UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Legal rights to information and skilled employees in the computer industry Smeltzer, Gerald Gilbert 1985

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1985_A6_4 S62.pdf [ 9.86MB ]
Metadata
JSON: 831-1.0077662.json
JSON-LD: 831-1.0077662-ld.json
RDF/XML (Pretty): 831-1.0077662-rdf.xml
RDF/JSON: 831-1.0077662-rdf.json
Turtle: 831-1.0077662-turtle.txt
N-Triples: 831-1.0077662-rdf-ntriples.txt
Original Record: 831-1.0077662-source.json
Full Text
831-1.0077662-fulltext.txt
Citation
831-1.0077662.ris

Full Text

LEGAL RIGHTS TO INFORMATION AND SKILLED EMPLOYEES IN THE COMPUTER INDUSTRY by GERALD GILBERT SMELTZER B.Comnw, The University of Alberta, 1968 LL.B., The University of B r i t i s h Columbia, 1971 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES (FACULTY OF LAW) accept t h i s t h e s i s as conforming to the required standard Prof. M. A. Hi c k l i n g (Chairman) Dr. D. Vaver (Associate Prof.) A p r i l 1985 Copyright Gerald G i l b e r t Smeltzer, 1985 In presenting t h i s t h e s i s i n p a r t i a l f u l f i l l m e n t of the requirements for an advanced degree at the Univ e r s i t y of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y a v ailable f o r reference and study. I further agree that permission f o r extensive copying of t h i s t h e s i s for scholarly purposes may be granted by the head of my department or by h i s or her representatives. I t i s understood that copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l gain s h a l l not be allowed without my written permission. FACULTY OF GRADUATE STUDIES The U n i v e r s i t y of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date: GERALD GILBERT SMELTZER' i i THESIS ABSTRACT Canada i s currently experiencing the t r a n s i t i o n to a p o s t - i n d u s t r i a l society as the r e s u l t of the wide spread introduction of information r e l a t e d technologies. This thesis focuses on the l e g a l r i g h t s to information of s k i l l e d employees who work with modern computer technology. The objective i s to assess the adequacy of e x i s t i n g laws to meet the needs of employers and employees and to serve the p u b l i c i n t e r e s t . The i n i t i a l chapters concentrate on the l e g a l p r i n c i p l e s of trade secrets and breach of confidence as applied to the employment r e l a t i o n s h i p . Patent and copyright protection for software i s b r i e f l y reviewed but not emphasized. Against t h i s background, the major portion of the thesis examines the d e l i c a t e balance between the l e g a l i n t e r e s t s of the employer, the employee and the p u b l i c . Any attempt by employers to l i m i t post employment use of information by employees invokes the doctrine of r e s t r a i n t of trade. This doctrine recognizes an employee's r i g h t to use the knowledge and s k i l l s developed during employment for the benefit of other employers. The t h e s i s examines the elements of the r e s t r a i n t of trade doctrine as applied to s k i l l e d employees i n the computer industry. The creation and development of software i s used throughout the t h e s i s to i l l u s t r a t e l e g a l p r i n c i p l e s . Employers such as software developers are extremely vunerable to misappropriation of c o n f i d e n t i a l information by t h e i r employees. Such employers r e l y heavily upon the use of r e s t r i c t i v e covenants i n employment agreements to l i m i t disclosure and to prevent future competition. i i i The remedies f o r an employee's breach of confidence are reviewed. This chapter concludes that the l e g a l p r i n c i p l e s governing i n t e r l o c u t o r y injunctions are inadequate to properly protect the information employer. The thesis concludes that the present Canadian law i s i n c r e a s i n g l y inadequate to protect a computer industry employer against an employee's unauthorized appropriation of c o n f i d e n t i a l information. In short, the law has not yet recognized the s o c i a l and technological changes that have greatly increased the v u n e r a b i l i t y of the information employer. I f neither the courts nor the l e g i s l a t u r e s take action, information employers w i l l have to further increase t h e i r r e l i a n c e on the l i m i t e d and uncertain protection of r e s t r i c t i v e covenants i n employment agreements. THESIS SUPERVISOR: PROF. M.A. HICKLING i v ACKNOWLEDGEMENT For t h e i r u n f a i l i n g patience, support and love, t h i s t hesis i s dedicated to Morrison and Muriel Smeltzer. I could not have asked for truer friends or better parents than I received i n them. V LEGAL RIGHTS TO INFORMATION AMP SKILLED EMPLOYEES IN THE COMPUTER INDUSTRY THESIS ABSTRACT i i ACKNOWLEDGEMENT i v I. INTRODUCTION A. The P o s t i n d u s t r i a l Information Society 1 B. The Si g n i f i c a n c e of Information 4 C. The Legal Paradigm and the Challenge f o r Lawyers. 8 I I . WHO QUALIFIES AS AN EMPLOYEE? A. General Considerations 17 B. The J u d i c i a l Tests f o r Determining Status as an Employee 21 C. The Control Test 23 D. The Multiple Test 25 E. The Organizational or Integration Test 28 F. Summary ' 29 I I I . AN EMPLOYER'S PROPRIETARY RIGHTS TO INFORMATION A. General Considerations 35 1. Increasing Commercial Reliance on Secrecy and C o n f i d e n t i a l i t y 40 2. Confusion over Ownership of Software 41 3. Possible Policy Biases i n the E x i s t i n g Law 42 4. P o l i c y Objections to Property Rights i n Information .45 B. Patent Protection f o r Information 48 C. Copyright Protection 51 D. Trade Secret Protection f o r Information 61 v i 1. The Legal P r i n c i p l e s 61 2. Trade Secrets and Software 67 IV. THE FIDUCIARY AND IMPLIED OBLIGATIONS OF AN EMPLOYEE: A. Implied Obligations 86 B. Fiduciary Obligations 93 C. Fiduciary Obligations and the B.C. Software Industry 99 V. COVENANTS IN RESTRAINT OF TRADE: A. Should Employers Use Express Covenants of Restraint? 110 B. Special Status of Restraints on Employment 118 C. What i s a Restraint of Trade? 124 D. The Employer's Proprietary Interest and the Reasonableness Test 130 1. Protection of Employer's Business Connections 131 2. Protection of an Employer's Interest i n Co n f i d e n t i a l Information .133 3. Protection of an Employer's Rights to Trade Secrets 134 4. Know How vs. Trade Secrets 137 5. Other Related Proprietary Interests 141 E. Reasonableness Between the Employer and Employee 144 F. The Public Interest and Employment Restraints.... 149 G. Other Considerations. 156 v i i VII. THE CRITICAL REMEDIES FOR BREACH OF AN EMPLOYEE'S OBLIGATIONS 1. Damage Awards Against a Third Party Who Benefits From An Employee's Breach of Confidence 173 2. Interlocutory Injunctions to Restrain Breaches of a R e s t r i c t i v e Covenant 178 3. Punitive Damage Awards Against an Employee for Breach , of Employment Obligations 188 VII. CONCLUSION 202 VIII. BIBLIOGRAPHY 214 1 I INTRODUCTION A. THE POST INDUSTRIAL INFORMATION SOCIETY "In the midst of the computer age, we are often s t a r t l e d witnesses to the r a d i c a l changes taking place around us. Patterns of doing business, which have evolved slowly over many generations, are being i n e x t r i c a b l y a l t e r e d almost overnight. Although i t may be d i f f i c u l t to imagine, the day w i l l come, and some speculate before the end of the century when many of us w i l l work, shop, bank and take classes seated at a computer terminal i n our homes. The scope of these changes and the speed with which they are occurring w i l l have enormous implications for the structure of society. Often spoken of as a revolution, the development of microelectronics w i l l have a worldwide impact that i s at least as powerful and far-reaching as the development of the p r i n t i n g press." ^ One wonders i f there i s any Canadian who has not yet heard about the information r e v o l u t i o n . Numerous commentators i n both the popular media and i n academic l i t e r a t u r e t e l l us about the transformation from a smokestack i n d u s t r i a l economy to a "high tech" information economy. ^ A l v i n T o f f l e r , i n h i s book e n t i t l e d "The Third Wave" refer s to the countries of the world as either " f i r s t wave","second wave", or as " t h i r d wave" s o c i e t i e s . ^ i n t h i s simple but e f f e c t i v e metaphor,those nations l a b e l l e d as " f i r s t wave" are s t i l l experiencing the transformation from hunting a c t i v i t i e s to an a g r i c u l t u r a l l y based economy. Second wave countries are those undergoing the changeover from a g r i c u l t u r a l economies to i n d u s t r i a l i z a t i o n . Nations such as the United States, Japan, West Germany and the United Kingdom, which are leading the world i n the use of e l e c t r o n i c technology, are the t h i r d wave countries. Although Canada cannot be e a s i l y l a b e l l e d as e i t h e r a completely i n d u s t r i a l i z e d economy, or an economy based on microelectronics, the 2 current advances i n telecommunications and i n computers are re v o l u t i o n i z i n g our l i v e s . Numerous reports and a r t i c l e s document the s i g n i f i c a n t changes that are occurring i n the Canadian economy. 4 i n the past the goods producing i n d u s t r i e s were considered to be the heart of the economy. Growth of the manufacturing sector was the key to prosperity and the solution to the problem of unemployment. But i n d u s t r i a l growth no longer dominates the Canadian economy. A recent study conducted for the Ontario government shows that "information r e l a t e d a c t i v i t i e s account for close to hal f the Gross Domestic Product. The information economy - that part of the G.D.P. associated with the production, processing and d i s t r i b u t i o n of information goods and services accounted for 47% of the G.D.P. i n 1981, up from 35% i n 1971..." 4 a Canadians can no longer look to the manufacturing sector to create jobs for those entering the labour force. Intense foreign competition i s fo r c i n g our manufacturers to use the developing e l e c t r o n i c technology. Computer a s s i s t e d manufacturing (CAM) and robotics must be used on the plant f l o o r , while 1 o f f i c e automation confronts the white c o l l a r worker. Canada i s presently at the change-over point i n i n d u s t r i a l production where diminishing amounts of labour are needed to produce a constant quantity of goods. Just as mechanization converted farming from being labour intensive to being c a p i t a l intensive, the new technology i s converting the manufacturing process. The remarkable fa c t i s that the service sector now dominates the North American economy. Estimates are that i n 1982 services generated 67% of the U.S. gross national product, and employed seven out of every ten Americans. While employment i n the manufacturing sector has remained 3 constant for the l a s t decade, service re l a t e d jobs i n the U.S.A. have gone from an estimated 47 m i l l i o n to 65 m i l l i o n . ^ I t i s the service sector that best demonstrates the changeover to an information economy i n Canada or the U.S.A. Economists divide t h i s sector into two major areas: intermediary services and consumer/community ser v i c e s . ^ A close r look at the i n d u s t r i e s represented i n these categories points out the enormous information component. The intermediary services category includes d i s t r i b u t i o n services such as transportation, u t i l i t i e s , wholesale and r e t a i l a c t i v i t i e s , and general business services such as finance, insurance, l e g a l , and a l l the other supporting p r o f e s s i o n a l businesses. Consumer and community services covers a l l a c t i v i t y i n the f i e l d s of entertainment, hotels, r e a l estate and also includes a l l government programs. One common l i n k among a l l of these sub-categories i s information. A l l of these are either information dependent or else deal s o l e l y i n information as a basic stock i n trade. Accordingly, these businesses are responding e n t h u s i a s t i c a l l y to the new information technologies. Computers enable the service sector to process, evaluate and d i s t r i b u t e vast amounts of data. Telecommunications l i n k the data bases and computers together i n an ever expanding networks. Canadian p o l i c y makers cannot a f f o r d to ignore the impact of microelectronics. The new technologies are advancing so r a p i d l y that enormous s o c i a l and l e g a l changes appear to be i n e v i t a b l e . The following comparison captures the r e l a t i v e speed and power of the forces behind the movement to computerization. " I f the a i r c r a f t industry had evolved as spectacularly as the computer industry over the past twenty-five years, the Boeing 767 would cost $500 d o l l a r s today, and i t would c i r c l e the 4 globe i n twenty minutes on f i v e gallons of f u e l . Such performance would represent a rough analogue of a reduction i n cost, the increase i n speed of operation, and the decrease i n energy consumption of computers. B. THE SIGNIFICANCE OF INFORMATION What i s information? Does the term have a d i f f e r e n t meaning depending on the context? Has the d e f i n i t i o n changed over the past decade? The word i s widely used, but a m u l t i p l i c i t y of meanings come to mind. Information seems to be one of those enigmatic terras that acquires meaning from i t s surroundings. Information has not yet been s t r i c t l y considered or defined i n Canadian case law. For example, the general concept of information i s not r e f e r r e d to i n either the Canadian Law Dictionary^ or the Words and Phrases section of the Canadian Abridgement. (The obvious exception i s the very s p e c i f i c d e f i n i t i o n given to the word i n the criminal j u s t i c e process i n r e f e r r i n g to the document which sets out the criminal charges against an a c c u s e d . ) ^ A non-legal d e f i n i t i o n for information from a general dictionary explains the concept as "knowledge acquired or derived; f a c t s " or else as 11 "timely knowledge; news". But t h i s type of explanation lacks the p r e c i s i o n and accuracy that i s required for any discussion of l e g a l rights to information. This thesis w i l l focus on the r i g h t s to information i n the computer industry, and p a r t i c u l a r l y upon the obligations of secrecy and confidence that an employer can l e g a l l y enforce against an employee. Therefore information must be defined at l e a s t i n t h i s l i m i t e d commercial context. However, even with these l i m i t s , a precise d e f i n i t i o n s t i l l eludes legal 5 commentators. In a recent a r t i c l e , Hammond avoided such an attempt and instead i d e n t i f i e d information as a continuum "which runs from pure ideas through information,data and know-how, and into the areas conventionally covered by the statutory monopolies."^ In t h i s context, the statutory monopolies mean the ri g h t s of patent and copyright holders under the federal l e g i s l a t i o n . The concept of information only acquires a degree of pr e c i s i o n when i t i s used i n the t e c h n i c a l sense. The glossary for the 1983 Computers and Law I n s t i t u t e provides the following explanations of information and i t s . r e l a t e d t e r m s : ^ data processing system - a network of machine components capable of accepting information, processing i t according to a plan, and producing the desired r e s u l t s . information - the meaning derived from data which has been arranged and displayed i n such a way that i t can be r e l a t e d to that which i s previously known, (cf. data). information system - a l o g i c a l group of subsystems and data required to support the information needs of one or more business processes. information system network - a network of multiple o p e r a t i o n a l - l e v e l information systems and one management-orientated information system (centred around planning, c o n t r o l and measurement processes.) The network r e t r i e v e s data from databases and synthesizes that data into meaningful information to support the o r g a n i z a t i o n . 1 4 To i l l u s t r a t e the obligations of secrecy and confidence i n the ensuing pages, t h i s t h e s i s w i l l r e f e r to one s p e c i f i c type of e l e c t r o n i c information, namely software. In the computer terminology, software means the set of e l e c t r o n i c i n s t r u c t i o n s that t e l l a computer what function i t i s to p e r f o r m . 