled to sell it to S. However, LA never owned the second book and, hence, committed the tort of conversion by selling it to S. She was not a fiduciary because she was an employee at all times and did not occupy a sufficiently senior management role to have fiduciary duties. Despite the movement of 90% of clients, it was unclear how much this was due to client loyalty versus sale of the books. In the end, the trial judge held LA and S jointly and severally liable for the sale of the second book.
The Ontario Court of Appeal found the trial judge’s reasoning to be problematic. The first problem area was the finding that LA owned the first book of business by default. It was not factually established that LA owned it at the time of joining PDI. The trial judge also didn’t make any findings about what information the book contained when she joined PDI and when she sold it to S. The relationship between the clients in the first book to PDI was unclear; if the relationship between PDI and LA was one of employment, then the clients in the first book were clients of PDI not LA. Lastly, at the time of the sale of the books to S, the items of information in the first book had been comingled with items of the information in the second.
The other problem area identified was that conversion had not been proven. It is not settled law whether intangible property can be the subject of a conversion claim. There have been several trial decisions that have decided otherwise.
Lastly, there were not enough findings of fact made at the trial level for the conversion claim, and no material facts were made concerning other claims such as breach of confidentiality, for the Court of Appeal to decide the claims and so a new trial was ordered with both parties to bear their own costs of the appeal but costs of both trials reserved to the second trial.
The moral of the case is the trial judge’s description of it as an object lesson on why parties working together should put the terms of their business agreement into writing.