1 4 3 Brooks i d e n t i f i e s d i f f e r e n t types of 6 software such as systems software, a p p l i c a t i o n software, l i s t i n g s , and updates and program m o d i f i c a t i o n s . ^ However, the precise d i s t i n c t i o n s are unimportant for the purpose of t h i s t h e s i s . The term software was coined to contrast computer programs with the "ir o n " or hardware of a computer system. Software provides a dramatic and e f f e c t i v e i l l u s t r a t i o n of information r i g h t s . I t i s a type of e l e c t r o n i c information that plays an increasingly important r o l e i n the emerging high technologies. The production of software i s labour-intensive rather than c a p i t a l intensive, and so provides a relevant background for the c o n f l i c t s between the rights of employers and employees i n the computer industry. Thus, software i l l u s t r a t i o n s w i l l be used to explore the a p p l i c a t i o n of the law to the high technology employer and employee. Admittedly, the d e f i n i t i o n s of software and information offered above are vague and l e g a l l y imprecise. The terms only take on any degree of cer t a i n t y when used i n a narrower t e c h n i c a l sense. The concepts have not yet been defined i n non-technical language that i s both completely accurate, and s t i l l comprehensible to a non-technical outsider. In e f f e c t , our society and our l e g a l system have not yet come to grips with the s i g n i f i c a n c e of e l e c t r o n i c information as a mass produced product or as a valuable s o c i a l resource. An example from a r e l a t e d profession w i l l i l l u s t r a t e the d i f f i c u l t i e s of dealing the new information economics. The accounting profession i n North America i s currently debating the a p p l i c a t i o n of accounting p r i n c i p l e s to software. One p a r t i c u l a r disagreement r e l a t e s to the appropriate c l a s s i f i c a t i o n of software i n the f i n a n c i a l statements of software development corporations. The c l a s s i f i c a t i o n , issue i s 7 s i g n i f i c a n t because of the large amounts of money that i s spent by these corporations on the research and development of new software programs. The currently accepted Canadian p r a c t i c e i s to t r e a t software development costs as an expense i n the year i n c u r r e d . 1 6 Thus, the p r o f i t and loss statements of the corporations show huge expenses during the i n i t i a l years of the l i f e of a sucessful program. The contrary view i s to t r e a t the disbursement as the a c q u i s i t i o n of a c a p i t a l asset. This approach means that the cost of the asset can be depreciated on a year by year basis over the l i f e of the software program. Comserv,Inc. i s an American based maker of software systems for manufacturing companies. I t invested the sum of $735,000.00 i n 1981 and 1982 to develop a program for purchasing procedures. 1 7 When Comserv launched the product i n 1982, the corporation had already received firm orders for 35 sets of the program at $40,000.00 each for a t o t a l of $1.4 m i l l i o n d o l l a r s . By the end of October,1982 sales had reached a t o t a l of 70 systems for a t o t a l of $2.8 m i l l i o n i n sales revenue. The chief executive o f f i c e r of the corporation estimated that the purchasing program would generate at l e a s t $6 m i l l i o n d o l l a r s more i n revenue before the product was outdated. Given these f a c t s , the corporation's auditors, Peat, Marwick,Mitchell & Co., considered the program to be an asset of the corporation for the annual f i n a n c i a l statements. F i n a n c i a l statements for such companies change d r a s t i c a l l y i f software houses are expected to expense software costs on an annual basis instead of t r e a t i n g the programs as depreciating assets. In Comserv's case, reporting a l l of i t s 1981 development costs as an annual expense would have converted a 1981 reported p r o f i t to a $1.0 m i l l i o n l o s s . In the year 1982 when even more development work on a number of programs was 8 undertaken, t r e a t i n g research and development costs as current expenses would have changed a p r o f i t of nearly $2.5 m i l l i o n d o l l a r s to a loss of almost $4.0 m i l l i o n . 1 7 1 3 The Comserv s i t u a t i o n shows the accounting profession t r y i n g to deal with information i n the modern economy. If the normal rules of conservative accounting had been followed, the r e s u l t would have been i l l o g i c a l . Comserv would have generated $6.0 m i l l i o n i n extra revenue by s e l l i n g information that was not l i s t e d as a corporate asset. Perhaps these contradictions can be explained as an inappropriate a p p l i c a t i o n of accounting r u l e s . But another explanation i s that the accountants are no d i f f e r e n t than most groups i n our society. The normal response i s to t r e a t information production and d i s t r i b u t i o n as no d i f f e r e n t than any other i n d u s t r i a l product. By f i t t i n g information i n t o f a m i l i a r , comfortable categories, the impetus to change i s r e s i s t e d . The r e s u l t i s to avoid any change i n the e x i s t i n g r u l e s . Lawyers must now begin to deal seriously with the impact of e l e c t r o n i c information. In conjunction with the rest of Canadian society, we must determine whether the e x i s t i n g rules of law can accommodate the emerging information economy, or whether the rules of law must change. C. THE LEGAL PARADIGM AND THE CHALLENGE FOR LAWYERS A paradigm can be described as an i n d i v i d u a l ' s set of attitudes or a way of thinking that determines that i n d i v i d u a l ' s response to a p a r t i c u l a r e v e n t . 1 8 Since the l e g a l profession holds strongly to c e r t a i n shared attitudes and b e l i e f s , the profession can be said to approach problems with p a r t i c u l a r and d i s t i n c t i v e paradigms. In t h i s way the emphasis on 9 stare d e c i s i s i n the English common law i s a well a r t i c u l a t e d paradigm to solve new cases. The r i s k involved i n t h i s rear-view mirror approach to problems i s that lawyers may not catch the scope of a s o c i a l change nor see the r e a l l e g a l and p o l i c y issues that are involved. In p a r t i c u l a r , Hammond observes that the l e g a l profession customarily treats information as a type of property, and takes issue with t h i s easy c l a s s i f i c a t i o n . the_history of l e g a l responses to new information and knowledge suggests two c r i t i c a l challenges. The f i r s t r e l a t e s to the a b i l i t y of the profession and the commercial community to devise new s o c i a l arrangements that w i l l ensure both the creation and the e f f e c t i v e and p r o f i t a b l e u t i l i z a t i o n of new information and technology. The second challenges a l i b e r a l society to protect i t s basic p o l i t i c a l and human values from unwise applications or withdrawals of that new knowledge. The r e a l question i s whether the i n s t i t u t i o n of 'property' i s an appropriate vehicle for addressing those challenges. 1^ Canadian society now confronts the two c r i t i c a l challenges i d e n t i f i e d by Hammond. One area that tests our a b i l i t y to use new information c r e a t i v e l y while simultaneously protecting basic p o l i t i c a l values i s the recent freedom of information l e g i s l a t i o n enacted by the federal government. 2^ As Hammond predicted, the issue of access to information i s becoming an obvious change i n the l e v e l s of formal l e g a l o r d e r i n g . 2 0 a The North American experience with access to information l e g i s l a t i o n indicates that l e g i s l a t o r s and lawyers have not as yet e n t i r e l y met Hammond's challenges. In the United States, the Freedom of Information A c t ^ was enacted i n 1966. The basic purpose of the l e g i s l a t i o n was to "ensure an informed c i t i z e n r y , v i t a l to the functioning of a democratic society, needed to check against corruption and to hold the governors accountable to the governed". 2 2 This objective may have met Hammond's 10 f i r s t challenge of preserving basic p o l i t i c a l values i n the United States. But constant c r i t i c i s m has been directed at the l e g i s l a t i o n for i t s f a i l u r e to ensure the f a i r and e f f e c t i v e use of commercial information i n the United States. These widespread complaints have been generated by the f a c t that the l e g i s l a t i o n permits v i o l a t i o n s of corporate privacy or corporate c o n f i d e n t i a l i t y . 2 - * These alleged v i o l a t i o n s occur a f t e r corporate trade secrets or c o n f i d e n t i a l information have been disclosed to the government. Competitors of the trade secret holder then use the Freedom of Information Act to obtain the trade secret from the government. The American l e g i s l a t i o n does contain exemptions for t h i r d party trade s e c r e t s , 2 4 but "recent decisions of the U.S. Supreme Court have underscored, and perhaps enhanced, the v u l n e r a b i l i t y of Government held trade secrets to public d i s c l o s u r e . " 2 ^ The Canadian counterpart to the American freedom of information l e g i s l a t i o n was proclaimed i n July, 1983. The announced purpose of the Access to Information A c t 2 ^ a was to improve our democratic process by expanding the flow of information to Canadian v o t e r s . 2 6 Yet even before the l e g i s l a t i o n was proclaimed, Canadian l e g a l c r i t i c s attacked the b i l l f o r i t s threat to corporate c o n f i d e n t i a l i t y . 2 7 Relying upon the American experience, these c r i t i c s claim that most freedom of information enquiries are not seeking government information. It i s alleged that 80% of the requests f o r information made to U.S. fe d e r a l agencies (excluding F.B.I, and C.I.A. enquiries) have been made by businesses seeking information about the secrets of t h e i r competitors. 2 8 Although neither the Canadian or American governments intended such r e s u l t s , the l e g i s l a t i o n appears to l e g a l i z e a c e r t a i n amount of i n d u s t r i a l espionage. 11 The foregoing debate indicates that our l e g i s l a t o r s may have underestimated the s i g n i f i c a n c e of these new laws i n an information economy. The Canadian statute opens the doors to the huge quantities of information stored i n the government data banks. The federal government plays a major r o l e i n many sectors of the Canadian economy and p a r t i c i p a t e s i n a multitude of j o i n t ventures with the private sector. As a r e s u l t of the l e g i s l a t i o n , the records of 27 M i n i s t r i e s of State and 106 other government i n s t i t u t i o n s are now subject to public d i s c l o s u r e . Even though the Canadian l e g i s l a t i o n contains exemption provisions for corporate trade secrets i n section 20(1), at le a s t one leading corporate counsel doubts the effectiveness of these p r o t e c t i o n s . 2 ^ The doubts appear to have some foundation. For example, the exemptions to protect c o n f i d e n t i a l i t y are subject to an override provision. Section 20(6) allows legitimate corporate secrets to be released when the disclosure would be i n the public i n t e r e s t as i t relates to the public health, p u b l i c safety or protection of the environment. This same subsection also permits release of c o n f i d e n t i a l information where the public i n t e r e s t c l e a r l y outweighs the f i n a n c i a l l o ss, prejudice to the competitive p o s i t i o n , or interference with the contractual negotiations of a t h i r d party. Another discouraging aspect are the l i m i t a t i o n s placed upon a party who has been injured by a mistaken disclosure of information. Section 74 p r o h i b i t s any c i v i l action for the recovery of damages caused by an erroneous disclosure by a government employee so long as the disclosure was made i n good f a i t h . Recent case law confirms that the overriding objective of the Access to Information A c t 2 9 a i s the disclosure of information. In Re M a i s l i n  Industries L td. and Minister f o r Industry, Trade and Commerce, Regional Economic E x p a n s i o n , 2 9 b the Court emphasized two p r i n c i p l e s that are to be 12 applied to any attempt to use the exemption i n s. 20(1) to protect c o n f i d e n t i a l information or trade secrets. F i r s t , since the statute c o d i f i e s the r i g h t of pu b l i c access to government information, such "public access ought not to be fr u s t r a t e d by the courts except on the c l e a r e s t grounds so that doubt ought to be resolved i n favour of d i s c l o s u r e " . 2 9 0 Second, the court placed the burden of persuasion upon the party r e s i s t i n g the disclosure of the information. 2^** To return to Hammond's two c r i t i c a l challenges for the l e g a l profession, we can again ask whether the Access to Information Act "ensures the creation and . . . u t i l i z a t i o n of new information"? Does the statute protect "against unwise...withdrawals of ...new knowledge"? 2 9 e The apparent conclusion forced upon us i s that c e r t a i n of the assumptions underlying the Access to Information Act are u n r e a l i s t i c . Canadian l e g i s l a t o r s may have seriously underestimated the value of information i n our society. The property paradigm and u n f a m i l i a r i t y with the economics of information seem to have created new and unforeseen problems. Working from attitudes conditioned by an i n d u s t r i a l society, our l e g i s l a t o r s thought the statute would redress the imbalance between the i n d i v i d u a l and the federal bureaucracy. Their i n t e n t i o n was that the statute would extend the c i t i z e n ' s property r i g h t s to information held i n the government f i l e s . However, i f the c r i t i c ' s claims are correct, the f i r s t major Canadian l e g i s l a t i o n i n the information f i e l d has serious economic consequences that are counter-productive. Instead of a statute that encourages the free exchange of information, we have enacted a law that encourages businesses to avoid disclosure and to l a b e l information as c o n f i d e n t i a l . Instead of a statute that encourages industry and government cooperation, 13 we have a law that discourages business from p a r t i c i p a t i n g i n frank and open discussions with government. F i n a l l y , there i s a clear r i s k that the statute allows l e g a l i z e d i n d u s t r i a l espionage. An unethical competitor may yet be able " to reap where i t has not sown."3° Canadians are now facing the d i f f i c u l t task of converting to an information economy. We must therefore examine our e x i s t i n g paradigms to avoid making any unintended yet c o s t l y s o c i a l e r r o r s . Achieving the transformation to a computerized society with minimal s o c i a l costs i s important for our domestic harmony, and c r i t i c a l f o r our i n t e r n a t i o n a l competitive p o s i t i o n . The thesis i s part of the t r a n s i t i o n process to an information based society. The subsequent chapters examine the r e l a t i o n s h i p between the law and information i n the computer industry. The precise focus i s on the employer and employee s i t u a t i o n s where l e g a l r i g hts to information are a predominant concern of the p a r t i e s . The central question w i l l be an assessment of the adequacy of e x i s t i n g laws to meet the needs of employers and employees, and to serve the public i n t e r e s t . 14 FOOTNOTES; CHAPTER I 1. Science Council of Canada (1982-83), Annual Report; at page 21. 2. John C. Lautsch, Communications and the Wealth of Nations: Some  Th e o r e t i c a l and P o l i c y Considerations about an Information Economy, (1983) V o l . IV, No. 1, Computer/Law Journal 101; Michael Jenkin, The Challenge of D i v e r s i t y , 1982/83 Science Council of Canada; G. Stead, Threshold Firms, 1982/83 Science Council of Canada; H. Menzies, Computers on the Job, (1982) James Lorimer and Company, Toronto. 3. A l v i n T o f f l e r , The Third Wave, (1980) 4. Supra, note 2; see also Science Council of Canada, Planning Now for an Information Society: Tomorrow Is Too Late, (1982/83) Report 33. 4a A. S i l v e r s i d e s , Study finds a S i g n i f i c a n t S h i f t Toward Information  Economy, Globe and Mail, June 22 1984, at 12. 5. Forbes magazine, You Mean We've Been Speaking Prose a l l These Years?, A p r i l 11, 1983 p. 142. 6. Id., at 144-145. 7. H. D. Toong and A. Gapta, Personal Computers, (1983/April) S c i e n t i f i c American 87. 8. D. S. Sodhi, The Canadian Law Dictionary, (1980). 9. The Canadian Abridgement, (2nd E d i t i o n 1977) Table of Words and Phrases J u d i c i a l l y Considered i n Canadian Reports. 10. Id., at page 236. 11. Funk and Wagnall's Standard Desk Dictionary (1980), L i p p i n c o t t and Crowell. 12. R. Grant Hammond, Quantum Physics, Econometric Models and Property  Rights to Information (1981) 27 M c G i l l Law Journal 47. 15 13. Computers and Law I n s t i t u t e (July 1983), Continuing Legal Education Society of B.C. at p. 5.1.01. 14. Id. 14a. For an extensive discussion of the problems i n defining software see J . Palmer, R. Resendes, Copyright and the Computer (1982) Consumer and Corporate Affairs/Canada at p 5-15. A general d e f i n i t i o n of software provided by t h i s study at pg. 6 was "a set of precise i n s t r u c t i o n s that t e l l s the computer how to solve a p a r t i c u l a r problem." 15. Daniel T. Brooks, Agreements with Consultants and Employees and  Registering Copyrights i n Computer Software (1982) P r a c t i s i n g Law I n s t i t u t e , Computer Law - Acquiring Computer Goods and Services. 16. Wayne L i l l y , The Problem with Backing Brains (1983/May) Canadian Business 84. 17. Forbes, C a p i t a l Offense (1983) January 17th at page 100. 17a. Id. 17b. 1A. 18. Supra, note 12, 49. 19. Supra, note 12, 52. 20. Access to Information Act, 1980-81-82-83 (Can.) , c l l l , S c h . I . 20a. Supra., note 12, 50. 21. 5 U.S.C. Section 552. 22. National Labor Relations Board v. Robbins T i r e and Rubber Co. (1978) 437 U.S. 214 at 242,57 L Ed 2d 159, 98 S Ct 2311,(1978) 23. See Mark R. Arnold, Who's Going F i s h i n g i n Government F i l e s ? (1976) 6 J u r i s Doctor 17; Johnson, Treatment of C o n f i d e n t i a l Documents by the  Federal Trade Commission (1978) 46 A n t i t r u s t L.J. 1017, at 16 1036; O'Reilly, Government Disclosure of P r i v a t e Secrets under the  Freedom of Information Act (1975) 30 Bus. Law 1125, at 1134. 24. 5 U.S.C. Section 552(b)(4). 25. D. Glancy, Disclosure of Trade Secrets Under the U.S. Freedom of  Information Act, (1981) 2 E.I.P.R. 38 at 38 - 39 r e f e r r i n g to National Labor Relations Board v. Robbins T i r e and Rubber Co. , 437 U.S. 214 (1978), and Chrysler Corp. v. Brown 441 U.S. 281 (1979). 25a. Supra., note 20 26. Section 2(1) of the Access to Information Act provides: The purpose of t h i s act i s to extend the present laws of Canada to provide a r i g h t of access to information i n records under the co n t r o l of a government i n s t i t u t i o n i n accordance with the p r i n c i p l e s that government information should be a v a i l a b l e to the p u b l i c , that necessary exceptions to the r i g h t of access should be l i m i t e d and s p e c i f i c and that decisions on the disclosure of government information should be reviewed independently of government. 27. Laurent C a r r i e r , Access to Information May Carry Spy Threat (Dec. 1982) The National; Ross W. McFarlane Q.C., Corporate Freedom of  Information Can Prove Costly (May/June 1983) The Canadian Lawyer, at 23. 28. Id., Both of the a r t i c l e s noted use the 80% f i g u r e . 29. Id., Ross W. McFarlane i s corporate counsel f o r General Motors of Canada Ltd. 29a. Supra., note 26. 29b. (1984) 10 D.L.R. (4th) 417 (Fed. Ct. T r i a l Div.) 29c. Id. at 420. 29d. IdN at 420. One possible l i m i t a t i o n on the disclosure of c o n f i d e n t i a l information i s that the information must ex i s t i n the government data banks i n the compilation or format requested by the 17 applicant. The d i f f i c u l t y i n preparing the information can be grounds for refusing d i s c l o s u r e . See re Lahey and Minister of  Finance of New Brunswick (1984) 10 D.L.R. (4th) 758 under Right to  Information Act 1978 (N.B.) C. R-10-3. 29e. Supra., note 12. 30. In t e r n a t i o n a l News Service v. Associated Press, (1918) 248 U.S. 215, at 239 18 II WHO QUALIFIES AS AN EMPLOYEE? A. GENERAL CONSIDERATIONS The Information Revolution has changed the nature of employment i n our society. While many u n s k i l l e d as well as managerial jobs are being eliminated, .the increasing use of computers has dramatically raised the demands for highly tra i n e d researchers, engineers, technicians and programmers.1 These are the key employees who are charged with the design and development at each new generation of technology. The booming North American computer industry also employs legions of other people i n the a n c i l l i a r y areas of marketing, customer support, maintenance, finance and accounting. The s k i l l e d employees who f i r s t develop the technology, and then l a t e r d i s t r i b u t e the software and hardware to the customers normally obtain access to the employer's c o n f i d e n t i a l product information. The competitive demands for t h e i r talents and the quickly changing structure of the industry also means that the s k i l l e d employees are highly mobile i n the labour market. When they move to a new employer, the knowledge of the product information of the previous employer moves with them. This t h e s i s w i l l examine the extent to which an employer can impose obligations of confidence and secrecy upon his former employees. This thesis d e l i b e r a t e l y concentrates on information r i g h t s i n the employment r e l a t i o n s h i p . However, t h i s focus does not assume that the employment r e l a t i o n s h i p i s the only means to organize the production of information i n the computer industry. The l e g a l categories of partnership, independent contractor, incorporation and principal/agent are other ways to organize the development of hardware and software. However, these separate categories must be distinguished from the employment r e l a t i o n s h i p . 19 Apart from the motives of business strategy, there are important l e g a l reasons for separating employees from agents, partners and independent contractors. While a l l of these groups face o b l i g a t i o n s under the doctrine of breach of confidence, there are l e g a l s u b t l e t i e s p e c u l i a r to each group and p a r t i c u l a r l y to employees. Therefore, the precise obligations imposed on any information worker cannot be determined without f i r s t examining that i n d i v i d u a l ' s l e g a l status. Is the person operating as an employee, an agent, a partner or a independent contractor? An employee d i f f e r s from the other groups f o r the following reasons. An employee must comply with obligations of l o y a l t y and good f a i t h that are implied as part of the employment contract,3 whereas an independent contractor can more f r e e l y pursue his own s e l f - i n t e r e s t . On the other hand, an employee i s r a r e l y f i x e d with the same onerous f i d u c i a r y obligations that are placed upon agents, or upon d i r e c t o r s and senior o f f i c e r s of a corporation.4 s i m i l a r l y , an employee faces d i f f e r e n t l e g a l o b l i g a t i o n s than those imposed upon a partner. Unlike partners, an employee and employer are not "carrying on business i n common with a view to p r o f i t " 5 , and an employee i s not f i x e d with a partner's j o i n t and several l i a b i l i t y f o r a l l the debts and l i a b i l i t i e s of the partnership.6 The employment r e l a t i o n s h i p also receives d i s t i n c t i v e treatment under the doctrine of r e s t r a i n t of trade.7 Subsequent chapters w i l l point out that although the doctrine applies generally to other r e l a t i o n s h i p s such as partnership, independent contractor/contractee and the sale of a business, a more rigorous scrutiny i s given to employment r e s t r a i n t s i n contrast to other types of r e s t r a i n t s on trade.8 I t i s even argued that the "reasonableness t e s t " when applied to an employment r e s t r a i n t should be considered against the equitable standard 20 unconscionability.9 Many courts that are less adventureous s t i l l s t a r t with the assumption that employment r e s t r a i n t s are prima f a c i e void. This i n i t i a l assumption i s i n clear contrast to the more deliberate a n a l y t i c a l approach taken on other r e s t r a i n t s such as solus agreements. 1^ One f i n a l reason f o r determining an i n d i v i d u a l ' s l e g a l status a r i s e s from the Copyright Act. Copyright protection f or software i s inc r e a s i n g l y important i n Canada due to the s i z e of the market. Section 12(3) of the Act provides a presumption of ownership of copyright for an employer. 1 1 In summary, a s k i l l e d employee i n the computer industry occupies a d i f f e r e n t l e g a l p o s i t i o n than agents, independent contractors or senior o f f i c e r s and d i r e c t o r s . A dramatic i l l u s t r a t i o n of t h i s point was provided by the 1981 judgement of Reid J . i n Investors Syndicate Ltd. v. V e r s a t i l e Investments Inc. The p l a i n t i f f had applied for an i n j u n c t i o n to prevent one of i t s former sales representatives from s e l l i n g account l i s t s to the corporate defendant. At t r i a l , the i n j u n c t i o n was refused on the grounds that the sales rep was an employee and that the r e s t r i c t i v e covenants i n the 1? employment contract were unreasonably r e s t r i c t i v e . On appeal to the Ontario Court of Appeal the p l a i n t i f f was successful, but on somewhat s u r p r i s i n g grounds. Although the argument had > not been raised i n the lower court, the Court of Appeal was persuaded to c l a s s i f y the sales rep as an agent of the p l a i n t i f f . As an agent the salesman was bound by wider f i d u c i a r y o b l i g a t i o n s than those of a lower l e v e l employee. He was not permitted to place himself i n a p o s i t i o n of c o n f l i c t with h i s former principal.13 Thus, the l e g a l status of the i n d i v i d u a l salesman d i r e c t l y a f f e c t e d the l e g a l protection that was applied to v i t a l business information. 21 B. THE JUDICIAL TESTS FOR DETERMINING STATUS AS AN EMPLOYEE The courts cannot determine employment status simply by looking at a general d e f i n i t i o n of an employee. Such d e f i n i t i o n s are only generalizations of the s p e c i f i c j u d i c i a l t e s t s , and must be treated with caution. For example, an employee has been defined: "as an i n d i v i d u a l who has entered i n t o or works under (or, where the employment has ceased, worked under) a contract with an employer, whether the contract i s for manual labour, c l e r i c a l work or otherwise, i s expressed or implied, o r a l or i n writing, and whether i t i s a contract of service or apprenticeship."15 This d e f i n i t i o n then distinguishes between a contract of service and a contract f o r services.16 Thus, a servant or employee i s a person "subject to the command of hi s master as to the manner i n which he s h a l l do h i s work". In contrast, the independent contractor " i n the actual execution of the work ... i s not under the order or control of the person f o r whom he does i t . "17 This d e f i n i t i o n h i g h l i g h t s the c o n t r o l element, and therefore i s only a d i l u t e d version of the widely recognized control t e s t . Instead of d e f i n i t i o n s , what are the j u d i c i a l t e s t s that determine whether a person i s an employee as d i s t i n c t from an independent contractor, an agent, or a partner? The general answer i s that the common law has not adhered to one s t a t i c t e s t f o r i d e n t i f y i n g the employment r e l a t i o n s h i p . Rather the English and Canadian courts have shown a d e f i n i t e willingness to adjust to changing economic times. Instead of adopting one r i g i d formula, a v a r i e t y of tests have been used i n recent decisions. Appeal court decisions have also been c a r e f u l not to make au t h o r i t a t i v e statements adopting any one t e s t that necessarily excludes the others. The judgement of Lord Wright i n Montreal v. Montreal Locomotive Works Ltd. demonstrates t h i s f l e x i b l e a t t i t u d e . 22 In e a r l i e r cases a s i n g l e t e s t , such as the presence or absence of c o n t r o l , was often r e l i e d on to determine whether the case was one of master and servant ... In the more complex conditions of modern industry, more complicated t e s t s have often to be applied. ... In many cases the question can only be s e t t l e d by examining the whole of the various elements which constitute the r e l a t i o n s h i p between the parties. 1® Aside from the acceptance of multiple t e s t s , Lord Wright's statement also indicates that the existence of the employment r e l a t i o n s h i p i s p r i m a r i l y a question of f a c t . After the i n i t i a l determination of the relevant f a c t o r s , then the contract i s to be construed i n the l i g h t of the circumstances governing the r e l a t i o n s h i p . 1 9 Due to t h i s f a c t u a l approach, the courts frequently ignore the l a b e l s which the p a r t i e s have attached to the contract i n question. The proper approach looks past the f o r m a l i t i e s to examine the substance of the r e l a t i o n s h i p between the p a r t i e s . The Ontario Court of Appeal recently upheld a decision of a Referee who ignored the express r e c i t a l s and provisions of a contract. As a r e s u l t the i n d i v i d u a l s were held to be employees rather than wholesalers as s t i p u l a t e d i n the contract. Lacourciere J.A. stated that: Further, we see no error i n the use of the written contract made by the learned Referee. He was quite r i g h t i n looking at the e f f e c t of i t s provisions rather than at i t s formal r e c i t a l s . ... The Referee did not ignore the terms of the contract where they evidenced the conduct of the r e l a t i o n s h i p between the p a r t i e s ; he merely disregarded the r e c i t a l s and provisions purpor-t i n g to provide for the purchase and sale of the news-papers by the c i r c u l a t i o n managers as wholesalers. The r e c i t a l s and provisions were not i n accordance with the facts,. ... 2 0 In summary, Canadian courts have followed Lord Wright's acceptance of multiple tests for determining the employment r e l a t i o n s h i p . This chapter now examines the three most widely used t e s t s . 23 C. THE CONTROL TEST Western Canadian courts have long been using the control exercised over the conduct of work as a dominant fa c t o r i n t e s t i n g the existence of the employment r e l a t i o n s h i p . The 1913 decision i n Re Western Coal Co. r e f l e c t s a t y p i c a l early emphasis on the r i g h t of the employer to d i r e c t the work. The extent of the r i g h t of control seems to be the important question i n d i s t i n g u i s h i n g between the p o s i t i o n of a servant and that of an independent contractor, ... There seems no more reason for r e f u s i n g to recognize as holding the l e g a l p o s i t i o n of servant and to recognize hi s compensation as wages, a teamster using h i s own wagon and team, than a carpenter using his own tools or a laborer h i s own spade. The predominant and p r e v a i l i n g element i n each case i s the personal service, and a personal service which i s subject to the d i r e c t control of the employer.21 This j u d i c i a l approach was summarized i n the 1946 House of Lords decision i n Short v. Henderson Limited per Lord Thankerton: [L]et me r e c a p i t u l a t e the four i n d i c i a of a contract of service derived by the Lord J u s t i c e - C l e r k from the a u t h o r i t i e s r e f e r r e d to by him: these are (a) the master's power of s e l e c t i o n of h i s servant; (b) the payment of wages or other remuneration; (c) the master's r i g h t to control the method of doing the work; and (d) the master's r i g h t of suspension or d i s m i s s a l . The learned Judge adds that a contract of service may s t i l l e x i s t i f some of these elements are absent altogether, or present only i n an unusual form, and that the p r i n c i p a l requirement of a contract of service i s the r i g h t of the master i n some reasonable sense to c o n t r o l the method of doing the work, and that t h i s f a c t o r of superintendence and control has frequently been treated as c r i t i c a l and decisive of the l e g a l q u a l i t y of the relationship.22 Although more complicated t e s t s have emerged to meet the more complex conditions of modern industry, the c o n t r o l f a c t o r r e t a i n s i t s appeal to modern judges. In the past two decades the appeal courts i n Ontario, Alberta and B r i t i s h Columbia have applied e i t h e r Lord Thankerton's statements i n Short v. Henderson Limited.23, or else a very s i m i l a r wording of the c o n t r o l test.24 24 However, other courts have had increasing d i f f i c u l t y with using the control of the work performed as the dominant fa c t o r . This j u d i c i a l d i s s a t i s f a c t i o n has been caused by the increasing numbers of highly s k i l l e d and l a r g e l y s e l f - d i r e c t e d employees. Software programmers i n the computer industry are t y p i c a l examples. Such employees are normally assigned to a given project and the employer exercises a minimal amount of c o n t r o l and supervision. The development of the information economy w i l l accentuate t h i s trend to non-hierarchial managerial s t y l e s . Many of the t y p i c a l features of computer industry employment are the a n t i t h e s i s of the t r a d i t i o n a l control f a c t o r s . The adoption of flex-time o f f i c e hours, loosely defined organization structures, and project work assignments a l l reduce the employer's d i r e c t c o n t r o l . The widespread adoption of the e l e c t r o n i c cottage or tele-commuting (working from a personal residence v i a e l e c t r o n i c means) w i l l r e s u l t i n even more detached c o n t r o l . Thus, the courts have been inc r e a s i n g l y uncomfortable with the c o n t r o l t e s t ' s f a i l u r e to recognize the changing r e a l i t y of employment. As early as 1966 these reservations were expressed by Mocatta J. i n Whittaker v. Minister of Pensions S National Ins.25. It seems c l e a r , therefore, from the more recent cases that persons possessed of a high degree of professional s k i l l and expertise, such as surgeons and c i v i l engineers, may nevertheless be employed as servants under contracts of service, notwithstanding that t h e i r employers can, i n the nature of things, exercise extremely l i t t l e , i f any, control over the way i n which the s k i l l i s used. The t e s t of c o n t r o l i s , therefore, not as determinative as used to be thought to be the CclS6 / • • • In the 1976 case of Rosen v. The Queen, 2 6 the Federal Court of Canada was even more c r i t i c a l about the l i m i t a t i o n s of t h i s t e s t . Mr. J u s t i c e Marceau commented: 25 Superintendence and control cannot be the decisive t e s t when one i s dealing with professional man, or a man of some p a r t i c u l a r s k i l l and experience. Instances of that have been given i n the form of the master of a ship, an engine d r i v e r , a professional a r c h i t e c t or, as i n t h i s case, a consulting engineer. In such cases there can be no question of the employer t e l l i n g him how to do work; therefore, the absence of c o n t r o l and d i r e c t i o n i n that sense can be of l i t t l e , i f any, use as a t e s t ... 2 7 Yet i t can be argued that a court should not ignore the control f a c t o r , even for highly s k i l l e d and autonomous professions. The High Court of A u s t r a l i a has pointed to the p o t e n t i a l r i g h t of c o n t r o l , rather than the actual exercise of the c o n t r o l . If the r e l a t i o n s h i p i s one of employment, then the ultimate control must rest with the employer. In Z u i j s v. Wirth Brothers Properietary Ltd., Dixon C.J. made the argument that : The duties to be performed may depend so much on s p e c i a l s k i l l of knowledge or they may be so c l e a r l y i d e n t i f i e d or the necessity of the employee acting on hi s own r e s p o n s i b i l i t y may be so evident, that l i t t l e room for d i r e c t i o n or command i n d e t a i l may e x i s t . But that i s not the point. What matters i s lawful authority to command so far as there i s scope for i t . And there must always be some room for i t , i f only i n i n c i d e n t a l or c o l l a t e r a l m a t t e r s . 2 8 D. THE MULTIPLE TEST As i n d u s t r i a l society expanded a f t e r World War I I , the courts moved away from the basic c o n t r o l t e s t . Although an employer's apparent co n t r o l over the employee was s t i l l a useful i n d i c a t o r , the l i s t of other factors to be reviewed also increased. Lord Wright's judgment i n Montreal v.  Montreal Locomotive Works Ltd . s i g n a l l e d the major change. Aft e r noting that the more complex conditions of modern industry c a l l e d for more complicated t e s t s , 2 9 Lord Wright outlined a s e r i e s of elements to be considered i n t e s t i n g the existence of the employment r e l a t i o n s h i p : 26 I t has been suggested that a f o u r f o l d t e s t would i n some cases be more appropriate, a complex i n v o l v i n g (1) co n t r o l ; (2) ownership of the t o o l s ; (3)chance of p r o f i t ; (4) r i s k of l o s s . Control i n i t s e l f i s not always conclusive In many cases the question can only be s e t t l e d by examining the whole of the various elements which constitute the r e l a t i o n s h i p between the p a r t i e s . In t h i s way i t i s i n some cases possible to decide the issue by r a i s i n g as the c r u c i a l question whose business i s i t , or, i n other words, by asking whether the party i s carrying on the business, i n the sense of c a r r y i n g i t on for himself or on h i s own behalf and not merely for a s u p e r i o r . 3 ^ This open approach to the c l a s s i f i c a t i o n issue has been widely accepted i n Canadian courts. The degree of f l e x i b i l i t y i n the use of multiple factors i s shown by the Ontario Court of Appeal judgment i n Re  Telegram Publishing Co. L t d . and Amm.31 i n the o r i g i n a l c l a s s i f i c a t i o n , the Referee had emphasized what he had termed the "organizational" t e s t and the "economic dependency" t e s t . The choice of names to describe the te s t ( s ) being applied by the referee did not deeply concern the Court of Appeal. The c r i t i c a l point on appeal was to determine whether the referee had properly considered a l l of the appropriate material elements i n the r e l a t i o n s h i p between the p a r t i e s . Without discussing the two t e s t s i n any d e t a i l , Lacourciere, J.A. simply stated that such tests were acceptable i n the context of the Montreal v. Montreal Locomotive judgment. 3 2 The 1946 decision i n Montreal v. Montreal Locomotive, opened the way f o r many other factors to be considered by Canadian and English courts. Power of s e l e c t i o n and dismissal, payment of remuneration, exclusive s e r v i c e , place of work, hours of work, and the personal o b l i g a t i o n to work have a l l become part of the expanded l i s t . 3 3 One d i f f i c u l t y with a t e s t which uses multiple factors i s the apparent lack of p r e d i c t a b i l i t y . How can lawyers and t h e i r business c l i e n t s p r e d i c t the c l a s s i f i c a t i o n of a p a r t i c u l a r relationship? 27 D i r e c t i n g the court to consider a multitude of factors creates an enormous d i s c r e t i o n for the court. The approach permits the court to a r r i v e at a subjective view of the r e l a t i o n s h i p . However, continued concentration on the factor of c o n t r o l would not be any more e f f e c t i v e . If the courts were to adopt one t e s t to the exclusion of a l l others, then r e l a t i o n s h i p s would be organised so as to achieve the r e s u l t desired by the dominant party. The alleged employment contracts would expressly exclude or include whatever factors were necessary. Many of the early B r i t i s h Columbia cases show that employers t r i e d t h i s t a c t i c to circumvent the control t e s t . In A l l i s o n v. Standard  Lumber Co. the defendant argued that a contract of j o i n t venture existed between himself and the p l a i n t i f f . In support, the defendant referred to a clause which set the p l a i n t i f f ' s compensation at "... a sum equivalent to twenty-five percent of the net p r o f i t s as computed semi-annually." The B.C. Court" of Appeal looked to other fa c t o r s , such as exclusive service and c o n t r o l to f i n d that an employment r e l a t i o n s h i p e x i s t e d . 3 4 In Donkin  v. Disher the Supreme Court of Canada was faced with the argument that a partnership had been established between the p a r t i e s . The supporting evidence was a new agreement a l l o t i n g a percentage of p r o f i t s i n l i e u of a salary, and correspondence r e f e r r i n g to a partnership. Yet t h i s evidence was not d e c i s i v e , and an employment s i t u a t i o n was found to e x i s t . 3 5 The strength of the multiple factor t e s t approach comes i n allowing the court to r e j e c t any p a r t i c u l a r factors that are inconsistent with the true r e l a t i o n s h i p between the p a r t i e s . 28 E. THE ORGANIZATION OR INTEGRATION TEST As with other developing areas of the law, Lord Denning has had an influence on employment r e l a t i o n s h i p s . In proposing the i n t e g r a t i o n t e s t , Lord Denning recognized the increasing independence of employees with s p e c i a l s k i l l s . Highly t r a i n e d s p e c i a l i s t s are not c o n t r o l l e d i n the t r a d i t i o n a l sense by employers. Therefore t h i s t e s t suggests that the court should look at the degree to which the s p e c i a l i s t i s integrated into the business organization. The case of Stephenson, Jordan and Harrison L t d . v. MacDonald and Evans provided the i n i t i a l formulation of t h i s approach: • Under a contract of service, a man i s employed as part of the business and his work i s done as an i n t e g r a l part of the business; whereas under a contract for services h i s work, although done for the business, i s not integrated into i t but i s only accessory to i t . 3 6 A data processing manager i n a large corporation i s an example of a s k i l l e d employee who would be covered by t h i s t e s t . Although most corporate executives lack the expertise to c l o s e l y supervise or control a data processing manager, h i s a c t i v i t i e s are a key part of the corporate business. The functions of data processing are necessarily t i e d to the d a i l y operation of every corporate department. The clear advantage of t h i s t e s t i s the attention paid to the substance of the r e l a t i o n s h i p . By taking a wide perspective, the court i s able to assess the actual s i g n i f i c a n c e of the r e l a t i o n s h i p to the p a r t i e s involved. Thus, i n Rosen v. The Queen, the Federal Court of Canada was able to properly deal with an apparent lack of control by the employer. The work done by the p l a i n t i f f f o r the three schools at which he taught was done as an i n t e g r a l part of the c u r r i c u l a of the schools; the courses were regular courses and, i f I may say so, the business i n which he was a c t i v e l y p a r t i c i p a t i n g was the business of the schools not h i s own.3' 29 Yet t h i s t e s t has inherent l i m i t a t i o n s . Not every highly s k i l l e d i n d i v i d u a l i s going to be integrated into the organization. The business may decide to engage systems analysts and programmers to develop a new data processing a p p l i c a t i o n . In t h i s s i t u a t i o n the i n d i v i d u a l s are performing a function that i s a n c i l l a r y to normal operations. Thus the i n d i v i d u a l s w i l l not be integrated i n the organization, but s t i l l may q u a l i f y as employees i n a l l other respects. Functions such as research, advertising, insurance and safety are examples of departments that may be a n c i l l a r y to the p r i n c i p a l a c t i v i t y of a business organization. Accordingly, few current decisions have chosen to r e l y e x c l u s i v e l y on the i n t e g r a t i o n t e s t . The 1979 decision of the Ontario Court of Appeal i n Mayer v. Conrad  Lavigne Ltd. r e f l e c t s t h i s caution. The unanimous de c i s i o n r e f e r r e d to both the multiple t e s t of Lord Wright i n Montreal Locomotive, and to the organization t e s t expounded by Lord Denning. The conclusion was that the fa c t s s a t i s f i e d whatever t e s t was used. The work i n question "was c l e a r l y integrated i n t o the business and not merely accessory to it."38 As the Mayer decision and other cases i l l u s t r a t e , the i n t e g r a t i o n t e s t functions best as a backstop or safety net to the multiple test.39 F. SUMMARY After examining the three d i s t i n c t tests for the employment r e l a t i o n s h i p , several conclusions are apparent. Present case law does not compel the courts to apply a r i g i d framework for c l a s s i f y i n g an i n d i v i d u a l as an employee rather than an agent or independent contractor. Instead, the courts are given a wide ranging d i s c r e t i o n i n the choice of l e g a l t e s t s . This f l e x i b i l i t y extends even further i n t o the i n t e r p r e t a t i o n of the f a c t s . 30 One over-riding objective seems to l i e behind t h i s deliberate f l e x i b i l i t y . The j u d i c i a r y c o n s i s t e n t l y recognizes the need to i n t e r p r e t employment contracts i n l i g h t of t h e i r p a r t i c u l a r circumstances. The mutual intent of the p a r t i e s , t h e i r conduct a f t e r entering the r e l a t i o n s h i p , and the surrounding commercial environment a l l must be examined. At the same time, the courts may ignore any s p e c i f i c terms of the contract that c o n f l i c t with the r e a l s i t u a t i o n . 4 0 With t h i s broad d i s c r e t i o n , the courts are able to make determinations of l e g a l status that are based on the r e a l i t y of the r e l a t i o n s h i p . Another advantage to these broad i n t e r p r e t a t i v e powers l i e s i n the response to change. This i s not an area of the common law which has been trapped i n out-dated doctrines. Once the l i m i t a t i o n s of the control t e s t were obvious, the judges moved r e l a t i v e l y quickly to the two d i s t i n c t a l t e r n a t i v e s . In t h i s way the law has kept pace with business p r a c t i c e s and s h i f t s i n the economy. Such a g i l i t y w i l l be even more important as the courts are confronted with an information economy. S k i l l e d employees i n the computer industry are even more independent, more mobile, and more sophisticated than i n d u s t r i a l workers. The d i v i d i n g l i n e between managers and workers w i l l be even more blurred, and there w i l l be an increasing v a r i e t y of work arrangements. The dangers associated with the courts' broad discretionary power appear to be l i m i t e d . The biggest s o c i a l r i s k l i e s with a j u d i c i a r y that loses i t s awareness of external s o c i a l changes. Such a b l i n d spot could lead to inappropriate c l a s s i f i c a t i o n s , and economic i n e f f i c i e n c i e s . Yet the past record of the courts seems to minimize t h i s r i s k . The intense examination that the courts give to the circumstances of each case keeps the judges well informed of the current business trends. In conclusion, 31 the common law i s well-equipped to decide whether a p a r t i c u l a r i n d i v i d u a l i s an employee. 32 FOOTNOTES; CHAPTER III 1. H. Menzies, Computers on the Job, (1982) James Lorimer and Co. Toronto; Science Council of Canada, Planning Now f o r an Information  Society; Tomorrow i s Too Late (1982/83) Report No.33; For a measure of the increasing s i g n i f i c a n c e of computers i n Canada see Canadian Information Processing Society (C.I.P.S.) 1984 Canadian Computer  Census at page 2 0 which indicates that i n May 1979 there were 8598 computer i n s t a l l a t i o n s i n Canada (not including computers that rent for less than $1 ,000.00 per month). In December 1983 the number of i n s t a l l a t i o n s had increased to 16643. 2. Id. 3. Chapter IV examines the Fiduciary and Implied Obligations of an Employee. 4. Id. 5. Partnership Act, R.S.B.C. 1979, c. 312, s. 2(1) d e f i n i n g partnership. 6. Id. at s. 11 and 12. 7. Chapter V provides a d e t a i l e d examination of the doctrine of r e s t r a i n t of trade, and Chapter VII summarizes the conclusions of the th e s i s . 8. Id. at p. 118. 9. Id. at p. 126-29. 10. Id. at p. 129-30. 11. Copyright Act, R.S.C. 1970, c C-30; See S i l v e r s o n v. Neon Products (1978) 39 C.P.R. (2d) 234. 12. (1982) 126 D.L.R. (3d) 451, at 467-468. 13. (1983) 149 D.L.R. (3d) 46, at 51. 33 15. 16 Halsbury's Laws of England 313 a t Para. 501. (3rd. Ed. 1983). 16. M c A l l i s t e r v. B e l l Lbr. & Pole Co. [1931] 3 W.W.R. 767, 45 B.C.R. 30. 17. Montreal v. Montreal Locomotive Works Ltd., [1946] 3 W.W.R. 748, at 756-757, [1947] 1 D.L.R. 161 (H.L.) a f f i r m i n g [1945] S.C.R. 621. 18. Id., at 756 W.W.R. 19. St. John v. Donald [1926] S.C.R. 371, per Anglin C.J.C., quoting McCardie J. i n Performing Rights Society v. M i t c h e l l & Booker [1924] 1 K.B. 762, at 767. 20. Re Telegram Publishing Co. L t d . and Amm et a l . (1979) 94 D.L.R. (3d) 456, at 460-461 (Ont. C.A.). 21. (1913) 4 W.W.R. 1238, 12 D.L.R. 401; see also Re Parkin Elevator Co; Dunsmoor's Claim ,(1916) 37 O.L.R. 277; Saunders v. Toronto (1899) 26 O.A.R. 265; and Canadian Performing Right Society v. Can. Nat.  E x h i b i t i o n Assoc. [1938] O.R. 476. 22. (1946), 115 L.J.P.C. 42, at 47 23. Id., note 15. 24. Marine P i p e l i n e & Dredging L t d . v. Canadian Fina O i l L t d . (1964) 46 D.L.R. (2d) 495 (Alt a . C.A.); Re Nelson et a l . and Gubbins et a l . (1980) 116 D.L.R. (3d) 486 (B.C.S.C.) a f f ' d (1981) 122 D.L.R. (3d) 340 (B.C.C.A.); Re Telegram Publishing Co. L t d . and Amm (1979) 94 D.L.R. (3d) 456, at 461 (Ont. C.A.). 25. [1967] 1 Q.B. 1567, at 167. 26. (1976) C.T.C. 462; 68 D.L.R. (3d) 380 (Fed. Ct. T r i a l D i v . ) . "27. Id., at 465-66 (C . T . C ) ; at 383-84 (D.L.R.). 28. (1955) 93 C.L.R. 561, at 571. 29. Supra, note 18, at 756. /' 34 30. Supra, note 18, at 756-757. 31. Supra, note 20. 32. Supra, note 20, at 461 33. The factors and supporting a u t h o r i t i e s are l i s t e d i n Halsburys supra, note 15. For more recent a p p l i c a t i o n s of the multiple factor approach, see Odin v. Columbia C e l l u l o s e Co. L t d . (1968) 62 W.W.R. 479 (B.C.S.C.), and Earthworm Red River Limited v. Underwood,  McLellan & Associates Ltd. [1972] 1 W.W.R. 362 (Man. Q.B.). 34. [1924] 3 W.W.R. 481, 34 B.C.R. 257. 35. (1913) 49 S.C.R. 60, 16 D.L.R. 610. 36. [1952] 1 T.L.R. 101, at 111 (C.A.). 37. (1976) 68 D.L.R.(3d) 380, at 383 (Fed. C t . T r i a l Div.); see also MacDonald v. M.N.R. [1974] C.T.C. 2204 and Barnard v. T.M. Energy  House Ltd. [1982] 4 W.W.R. 619 (B.C. Co. C t . ) . 38. (1980) 105 D.L.R. (3d) 734, at 737-738 (Ont. C.A.). 39. Co-operators Ins. Ass'n. v. Kearney (1964) 48 D.L.R. (2d) 1, at 22-3. 40. Supra, note 20. 35 III EMPLOYER'S PROPRIETARY RIGHTS TO INFORMATION; A. GENERAL CONSIDERATIONS We are witnessing a technological revolution that i s reshaping our world, c a l l i n g for new, innovative responses from people. Daily, technology i s crea t i n g new opportunities for the human mind to expand into areas only dreamed of a few short years ago Increasingly, those countries that can draw f o r t h t h e i r innovative t a l e n t are those that w i l l prosper. 1 The preceding two chapters provided background material f o r the cen t r a l theme of t h i s t h e s i s . Chapter I introduced the concept of an information based economy, and then reviewed the information-as-property paradigm currently being used by lawyers and l e g i s l a t o r s . The chapter concluded that these p o l i c y tensions w i l l only increase as our society places an incr e a s i n g l y greater value on information as an economic resource. 2 Chapter II then examined the l e g a l tests that determine whether an employment r e l a t i o n s h i p exists between two p a r t i e s . The l e g a l status of employee must be distinguished from the other categories such as independent contractor or agent because of the d i f f e r e n t l e g a l o b l i g a t i o n that attach to each group. 3 This t h i r d chapter concentrates on an employer's proprietary r i g h t s to information. As discussed Chapter I, one example of high technology information has been selected to i l l u s t r a t e the a p p l i c a t i o n of l e g a l p r i n c i p l e s . Software and i t s creation, d i s t r i b u t i o n and marketing w i l l be the reference product. The intent of t h i s chapter i s to examine the proprietary basis that underlies an employer's demands for l e g a l protection against a former employee. What are the l e g a l grounds upon which an employer claims the ri g h t to r e s t r i c t an ex-employee's a c t i v i t i e s ? What i n t e r e s t i s a court 36 p r o t e c t i n g by enforcing obligations of secrecy or c o n f i d e n t i a l i t y against a s k i l l e d employee i n the computer industry? This chapter w i l l review an employer's r i g h t s to software under the patent and copyright l e g i s l a t i o n , and then focus on the theory of trade secrets and breach of confidence. Later, i n Chapter V, the balance between an employer's proprietory i n t e r e s t s and the employee's r i g h t s to compete w i l l be analyzed i n l i g h t of the s p e c i f i c requirements of the doctrine of r e s t r a i n t of trade. 4 There are degrees of protection for an employer offered by the f i e l d of c r i m i n a l law, but space does not permit a complete discussion of a l l of the recent developments i n t h i s area.^ I t would be i n c o r r e c t to discuss an employer's proprietary rights to software or any other information based product i n a narrow perspective. An employer's r i g h t s must always be viewed as competing with both the i n t e r e s t s of employees and the society at large. The law has always had to execute a d e l i c a t e balancing act i n t h i s area. English and Canadian case law has always t r i e d to reconcile the contradictory demands of the employer and the employee, while simultaneously preserving and protecting the public i n t e r e s t . The objectives of the common law on employment were well summarized in the 1960 American decision of Wexler v. Greenberg. The following quotation presents c e r t a i n themes that have reoccurred i n Canadian and American courts. Judges have long been concerned with employer's proprietary r i g h t s , as well as the employee's r i g h t of mobility and choice of l i v e l i h o o d , and the i n t e r e s t of society i n open competition and the encouragement of innovation. Society as a whole greatly benefits from technological improvements. Without some means of post-employment protection to assure that valuable 37 developments or improvements are e x c l u s i v e l y those of the employer, the businessman could not a f f o r d to subsidize research or improve current methods. In addition, i t must be recognized that modern economic growth and development have pushed the business venture beyond the s i z e of the one man f i r m , f o r c i n g the businessman to a much greater degree to entrust , c o n f i d e n t i a l business information r e l a t i n g to ' technological development to appropriate employees. While recognizing the u t i l i t y i n the dispersion of r e s p o n s i b i l i t i e s i n larger firms, the optimum amount of 'entrusting' w i l l not occur unless the r i s k of loss to the businessman through a breach of t r u s t can be held to a minimum. On the other hand, any form of post employment r e s t r a i n t reduces the economic mobility of employees and l i m i t s t h e i r personal freedom to pursue a preferred course of l i v e l i h o o d . The employee's bargaining p o s i t i o n i s weakened because he i s p o t e n t i a l l y shackled by the a c q u i s i t i o n of alleged trade secrets; and thus paradoxically, he i s restrained , because of h i s increased expertise, from advancing further i n the industry i n which he i s most productive. Moreover, as previously mentioned, society s u f f e r s because competition i s diminished by slackening the dissemination of ideas, processes and methods. 7 Any l e g a l system i n a t e c h n o l o g i c a l l y advanced nation faces the task of r e c o n c i l i n g these competing p o l i c y concerns with respect to employers and employees. As early as 160 2 the English courts faced the issue of an employee's r i g h t to mobility and to choose a l i v e l i h o o d . In the case of Colgate v. Bacheler, the English courts displayed the i n i t i a l objections to contractual l i m i t a t i o n s on the. r i g h t s of an i n d i v i d u a l to engage i n a lawful t r a d e . 8 Although there have been modifications of the l e g a l p r i n c i p l e s throughout the centuries, Canadian courts today apply the doctrine of r e s t r a i n t of trade to balance the r i v a l i n t e r e s t s of the employers, and the employees. 9 At the same time, Canadian courts also recognize that a strong p u b l i c i n t e r e s t surrounds the employment r e l a t i o n s h i p . There has been a constant 38 l e g i s l a t i v e and j u d i c i a l r e j e c t i o n of actions i n the marketplace that l i m i t or prevent competition. The Supreme Court of Canada has endorsed the competitive i d e a l i n vigorous language. In reference to the Combines Investigation Act, Taschereau J . stated that "The pub l i c i s e n t i t l e d to the benefits of free competition, and the p r o h i b i t i o n s of the Act cannot be evaded by good motives." 1 0 In the same decision, Kellock J . summarized the basic p o l i c y underlying the Act. "The statute proceeds upon the footing that the preventing or lessening of competition i s i n i t s e l f an in j u r y to the p u b l i c . I t i s not concerned with public i n j u r y or public benefit from any other standpoint." 1 1 Canadian courts have s i m i l a r l y spoken out on the importance of competition i n the employment r e l a t i o n s h i p . In T.S. Taylor Machinery Co. Ltd. v. B i g g a r 1 2 , the Manitoba Court of Appeal reviewed a r e s t r i c t i v e employment covenant and then asked: Why would the courts not recognize h i s freedom to contract and give e f f e c t to a r e s t r a i n t imposed upon him by h i s own agreement? The answer l i e s i n the f a c t that there i s a another freedom which must be considered, the freedom of a man to carry on his lawful trade or profession without hindrance, to the be n e f i t of himself and h i s family and the community at large. To the extent that r e s t r a i n t s are placed upon a man's r i g h t to earn h i s l i v i n g and to make the best use of hi s s k i l l s , the country at large s u f f e r s . " 9 F i n a l l y , the Canadian p o l i t i c a l system has long provided incentives for creation and innovation. The obvious i l l u s t r a t i o n of t h i s p o l i c y l i e s i n patent and copyright l e g i s l a t i o n . Canadian inventors and authors are rewarded and encouraged by the grant of a statutory monopoly on q u a l i f y i n g works. Under the Copyright Act and the Patent Act, the patent or copyright holder receives the statutory protection that permits an 39 inventor, to e x p l o i t his invention, or an author to guard his creation against unauthorized c o p y i n g . 1 0 How then do these basic p o l i c i e s of freedom for employees, maintenance of competition, and encouragement of innovation apply to the information economy? Is the e x i s t i n g accommodation between the competing demands going to be adequate i n the information age? Or i s the current balance between the i n t e r e s t s of employers, employees and the public r a p i d l y being t i l t e d to precarious extremes? The p i v o t a l point of the e x i s t i n g common law i s the doctrine of r e s t r a i n t of trade. This doctrine a l l o c a t e s r i g h t s between employer and employee by t e s t i n g the reasonableness of the r e s t r i c t i v e covenants given by the employee/covenantor. In e f f e c t , promises of non-competition or non-disclosure by the employee w i l l only be enforced i f the r e s t r a i n t s are reasonably necessary to protect the proprietory i n t e r e s t s of the employer. 1 0 a I t i s suggested that the information economy i s creating unanticipated imbalances i n the d e l i c a t e weighting of the employment r e l a t i o n s h i p . The Wexler decision aptly described the tensions between employers, employees and the public that were apparent i n I960. 1 1 However, i n 1985, these same tensions are affected by new r e a l i t i e s i n the computer industry. It i s suggested that courts and l e g i s l a t o r s must be aware of the dimensions of the following f a c t o r s : (1) an increasing commercial r e l i a n c e on secrecy and c o n f i d e n t i a l i t y ; (2) the confusion over ownership of software; (3) p o s s i b l e p o l i c y biases i n the e x i s t i n g law; and 40 (4) the p o l i c y objections to property r i g h t s i n information. Each of these concerns w i l l be b r i e f l y explored. (1) Increasing Commercial Reliance on Secrecy and C o n f i d e n t i a l i t y : Why does the widespread use of software lead to increased commercial concern with c o n f i d e n t i a l i t y ? The successful development of software does not depend upon the employer simply achieving a "dispersion of r e s p o n s i b i l i t i e s . . . " 1 2 between employees as suggested i n the Wexler de c i s i o n . In 1960, the Wexler court was discussing trade secrets that were only secondarily used to produce the primary products of an i n d u s t r i a l firm. Today, a software firm i s i n the business of producing and s e l l i n g trade secrets. Aside from the mass d i s t r i b u t e d packages for personal computers, most commercial software i s marketed under r e s t r i c t i v e l i c e n s i n g arrangements that impose s t r i c t obligations of c o n f i d e n t i a l i t y on the l i c e n s e e . 1 3 As a r e s u l t , even the employer that simply uses software as an authorized licensee must now be concerned about t r u s t i n g h i s employees. Aside from the c o n f i d e n t i a l i t y problem i n d i s t r i b u t i o n , there are s p e c i a l problems i n the development of software. Only r a r e l y i s software created by a single employee working alone under a well defined contract of employment. Usually the idea f o r a new software package comes e i t h e r from an i n t e r n a l group of employees, or i s an update or improvement of a package already offered by a competitor. Even a f t e r the i n i t i a l s p e c i f i c a t i o n stage, the w r i t i n g of the source c o d e 1 4 and t e s t i n g of the program w i l l l i k e l y be a group e f f o r t . The l o g i c a l reason f o r t h i s approach i s that well organized group work spurs c r e a t i v i t y and avoids c o s t l y mistakes. However, t h i s type of group e f f o r t to produce a trade 41 secret d i r e c t l y c o n f l i c t s with l e g a l e f f o r t s to e s t a b l i s h a clear claim to c o n f i d e n t i a l i t y . (2) Confusion Over Ownership of Software The widespread use of information such as software has heightened concerns over the ownership issue. The large number of i n d i v i d u a l s who are p o t e n t i a l l y involved i n software development means that there can be many competing claims to ownership. Who holds the l e g a l r i g h t s to lice n s e the software and to receive the user fees? How does the "employer" developer avoid lawsuits from outside l i c e n s o r s of si m i l a r programs or from disgruntled employees? Although these questions do not have easy l e g a l answers, there are many interest e d groups who require a d e f i n i t e response. S p e c i f i c a l l y , the marketing s t a f f at a l l points i n the d i s t r i b u t i o n chain must be able to reassure customers about the ownership issue. Licensees of software do not wish to be t h i r d p a r t i e s i n inj u n c t i o n actions taken by other claimants to software ownership. Marketeers must also worry about the reputation of the product, and the r e s u l t i n g l o s s of sales i f either a competitor or a former employee puts f o r t h a c o n f l i c t i n g claim on ownership. Financing the development of software also requires c e r t a i n t y about ownership and the associated l e g a l r i g h t s . Now that high technology has been recognized i n f i n a n c i a l c i r c l e s , there are many investors w i l l i n g to r i s k t h e i r money i n the information sector. The past three years have seen the use of research and development l i m i t e d p a r t n e r s h i p s , 1 ^ flow-through common shares i n a corporation to pass on research tax c r e d i t s to i n v e s t o r s , 1 6 and most recently a preferred share issue to take advantage 42 of the Federal government's Special Recovery Refundable Investment tax c r e d i t . 1 7 However, whatever route i s selected to a t t r a c t investors, the v i a b i l i t y of the investment always rests on ascertainable l e g a l r i g h t s . The lawyer who prepares the financing prospectus must be able to render a l e g a l opinion on the assets being acquired. F i n a l l y , the licensee users of software have d e f i n i t e i n t e r e s t s i n the ownership question. I n i t i a l l y , the licensees want to be assured that they are r e c e i v i n g a v a l i d l i c e n s e and w i l l not be party to an infringement action. In f a c t , most sophisticated users request that the lice n s o r provide them with a contractual indemnity against t h i s type of le g a l liability. 1® More importantly, licensees are concerned that they receive well-defined r i g h t s for software maintenance, and that they are protected i n the event that the li c e n s o r goes out of business or becomes bankrupt. 1 9 (3) Possible P o l i c y Biases i n the E x i s t i n g Law Are there biases i n the common law governing the employment r e l a t i o n -ship that c o n f l i c t with the unique a t t r i b u t e s of information such as software? This portion of the discussion w i l l consider t h i s question i n l i g h t of the basic p o l i c y considerations noted i n the Wexler decision. F i r s t , i t should be noted that the groups discussed i n the preceding paragraphs a l l had i n t e r e s t s i n common with the employer. The developers, the marketeers, the f i n a n c i e r s , and the users a l l expect the law to define a bundle of property rights to secure and protect t h e i r i n t e r e s t s . But the law must also consider the ri g h t s of employees and the public i n t e r e s t i n encouraging competition and innovation. How then w i l l the basic p o l i c i e s be af f e c t e d by information employment? 43 The doctrine of r e s t r a i n t of trade i l l u s t r a t e s two pos s i b l e biases i n favour of the common law employee. F i r s t , the e x i s t i n g case law recognizes a q u a l i t a t i v e difference between r e s t r i c t i v e covenants granted by the vendor of a business as compared to r e s t r i c t i v e covenants that are granted by an employee. 2 0 T r i a l courts have been directed to apply a fa r more r i g i d construction to employment covenants. The higher standard of proof f o r the employer has been viewed as the proper way to adjust f o r the employer's advantage i n b a r g a i n i n g . 2 ^ a Does the information employer s t i l l have t h i s same advantage i n the formation of the employment contract? Arguments can now be made that the information employee a c t u a l l y enjoys a p r a c t i c a l negotiating advantage over his employer. This apparent s h i f t i n the balance of power r e l a t e s both to the c h a r a c t e r i s t i c s of information and to the speed of technological change. Q u a l i f i e d information employees such as programmers or top l e v e l e l e c t r i c a l engineers are i n short supply, and frequently change jobs i n response to the o f f e r s of competitors. At the same time, i t i s very d i f f i c u l t for an employer to detect or to prevent loss of software. Information such as software can be e a s i l y and inexpensively duplicated, and there i s no physical evidence l e f t behind to a l e r t the employer. In addi t i o n , there i s a considerable personal incentive f o r the employee to appropriate software. Creating software i s notably labour intensive. A departing programmer might understandably f e e l that he i s e n t i t l e d to have at l e a s t one copy of h i s labours. The unsettled nature of most information r e l a t e d sectors also means that no c l e a r code of ethics has yet developed for information employees. 44 F i n a l l y , there i s the obvious f i n a n c i a l incentive behind the appropriation and use of software for personal gain. There are not many b a r r i e r s to entry i n the software industry and almost a t o t a l absence of regulatory c o n t r o l s . A departing employee finds i t r e l a t i v e l y easy to e s t a b l i s h a new business that d i r e c t l y competes with h i s former employer. In a recent a r t i c l e for the P r a c t i s i n g Law I n s t i t u t e , Daniel T. Brooks discussed the l e g a l concerns of the major p a r t i c i p a n t s i n the American software industry. According to the surveys c i t e d , there was a su r p r i s i n g lack of concern among many groups about the adequacy of statutory monopolies to protect software. For a v a r i e t y of reasons, service bureaus, small corporate users, government, u n i v e r s i t i e s and the mass marketeers a l l thought that external statutory protection was a low pr i o r i t y . 2 1 Brooks then noted the threat of software piracy, and concluded that employees posed the greatest r i s k f o r the firms involved. He compared the fac t o r s c o n t r i b u t i n g to software piracy by home users, by i n d u s t r i a l users (corporations and employees), and by organized p i r a t e s . Although a l l the other groups were viewed as manageable problems, pi r a c y by employees earned the d e s c r i p t i o n of a "very troublesome problem." 2 2 One possible conclusion i s that the e x i s t i n g case law wrongly assumes that the employer holds the balance of bargaining strength i n a l l employment r e l a t i o n s h i p s . There are strong arguments that information employment should be viewed as a r e l a t i o n s h i p between equals, with no s p e c i a l bias for the employee. A second inappropriate bias i n the e x i s t i n g law on r e s t r a i n t of trade has been highlighted by the Law Reform Commission of B r i t i s h Columbia. In 45 i t s 1984 Report on Covenants i n Restraint of T r a d e 2 2 a the Commission noted that courts have t r a d i t i o n a l l y ruled that a r e s t r i c t i v e covenant that f a i l s to meet the t e s t of reasonableness must be wholly unenforceable. After examining "[M]odern business p r a c t i c e , the increased complexity of modern society, and the changing j u d i c i a l perception of the relevant f a c t o r s . . . 2 2 1 3 , the Commission recommended new l e g i s l a t i o n to allow p a r t i a l e n f o r c e a b l i t y of r e s t r i c t i v e covenants. The reform was put for t h to " s t r i k e a f a i r e r balance between covenantor and convenantee", 2 2 c This discussion has outlined two biases i n the e x i s t i n g law that work i n favor of the employee/covenantor. It i s suggested that the o r i g i n a l j u s t i f i c a t i o n s for the biases are no longer v a l i d for the s k i l l e d employee i n the computer industry. (4) Policy Objections to Property Rights i n Information A f i n a l consideration must be the "property" o r i e n t a t i o n of e x i s t i n g law. This was ref e r r e d to as a l e g a l paradigm i n the introductory chapter. Hammond re j e c t s the present strong f a i t h i n property concepts as being inappropriate and wasteful for the e f f i c i e n t use of information. In Hammond's view, trade secret laws wrongly encourage the holders to think of the information as t h e i r "property", instead of a valuable s o c i a l resource. There are also sound economic reasons to support t h i s p o l i c y (of promoting wide-spread use of information): research and information generation i s expensive; d u p l i c a t i o n of e f f o r t i s wasteful; excessive secrecy promotes espionage, and serious diversion of e f f o r t occurs every day i n industry to f i n d out what competitors are doing. It i s a measure of the present f a i l u r e of western l e g a l systems that i n d u s t r i a l innovators are increasingly avoiding the very systems set up to 46 promote d i s c l o s u r e . Consensual agreements and trade-secret protection are now the paradigmatic way of dealing with information, research and development o u t p u t . 2 3 The arguments that Hammond uses to support h i s non-property stance are not well recognized e i t h e r i n Canadian caselaw or i n the l e g a l l i t e r a t u r e . However, the s p e c i f i c arguments are provocative and worth noting. Eight separate points are advanced against c l a s s i f y i n g information i n the s t r i c t concept of property. 1) The concept of sole ownership i s inappropriate for information. 2) Certain types of information can be i n f i n i t e l y m u l t i p l i e d at low cost 3) Information generally does not depreciate with use 4) Unused information i s generally of no value. But i f information i s used too much, i t can enter the pub l i c domain and again have no value. 5) Creation of information i s usually a j o i n t a c t i v i t y ; d i v i s i o n of ownership i s e x t r a o r d i n a r i l y d i f f i c u l t . 6) The longer frequency statutory monopolies are out of phase with the shorter frequency f o r information innovation. 7) Volume of information has reached over-whelming proportions, yet c l a s s i c a l economics assumes complete information about property i n the market. 8) Information cannot be reasonably separated i n t o p r i v a t e goods and public goods. 2 4 In contrast to Hammond's arguments, the l i m i t e d discussion of information i n Canadian law reports or i n current l e g a l l i t e r a t u r e displays a strong property o r i e n t a t i o n . For example, an English writer recently proposed that the so l u t i o n to the commercial e x p l o i t a t i o n of information was to develop an expanded d e f i n i t i o n of property that was 47 appropriate to modern c o n d i t i o n s . 2 4 3 Another recent a r t i c l e i n the Queens Law Journal dealt with the use of r e s t r i c t i v e covenants i n the employment c o n t r a c t . 2 5 The author commented on the 1979 Ontario High Court decision i n Schauenburg Industries v. Borowski. 2 6 The case involved a former employee who used c o n f i d e n t i a l information to compete with hi s former employer. Although the author approved of the courts decision to r e s t r a i n the employee, readers were cautioned not to ignore the "property" basis for the d e c i s i o n : One should be c a r e f u l not to take the r a t i o n a l e of Schauenburg v.Borowski too f a r . It i s submitted that while information not t o t a l l y secret may be e n t i t l e d to protection i f i t s c i r c u l a t i o n i s very l i m i t e d , nevertheless, there must be a substantial degree of secrecy i n order to brand the information with the e x c l u s i v i t y which i s a c h a r a c t e r i s t i c of property r i g h t s and which w i l l give the reasonable employee notice that the information i s h i s employer's and not merely p u b l i c p r o p e r t y . 2 7 With a s i m i l a r property o r i e n t a t i o n , numerous American a r t i c l e s present arguments for extending the statutory monopolies ( i e : patent and copyright) to protect s o f t w a r e . 2 8 The l i n e of reasoning i s that unless the creations ( i e ; property) of programmers and developers are protected then there are d i s i n c e n t i v e s to create computer works. Lack of protection for these works i n h i b i t s the advance of technology and science, and u l t i m a t e l y a f f e c t s the national and public i n t e r e s t . Accordingly, the p u b l i c good i s best served by the recognition of private property i n t e r e s t s . As Brooks points out, most large software house and user corporations want property protection to prevent the same type of unauthorized d u p l i c a t i o n of software. 2 9 In summary, t h i s discussion i l l u s t r a t e s that the creation of new types of information, such as software, i s also creating new p o l i c y concerns for the common law that governs the employment r e l a t i o n s h i p . 48 B. PATENT PROTECTION FOR INFORMATION The common law system in Canada i s just beginning to encounter the f i r s t l e g a l cases that are emerging from the widespread introduction of computer technology. 3 0 As a r e s u l t of the widespread use of micro-processors, the l e g a l system i s s t a r t i n g to re-examine e x i s t i n g p r i n c i p l e s of law. One p a r t i c u l a r concern i s whether present statutory protection can be properly applied to the protection of e l e c t r o n i c information such as computer software. In an information economy, the major advances are measured by gains i n the generations of technology used to process, store and d i s t r i b u t e data information material. However, each apparent advance i n the physical and t e c h n i c a l hardware only camouflages the r e a l c reative innovation. The true leap forward that must have already occurred i s i n the design of the system software and a p p l i c a t i o n software. Even for the purchaser of a personal computer, the supporting a p p l i c a t i o n software usually ranks as a key factor i n evaluating the competing models. Thus, the r e a l concern for major vendors such as I.B.M. i s to protect the ideas and information behind the physical product. The c r i t i c a l l e g a l focus must be on the s e c u r i t y of software rather than on the protection of hardware. In Canada, the l e g i s l a t i o n that possibly could be used for the p r o t e c t i o n of software i s l i m i t e d . Neither the Patent A c t 3 1 nor the Copyright A c t 3 2 has been s i g n i f i c a n t l y amended since the 192 0s. As a r e s u l t , neither statute s p e c i f i c a l l y recognizes any of the new technologies such as videotape, s a t e l l i t e communications, cable broadcasting or computer software. In some s i t u a t i o n s the basic concepts i n the l e g i s l a t i o n have been e f f e c t i v e l y applied to deal with more recent 49 technologies.33 B u t t n e following discussion w i l l show that the attempt to str e t c h the e x i s t i n g patent l e g i s l a t i o n to cover computer software has been unsuccessful. Thus, the d i f f i c u l t i e s with using patent law f o r the protection of information are well i l l u s t r a t e d by reviewing the software s i t u a t i o n . Before the software p o s i t i o n i s reviewed, the general concepts of patent l e g i s l a t i o n w i l l be i d e n t i f i e d . In theory, patents are granted "as a reward for inventors who publish t h e i r inventions i n return for a monopoly r i g h t to the e x p l o i t a t i o n of t h e i r inventions over a period of y e a r s . " 3 4 During the l i m i t e d term of the patent monopoly, the statute permits the patent holder to use infringement actions to protect his invention agains unauthorized u s e . 3 5 No pro t e c t i o n e x i s t s for an invention under the l e g i s l a t i o n u n t i l a f t e r an a p p l i c a t i o n i s made to the Canada Patent O f f i c e and the patent granted. The grant of a patent i s l i m i t e d as to time (17 years) and to the subject matter of the s p e c i f i c invention, A patent holder has the l e g a l r i g h t to prevent unauthorized use of the subject matter i n Canada. Also, the inventor named i n the a p p l i c a t i o n must be the o r i g i n a l inventor of the proposed subject m a t t e r . 3 6 This l a t t e r requirement can cause serious problems i n obtaining a patent for an invention made by a group of i n d i v i d u a l s ( i . e . : a software development group), or by an i n d i v i d u a l employee who refuses to apply for the p a t e n t . 3 7 Can computer, software be patented under the Patent Act? The following two sections of the l e g i s l a t i o n are relevant: Section 2 Invention means "... any new and useful a r t , process, machine, manufacture or composition of matter, or any 50 new and useful improvement i n any a r t , process, machine, manufacture or composition of matter;" Section 28(B) "No patent s h a l l issue for an invention that has an i l l i c i t object i n view, or f o r any mere s c i e n t f i f i c  p r i n c i p l e or abstract theorem." (underlining added) As stated i n 2 above, the invention must be new or useful as compared to the current state of the technology. Thus, there i s a requirement for a degree of novelty or uniqueness i n the subject matter of the invention. Can software be patented as a computer-related invention under the Patent Act? The judgement of the Federal Court of Appeal i n Schlumberger  Canada L t d . v. Commissioner of Patents 3® appears to represent the current law i n Canada. Leave to appeal from t h i s decision to the Supreme Court of Canada was r e f u s e d . 3 9 In a short three page decision, Pratte J. noted that i n substance the Schlumberger program directed a computer to perform mechanically a series of mathematical c a l c u l a t i o n s . The observation was then made that the same c a l c u l a t i o n s could be performed mentally by humans. Simply using a computer to perform the c a l c u l a t i o n s did not constitute a "new or u s e f u l " advance i n the technology. In the words of Pratte J . : ... the f a c t that a computer i s or should be used to implement discovery does not change the nature of that discovery. What the appellant claims as an invention here i s merely the discovery that by making c e r t a i n c a l c u l a t i o n s according to c e r t a i n formulae, useful information could be extracted from c e r t a i n measurements. This i s not, i n my view, an invention within the meaning of s.2. 4 0 Accordingly the appeal was dismissed on the grounds that no invention within the meaning of section 2 had been established. The Canadian Patent O f f i c e views the Schlumberger case as confirming the following r u l e : 51 < "A computer program per se, an algorithm, or a set of i n s t r u c t i o n s to operate a computer (which i s e s s e n t i a l l y mathematical information developed from an algorithm) i s not p a t e n t a b l e . " 4 1 The o r i g i n a l decision of the Patent Appeal Branch i n the Schlumberger case provides a more extensive set of guidelines for any future a p p l i c a t i o n s . 4 2 (a) Claims to a computer per se are not patentable; (b) Claims to a new method of operating a computer are not patentable; (c) Claims to a computer programmed i n a novel manner, expressed i n any and a l l modes, where the novelty l i e s s o l e l y i n the program or algorithm, are not directed to patentable subject matter under Section 2 of the Patent Act; (d) Claims to a computing apparatus programmed i n a novel manner, where the patentable advance i s i n the apparatus i t s e l f , are patentable; and (e) Claims to a method or process c a r r i e d out with a s p e c i f i c novel apparatus devised to implement a newly discovered idea are p a t e n t a b l e . 4 2 3 Thus, the software example shows that patent l e g i s l a t i o n provides protection for novel advances i n the p h y s i c a l technology 4 2^, but r e s i s t s any attempt to stake a monopoly on the underlying idea for the invention. In f a c t , the Schlumberger decision points out a basic l e g a l r e a l i t y : the concept of a patent was never intended to provide protection for the creation of new information. C COPYRIGHT PROTECTION This section analyses Canadian copyright l e g i s l a t i o n as i t applies to e l e c t r o n i c information and again w i l l be using software as the p r i n c i p a l i l l u s t r a t i o n . 52 In b r i e f fashion the analysis w i l l move through the operation of the Copyright Act 4 3 , and then to the question of whether copyright properly applies to software. F i n a l l y , the American experience with copyright protection for software w i l l be discussed. The key features of the Canadian copyright l e g i s l a t i o n are as follows. The copyright system i s designed to protect the expression of an idea. The idea i t s e l f cannot be the subject of copyright, only the p a r t i c u l a r way i n which that idea i s expressed. Colin Tapper presents t h i s view of copyright l e g i s l a t i o n by s t a t i n g : The basic protection afforded by copyright i s di r e c t e d against reproduction of the form of the o r i g i n a l m a terial. The idea upon which the o r i g i n a l i s based i s not protected as such, nor i s any protection afforded against any use of the copyright material which does not i t s e l f involve copying. Independent cr e a t i o n and the e x p l o i t a t i o n of i d e n t i c a l , but uncopied, material i s also unaffected. It i s d i f f i c u l t to speci f y p r e c i s e l y and i n advance just where the d i s t i n c t i o n between an idea and i t s form of expression w i l l be drawn by a c o u r t . 4 3 3 Another feature i s that copyright i n Canada does not have to be reg i s t e r e d with the Copyright Registry to be l e g a l l y e n f o r c e a b l e . 4 3 1 3 Copyright e x i s t s as soon as any l i t e r a r y , a r t i s t i c , musical or dramatic work i s created. Even though r e g i s t r a t i o n i s not mandatory, there are some advantages provided by the act of r e g i s t r a t i o n . Registration acts as constructive notice of copyright to a l l p o t e n t i a l i n f r i n g e r s . 4 3 0 This avoids the defence that the i n f r i n g e r was unaware of the c o p y r i g h t . 4 3 d The statute also provides a lengthy time for copyright protection. Minimum period i s f i f t y years, or the l i f e of the author plus f i f t y years from the author's d e a t h . 4 3 e Also, r e g i s t r a t i o n establishes c e r t a i n presumptions that are useful i f a court action to prevent infringement i s taken. For example, the 53 r e g i s t r a t i o n establishes a d e f i n i t e date f o r the creation of the copyright. One l a s t feature of our Canadian system i s that an applicant fo r copyright r e g i s t r a t i o n does not have to prove o r i g i n a l i t y (authorship) at the time of r e g i s t r a t i o n . A copy of the work to be r e g i s t e r e d does not even have to be f i l e d at the time of r e g i s t r a t i o n . Can computer software be protected by copyright i n Canada? We must f i r s t ask whether a software program can be defined as an " a r t i s t i c work" or " l i t e r a r y work" and therefore be e l i g i b l e for p r o t e c t i o n . Section 3.(1) defines copyright as follows: For the purposes of t h i s Act, "copyright" means the sole r i g h t to produce or reproduce the work or any substantial part thereof i n any material form whatever, to perform, or i n the case of a lecture to d e l i v e r , the work or any substantial part thereof i n p u b l i c ; i f the work i s unpublished, to publish the work or any s u b s t a n t i a l part thereof; and includes the sole r i g h t (a) to produce, reproduce, perform, or publish any t r a n s l a t i o n of the work; (b) i n the case of a dramatic work, to convert i t i n t o a novel or other non-dramatic work; (c) i n the case of a l i t e r a r y , dramatic or musical work, to make any record, perforated r o l l , cinemato-graph f i l m ; or other contrivance by means of which the work may be mechanically performed or d e l i v e r e d . Section 2. of the Act provides the following d e f i n i t i o n s : " A r t i s t i c work" includes work of painting, drawing, sculpture, and a r t i s t i c craftsmanship, and a r c h i t e c t u r a l works of a r t and engravings and photographs ; " L i t e r a r y work" includes maps, charts, plans, t a b l e s , and compilations. This statute came into force i n 1924 and has been s u b s t a n t i a l l y unamended since that date. As a r e s u l t , the l e g i s l a t i o n does not expressly recognize any of the technologies that have been developed since 1924. 54 Therefore, i n order to apply copyright protection to software, the copyright must be argued by analogy to much older generations of technology. However, using the l i t e r a l a p p l i c a t i o n of the statute, copyright l o g i c a l l y covers a l l written documentation involved i n the creation of e l e c t r o n i c information. English and Canadian lawyers have therefore concluded that program descriptions, flow charts, and user manuals can be described as l i t e r a r y works and therefore protected by c o p y r i g h t . 4 4 The major d i f f i c u l t y with copyright p r o t e c t i o n a r i s e s with the d i s t i n c t i o n between source code and object code. 4^ Since source code i s meant to be read by human programmers, and can be expressed i n a physical form that i s comparable to an alleged copy, a strong claim can be made that source code i s covered by the statute. Another argument i n support of protection for source code i s the r i g h t of t r a n s l a t i o n . Copyright not only extends to the o r i g i n a l work, but also to the r i g h t "to produce, reproduce, perform or publish any t r a n s l a t i o n of the work;". 4 6 Therefore, i t can be argued that writing the source code i n FORTRAN or COBOL as an object program i s simply a t r a n s l a t i o n of the o r i g i n a l work in t o a programming language. It i s much more d i f f i c u l t to argue that an object code program by i t s e l f i s covered by the Copyright Act. F i r s t , an object program i s designed to be machine readable, and i s not intended to be read by a human being. Object code i s normally expressed i n the form of e l e c t r i c a l impulses on magnetic tape. A claim f o r copyright protection of object code therefore challenges a basic premise of the l e g i s l a t i o n . Given that the copyright was designed to secure the expression of an i d e a , 4 7 then i t 55 must be assumed that the expression must be i n t e l l i g i b l e to humans. To grant copyright to machine communications would be contrary to the intent of the act. Two dissenting commissioners to the CONTU report i n the United States opposed the American extension of copyright protection for software on t h i s b a s i s . 4 8 They stated the p h i l o s o p h i c a l c o n f l i c t over the status of object code as follows: [A] society that accepts i n any degree such equivalances of human beings and machines must become impoverished i n the long run i n those aspects on the human s p i r i t which can never be f u l l y q u a n t i f i e d and which machines .... w i l l never be able to experience, never be able to bring to l i f e , never be able therefore to communicate. 4 9 Another problem exists under the Canadian l e g i s l a t i o n for the p r o t e c t i o n of object code. There i s a general requirement that a work under the Copyright Act be expressed i n a material form.50a In e f f e c t , the material form requirement a n t i c i p a t e s that a court be able to observe the d i s t i n g u i s h i n g c h a r a c t e r i s t i c s of the o r i g i n a l work and any copy thereof. In a l i t e r a l sense, the t e s t for a copyright infringement i s the comparison of the o r i g i n a l with the alleged i n f r i n g i n g copy. Object code for a software program lacks the required material form that provides i d e n t i f y i n g c h a r a c t e r i s t i c s that are apparent to the human senses. A floppy disk containing a software program i s humanly in d i s t i n g u i s h a b l e from a blank d i s k . 5 0 a Only the computer can t e l l the d i f f e r e n c e between the two d i s k s . Therefore, u n t i l object code i s t r a n s l a t e d into some medium of hard copy, an arguable conclusion i s that i t can neither be copyrighted nor i n f r i n g e d . There i s a basic technological c a p a b i l i t y that further undermines the source code versus object code d i s t i n c t i o n . Although source code might 56 i n i t i a l l y be expressed i n the form of hard copy documentation, and object code normally be expressed i n e l e c t r i c a l impulses on a floppy disk, both types of codes are increasingly being expressed i n the e n t i r e range of tangible to intan g i b l e f o r m a t s . 5 0 1 3 Therefore, the issue of copyright p r o t e c t i o n must be tested not only by the type of code, but also with respect to the p a r t i c u l a r form of expression that was being used at the time of the alleged act of i n f r i n g e m e n t . 5 0 c . P r i o r to 1983, Canadian courts had not dealt d i r e c t l y nor d e c i s i v e l y with the question of software c o p y r i g h t . 5 1 There has also been very l i t t l e l e g i s l a t i v e a c t i v i t y to deal with the question. Although there are per s i s t e n t rumors of amendments to the Copyright Act to s p e c i f i c a l l y cover software,52 the House of Commons has not yet approved any changes. In 1984, the Federal government released i t s white paper on copyright e n t i t l e d "From Gutenberg to T e l i d o n " . 5 2 a rp^g p a p e r proposes r e v i s i o n s to the Copyright Act to provide i n t e l l e c t u a l property protection for computer programs. 5 2 1 3 However, i t i s doubtful that these proposals w i l l be implemented i n the next two to three y e a r s . 5 2 c However, during the past twenty-four months a number of in t e r l o c u t o r y a p p l i c a t i o n s i n Ontario and Quebec have started to t e s t the issue of software copyright. In Apple Computer Inc. v. Computermat Inc., Software  One L t d . and Michael S t a n f o r d 5 3 , the p l a i n t i f f was seeking an i n t e r -locutory i n j u n c t i o n to prevent infringement of i t s alleged copyright i n software on floppy d i s k s 5 4 and on c h i p s . 5 5 After noting that there were no appl i c a b l e Canadian t r i a l decisions, Mr. J u s t i c e Hughes referred to the i n t e r l o c u t o r y d ecision of the Federal Court of Appeal i n Nintendo  of America Inc. v. Coinex Video Games Inc., 1982 5 6. In the Nintendo case, 57 i n t e r l o c u t o r y r e l i e f had been granted to protect software which had been permanently wired on a chip (normally c a l l e d firmware 5^), i n e f f e c t , firmware i s a tec h n i c a l hybrid that occupies a middle ground between hardware and software. In the Apple case, Mr. J u s t i c e Hughes refused to grant the injunction request, but s t i l l recognized the seriousness of the p l a i n t i f f ' s claim to copyright. The i n t e r l o c u t o r y order provided that i f the defendant wished to continue s e l l i n g the software, i t was required to post a $100,000.00 bond to secure the p l a i n t i f f ' s p o t e n t i a l recovery of damages at t r i a l . It i s perhaps s i g n i f i c a n t that the other corporate defendant, Software One Ltd., d i d not even contest the inj u n c t i o n a p p l i c a t i o n against i t s software s a l e s . 5 8 In a second i n t e r l o c u t o r y proceeding, Space F i l e Limited, v. Smart Computing System, 5 9 Mr. Just i c e Steele dealt more d i r e c t l y with the software i s s u e . 6 0 Although the decision i s as yet unreported, Mr. J u s t i c e Steele apparently was w i l l i n g to admit that the p l a i n t i f f ' s documentation manual, source code program, and object code program were a l l protected by copyright. The Court reportedly stated that: The manual i s i n pri n t e d form. The source code and the programs are e l e c t r o n i c a l l y recorded on disks but are capable of, and have been, printed from them. They are o r i g i n a l ideas expressed i n a p a r t i c u l a r form. They are the proper subject of c o p y r i g h t . 6 1 The most o p t i m i s t i c i n t e r l o c u t o r y decision i s that of Reed J. i n I.B.M. v. S p i r a l e s Computers I n c . 6 2 , . which granted an inj u n c t i o n r e s t r a i n i n g the defendants from i n f r i n g i n g the p l a i n t i f f ' s apparent copyright i n a BIOS software program. The BIOS system i s part of the I.B.M. P.C. (personal computer) and i s permanently a f f i x e d on a chip i n 58 the computer's read only memory (ROM). 6 3 Although the p l a i n t i f f had received a copyright r e g i s t r a t i o n c e r t i f i c a t e for both the source code and object code l i s t i n g s as expressed i n i t s Technical Reference Manual, the alleged act of infringement was the ph y s i c a l d u p l i c a t i o n of the f irmware/chip. 6 3 a Thus, the I.B.M. v. Spi r a l e s i n t e r l o c u t o r y decision can be interpreted as extending copyright protection to object code even when the code i s p h y s i c a l l y burned into a s i l i c o n chip and only employed for machine communication. I t i s suggested that the I.B.M. v. Spi r a l e s judgement i s not well reasoned. The decision f a i l s to d i s t i n g u i s h between the various media i n which software can be expressed, and rather loosely r e f e r s to a number of software copyright decisions from other j u r i s d i c t i o n s . 6 3 1 3 This c r i t i c i s m appears to be confirmed by the recent r e f u s a l of another Federal Court judge to grant an in t e r l o c u t o r y injunction to Apple Canada I n c . 6 3 c On January 17, 1985, Mr. Ju s t i c e Cullen agreed that the defendants had an arguable case on a l l of the issues covering an Apple Canada Inc. claim to copyright protection for i t s Autostart read-only memory (ROM) chip. 6 3* 3- However, the arguments were not convincing enough to secure the in t e r l o c u t o r y injunction order. In summary, the protection of copyright marginally secures a creator's r i g h t s to e l e c t r o n i c information. As the software example shows, a reasonable conclusion i s that the supporting written documentation f o r t h i s type of information i s protected by copyright. But copyright for the e l e c t r o n i c versions of a software program i s f a r less c e r t a i n , and e s p e c i a l l y i n the absence of any t r i a l court decisions. Tapper reaches a s i m i l a r conclusion with regard to the United Kingdom's 59 copyright l e g i s l a t i o n . Since the l e g i s l a t i o n contains "no e x p l i c i t references to computer programs, and as i t s a p p l i c a t i o n to them has not so f a r been tested i n the courts any f i n a l judgment upon the matter must remain speculative." 6 4 The Copyright Act does provide one other source of p r o t e c t i o n for an information employer. Although the o r i g i n a l author normally holds the copyright, Section 12 (3) reverses t h i s presumption i n the context of the employment r e l a t i o n s h i p . Where the author was i n the employment of some other person under a contract of service or apprenticeship and the work was made i n the course of h i s employment by that person, the person by whom the author was employed s h a l l , i n the absense of any other agreement to the contrary, be the f i r s t owner of the c o p y r i g h t . 6 4 3 As discussed i n the previous chapter, the section 12(3) p r e s c r i p t i o n can be an important commercial impetus f o r d i s t i n g u i s h i n g between independent contractors and employees. 6 4 1 3 In S i l v e r s o n v. Neon Products  Ltd., the B.C. Supreme Court r e l i e d , i n part, upon sec 12(3) to dismiss a copyright infringement action brought by an ex-employee. 6 4 0 The Computer Software Copyright Act of 1980 6 5 i n the United States provides c e r t a i n lessons for any attempt to protect information v i a copyright l e g i s l a t i o n . The United States has now had more than three years of experience with statutory protection for software. The effectiveness of the 1980 amendments were recently considered i n the Computer/Law J o u r n a l . 6 6 Mihm reviewed the double threat of software p i r a c y from competitors who copy and r e s e l l and from i n d i v i d u a l s who copy for personal use. His conclusion was that p r o t e c t i n g computer software v i a copyright was "neither e f f e c t i v e nor p r a c t i c a l " to deal with e i t h e r of 60 these threats. The explanation was that "The process of detecting copyright infringement and then proving i t and obtaining a recovery i s too d i f f i c u l t and uncertain to be of great v a l u e . " 6 7 i f Mihm's conclusions are correct, then amendments to the Canadian act may not provide f i n a l nor e f f e c t i v e protection for e l e c t r o n i c information. In one other area, Canadian copyright law appears to avoid one of the c o n f l i c t s experienced i n the United States. For a number of years i t was feared that r e g i s t e r i n g for Federal copyright protection i n the U.S.A. would extinguish or pre-empt trade secret protection. This widespread concern among American software producers was caused by the requirement of disclosure under the U.S. copyright l e g i s l a t i o n . As noted previously, a copyright holder i n Canada i s not required to disclose his o r i g i n a l material at the time of copyright r e g i s t r a t i o n . This point i s c r i t i c a l to prevent the waiver of trade secret protection. While s p e c i f i c l e g a l p r i n c i p l e s w i l l be reviewed i n the next section, the general rule i s that p u b l i c a t i o n of a trade secret ends the l e g a l protection provided to the user. If the holder of the secret has released the information to the p u b l i c , then the holder cannot claim continued protection for the secret. Following t h i s l o g i c , the c r i t i c a l l e g a l question then i s whether the r e g i s t r a t i o n of a copyright amounted to the p u b l i c a t i o n of the information to the public? In the United States the p o s s i b i l i t y that copyright r e g i s t r a t i o n might pre-empt trade secret protection plagued the software industry for almost a decade. F i n a l l y , the U.S. Supreme Court ruled that Congress did not intend to pre-empt state trade secret law with the f e d e r a l Copyright A c t . 6 8 Fortunately, t h i s pre-emption issue can be avoided i n Canada so long as the subject matter of the copyright i s not f i l e d with the copyright 61 a p p l i c a t i o n . Also, the Canadian statute does not require materials to be marked with the i d e n t i f y i n g copyright and the date of f i r s t p u b l i c a t i o n . Under American law the requirement of marking the p u b l i c a t i o n date on the materials unavoidably raised the pre-emption c o n f l i c t . F i n a l l y , although copyright i s . s t r i c t l y a statutory r i g h t , section 45 of the Act 6 8 a q u a l i f i e s copyright by s t a t i n g that "nothing i n t h i s section s h a l l be construed as abrogating any r i g h t of j u r i s d i c t i o n to r e s t r a i n a breach of t r u s t or confidence." Thus, section 45 could be a marginal assurance that copyright r e g i s t r a t i o n does not destroy the c o n f i d e n t i a l aspects of trade secrets. In conclusion, the patent and copyright laws i n Canada are only marginally e f f e c t i v e i n coping with r i g h t s to information i n the computer industry. Accordingly, t h i s t hesis has chosen to concentrate on the trade secret and contractual obligations that apply to s k i l l e d employees. D. TRADE SECRET PROTECTION FOR INFORMATION 1. The Legal P r i n c i p l e s of Trade Secrets: Trade secret law i n Canada i s a creation of the common law and equity, and has received almost no statutory recognition. 69 However, the absence of trade secret l e g i s l a t i o n i n Canada has not constrained the a p p l i c a t i o n and vigor of t h i s area of the law. English Courts have long recognized that l e g a l and equitable r e l i e f should be granted to prevent what was termed a "breach of confidence". The dimensions of the duty of confidence imposed on an employee were summarized i n the 1913 Chancery decision i n Amber Size and Chemicals Co. L t d . v. Menzel: 62 In my view, a f t e r giving the a u t h o r i t i e s the best attention I can, the law stands thus: The Court w i l l r e s t r a i n an ex-servant from publishing or divulging that which has been communicated to him i n confidence or under a contract by him, express or implied, not to do so: Morrison v. Moat, 9 Hare, 241, and generally from making an improper use of information obtained i n the course of c o n f i d e n t i a l employment: Tuck & Sons v. P r i e s t e r , 19 Q.B.D. 629, and, further, from using to his l a t e master's detriment information and knowledge s u r r e p t i t i o u s l y obtained from him during h i s , the servant's employment: Robb v. Green, (1885) 2 W.B. 1, 315. 70 Outside of the employment r e l a t i o n s h i p , p l a i n t i f f s have been able to obtain r e l i e f from the courts for breach of confidence whether the c o n f i d e n t i a l information arose i n a business setting,71 or was obtained outside of any quasi-contract or implied term of confidence.72 T n e common element i s that the defendant must have obtained the information i n such a way as to be bound by the o b l i g a t i o n s of confidence.73 Lord Denning's decision i n Seager v. Copydex Ltd.74 i l l u s t r a t e s the scope of the doctrine. The case concerned a p l a i n t i f f who had disclosed c o n f i d e n t i a l product information to the defendant during negotiations which ended without the p a r t i e s entering into a contract. However, the defendant thereafter used the p l a i n t i f f ' s information to develop and market i t s own a l t e r n a t i v e product. The p l a i n t i f f s u c cessfully sued and received a lump sum damage award from the Court. In summary, Lord Denning affirmed that s p e c i f i c trade secrets i n England are protected by the general theory of breach of confidence. The p r o t e c t i o n afforded the p l a i n t i f f was based upon: [T]he broad p r i n c i p l e of equity that he who has received information i n confidence s h a l l not take unfair advantage of i t . He must not make use of i t to the prejudice of him who gave i t without obtaining h i s consent. 75 63 This formulation c l e a r l y protects information whether or not i t was received i n a business context. Canadian courts have generally followed the basic p r i n c i p l e s established by the English jurisprudence. The statement i n Amber Size  Chemicals noted above was adopted by the Ontario Court of Appeal i n International Tools Ltd. v. K o l l a r ^ 6 . In addition/ the decision of Seager  v. Copydex has been c i t e d with approval i n other decisions i n Canada.77 Canadian courts are also i n agreement with Lord Denning's statement that the j u r i s d i c t i o n to r e s t r a i n a breach of confidence does not depend upon an express term of contract. Almost two decades before Seager v. Copydex, the Ontario Court of Appeal i n the well known decision of Crain Limited v. Ashton and Ashton Press Mfg. Co. stated: The cases on t h i s subject of trade secrets e s t a b l i s h that independently of any express covenant or contract, an ex-employee who, i n the course of his employment, acquired a knowledge of a secret process belonging to h i s employer, a r i s i n g out of the c o n f i d e n t i a l r e l a t i o n between an employer and h i s employee, i s under an implied o b l i g a t i o n not to use that knowledge upon leaving his employment.78 These general statements of the theory of breach of confidence lead to other l e g a l questions that are important for information such as software. Is the r i g h t that i s being v i o l a t e d properly viewed as a breach of confidence or as a v i o l a t i o n of a trade secret? In f a c t and i n law, are there any reasons for d i s t i n g u i s h i n g between a trade secret and c o n f i d e n t i a l information? Once these issues are resolved, a secondary question then emerges. Is a trade secret a substantive l e g a l r i g h t , a property r i g h t or equity a c t i n g to deal with an inadequate l e g a l remedy? This l a s t question w i l l be discussed i n Chapter VI under the topic of C r i t i c a l Remedies for Breach of an Employee's Obligations. 64 The f i r s t of the above questions i s perhaps the easier to answer. Canadian cases c l e a r l y apply o b l i g a t i o n s of confidence a f t e r the existence of a trade secret has been proved. As i n Computer Centre Personnel L t d .  v. Lagopoulos, 7 9 A l b e r t s (Edgar T.) L t d . v. Mountjoy, 8 0 or Molnar  Lithographic Supplies L t d . v. S i k a t o r y , 8 1 the courts accept that communication of trade secrets imposes an o b l i g a t i o n of confidence upon the r e c i p i e n t . Yet there are other important decisions i n which c o n f i d e n t i a l information has been protected i n circumstances where the r e l i e f could not be based on the existence of a trade secret. In Slavutych v. B a k e r 8 2 the Supreme Court of Canada upheld the c o n f i d e n t i a l i t y of a tenure recommendation written by a u n i v e r s i t y professor. In A l b e r t a Human Rights  Commission v. A l b e r t a Blue Cross Plan 8 2 a ^he Alberta Court of Appeal held that o b l i g a t i o n s of confidence could t h e o r e t i c a l l y be applied to the personnel f i l e s of an employer. Even i n cases on employment o b l i g a t i o n s , the courts do not f i n d i t necessary to f i r s t i d e n t i f y a trade secret. In decisions such as Chevron standard L t d . v. Home O i l Co. and Leeson ( A l t a . Court Of A p p e a l ) , 8 3 and Guyer O i l Co. v.Fulton (affirmed by S.C.C.), 8 4 the c r i t i c a l matter was whether there existed c o n f i d e n t i a l information which had been communicated to the employee. In spite of the ambivalence of the decisons, the d i s t i n c t i o n between trade secrets and c o n f i d e n t i a l information i s important. Although the o b l i g a t i o n of confidence enunciated i n Seager v. Copydex 8 5 w i l l protect both categories, the d e f i n i t i o n of trade secrets covers a much more l i m i t e d range of information. One l i m i t a t i o n i s that information may be communicated and treated as c o n f i d e n t i a l , yet not q u a l i f y as a trade 65 secret. Secondly, i f the information i s already i n the public domain, the use of the information by a business cannot be a trade secret. The d e f i n i t i o n of a trade secret contained i n Section 7 57 of the U.S. Restatement of Torts confirms that trade secrets cover a more l i m i t e d range of circumstances than the equitable o b l i g a t i o n s of confidence. Since the following d e f i n i t i o n l i m i t s trade secrets to use " i n one's business", and to where the secret provides an "advantage over competitors", how could a non-profit research organization claim trade secret protection i n the United States?: A trade secret may c o n s i s t of any formula, pattern, device or compilation of information which i s used i n one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use i t . It may be a formula for a chemical compound, a process for manufacturing, t r e a t i n g or preserving materials, a pattern for a machine or other device, or a l i s t of customers. 8 6 Canadian a u t h o r i t i e s that have se r i o u s l y considered the scope of a trade secret also adopted such a l i m i t e d d e f i n i t i o n . In R.I. C r a i n v. Ashton 8 6 a Chevrier J. accepted four s i m i l a r descriptions of a trade secret taken from American cases. A l l of these d e f i n i t i o n s l i m i t e d possession of trade secrets to commercial enterprises. S i m i l a r l y , i n Schauenburg Industries L t d . v. B o r o w s k i 8 6 D Craig J . c o r r e c t l y noted that even i n a business context a d i s t i n c t i o n can be drawn between c o n f i d e n t i a l information and a trade secret: While i t would not be correct to describe t h i s process or the operation a trade secret, i t i s my opinion that i t i s c o n f i d e n t i a l information. Borowski wrongfully used t h i s c o n f i d e n t i a l information; that i s , i n the sense that i t had been entrusted to him as general manager and i n the b e l i e f that he would not d i s c l o s e i t to the detriment of the p l a i n t i f f s . Information may be c o n f i d e n t i a l i f the whole r e s u l t i s not known 66 though i t s separate features or ingredients 'have been published or are capable of being ascertained by actual inspection by any member of the p u b l i c ' : A n s e l l  Rubber Co. Pty. L t d . v. A l l i e d Rubber Industries L t d . , [1967] V.R. 37 at p. 49.86c Thus, one i n i t i a l conclusion i s possible. There are v a l i d reasons f o r making the l e g a l d i s t i n c t i o n between a trade secret and an o b l i g a t i o n of confidence. The aforementioned cases ind i c a t e that the scope of a trade secret w i l l be l i m i t e d to p a r t i e s i n business where the secret i s used to achieve a competitive advantage. However, obligations of confidence can be more widely applied to any persons who meet the e s s e n t i a l c r i t e r i a . This t h e s i s w i l l be examining r i g h t s to information i n the wide range of employment r e l a t i o n s h i p s associated with the computer industry. Since the organizations involved can range from private businesses to non-profit research units, the wider l e g a l bounds of obligations of confidence generally w i l l be more applicable than the narrower concept of trade secrets. The courts have established p r e r e q u i s i t e s for the p r o t e c t i o n of information such as computer software. In e f f e c t , the equitable o b l i g a t i o n s of confidence protect both trade secrets and other types of information so long as three basic elements are established. As Megarry J. i n the case of Coco v. A.N. Clark (Engineers)86d stated: F i r s t , the information i t s e l f , i n the words of Lord Greene, M.R. i n the Saltman case must 'have the necessary q u a l i t y of confidence about i t ' . Secondly, that information must have been imparted i n circumstances importing an o b l i g a t i o n of confidence. T h i r d l y , there must be an unauthorized use of that information to the detriment of the party communicating i t . 8 6 e 67 In Thomas Marshall (Exports) L t d . v. G u i n l e , 8 6 f the Chancery D i v i s i o n i n England further c l a r i f i e d the three elements given i n the Coco case. But again, Megarry V.C. was c a r e f u l to recognize that the c r i t e r i a f o r the protection of information could apply to eit h e r trade secrets or c o n f i d e n t i a l information i f the communication took place i n an i n d u s t r i a l s e t t i n g . 8 6 9 These requirements f o r the protection of information w i l l be discussed i n more d e t a i l i n Chapter V under Section D - The Employer's Proprietary Interest and the Reasonableness Test. 2. Trade Secrets and Software: There are l e g a l , t e c h n i c a l , and market considerations that i d e n t i f y trade secrets as the dominant non-contractual l e g a l protection f o r information i n the computer industry. As the previous two sections discussed, both e x i s t i n g copyright and patent laws are i l l - s u i t e d for protecting the new information technologies. In contrast, trade secrets or the ob l i g a t i o n s of confidence are p a r t i c u l a r l y suited to information a c t i v i t i e s such as software development and marketing. Trade secrets protects c o n f i d e n t i a l information that i s being used by a business e n t i t y to maintain a competitive advantage. As discussed, an employee or an outsider who receives such information i n confidence must respect and preserve that secret and equity w i l l not permit the r e c i p i e n t to make use of the confidence to h i s own b e n e f i t . 8 7 In 1977, a survey was taken of the p a r t i c i p a n t s i n the United States software industry. The survey asked p a r t i c i p a n t s to compare the l e g a l p r o t e c t i o n o f f e r e d by patent law, copyright law, trade secrets, and the possible protection o f f e r e d by t e c h n i c a l features such as cryptographic 68 coding, releasing of object program only, and other means of l i m i t i n g program access. The survey concluded that trade secrets was the most widely used method of l e g a l p r o t e c t i o n i n the American industry,87a It i s the l i n k between competitive advantage and secrecy that makes the doctrine of breach of confidence c r i t i c a l f o r the software industry. The computer sector depends heavily upon t h i s l e g a l doctrine for a number of reasons. F i r s t , the computer marketplace i s characterized by intense competition and rapid growth. Large market s h i f t s of 10% to 2 0% occur over periods of two to three years due to the continual introduction of new products. The product l i f e cycles of both software and hardware are r e l a t i v e l y short. As Hammond observed, information has a short term frequency as compared to the longer term frequencies of the statutory monopolies ( i e : patent and c o p y r i g h t ) . 8 8 At the same time, the speed of change i n the software marketplace means that l i t i g a t i o n i s often s e l f - d e f e a t i n g . Most vendors cannot a f f o r d to d i v e r t corporate resources into a lengthy court b a t t l e . A l l e f f o r t s must be direc t e d to maintaining a competitive edge and keeping pace with each new generation of software. As a r e s u l t , secrecy i n the development and introduction of new products i s a key f a c t o r . 8 9 These industry c h a r a c t e r i s t i c s also mean that l e g a l emphasis i s on immediate p r o t e c t i o n and i n t e r l o c u t o r y remedies rather than eventual t r i a l s to recover losses a f t e r the f a c t . 9 0 There are other market c h a r a c t e r i s t i c s that l i n k trade secrets c l o s e l y to the protection of software. Information products are now being introduced i n many in d u s t r i e s to increase p r o d u c t i v i t y and to cut labour 69 costs. However, these benefits can only be r e a l i z e d i f information technology i s allowed to play a major r o l e i n corporate operations. For example, the manufacturing sector w i l l use the CAM (computer assisted manufacturing) systems as the heart of a manufacturing process. Therefore, once the new technology i s introduced, the high degree of i n t e g r a t i o n makes i t d i f f i c u l t to then convert to another system. In general, t h i s phenomenon of software dependency increases the importance of trade secret protection for the computer industry. In most instances, companies which have automated t h e i r various accounting, manufacturing and reporting systems have long ago abandoned the p a r a l l e l manual systems. Thus, the o f t used marketing ploy i s to discount the p r i c e of the f i r s t software module to e s t a b l i s h the entry into the purchaser's operation. The enormous costs of converting to any r i v a l software package creates the dependency. As a r e s u l t of the l o c k - i n e f f e c t of software dependency, vendors must be f i r s t i n the market. Accordingly, there i s enormous pressure to get advance warning about the new products and marketing strategies of competitors. Trade secret protection plays a major defensive r o l e i n preventing competitors from using unauthorized disclosure of information to secure a market lead. Dominant companies i n the information sector also try to control t h e i r markets through the strategy of "product d i f f e r e n t i a t i o n " 9 1 . A large vendor w i l l do everything possible to d i s t i n g u i s h i t s products as being unique and incomparable to those of i t s r i v a l s . For example, the software of one p a r t i c u l a r manufacturer normally cannot be used to operate the hardware of another manufacturer. In the same way basic information cannot be r e a d i l y t r ansferred from one software system to another. 70 Software incompatability can be a vendor strategy rather than just a t e c h n i c a l problem of i l l - d e f i n e d standards. Product d i f f e r e n t i a t i o n , accordingly, heightens the dependency of a software purchaser upon that software vendor. These factors r a i s e the stakes for competitors i n the information sector. Since the i n s t a l l e d customer base i s so important for continued sale s , a l l producers must not be l e f t behind i n the product development race. These r i s k s accentuate the piracy of information, bribery of employees and the general concerns over c o n f i d e n t i a l information. The theory of trade secret deals with these r i s k s by emphasizing the preservation of a business' competitive secrets. However, i t should be said that the theory of trade secrets i s not the perfect protection for computer software. F i r s t , the widespread marketing and successful sale of a program w i l l eventually destroy the trade secret by making the information p u b l i c . The American courts have already dealt s p e c i f i c a l l y with computer software being marketed under a r e s t r i c t i v e l i c e n s i n g agreement. So long as the o b l i g a t i o n s of confidence are c l e a r l y and c o n s i s t e n t l y maintained by the vendor l i c e n s o r , i t appears that a generous degree of mass d i s t r i b u t i o n w i l l be t o l e r a t e d i n the United S t a t e s . 9 2 However, the more l i b e r a l American approach on the p u b l i c a t i o n of alleged trade secrets must be contrasted with the more r e s t r i c t i v e approach taken by the High Court i n A u s t r a l i a 9 3 or the House of Lords i n the United Kingdom. 9 4 Second, the general theory of trade secrets does not prevent a competitor from independently developing the same software program from h i s own research. F i n a l l y , enforcing trade secret obligations against 71 former employees eventually c o n f l i c t s with the doctrine of r e s t r a i n t of trade. This c o n f l i c t w i l l be discussed i n depth i n Chapter V. 72 FOOTNOTES: CHAPTER III 1. Dr. Stuart L. Smith, Chairman of the Science Council of Canada, i n Canadian Business/Special Supplement, Fall/1983 at page SC2. 2. Supra., p.8-13. 3. Supra., Chapter I I . 4. Chapter V, The Employer's Proprietary Interest and the Reasonableness Test at page 130. 5. Canadian c r i m i n a l law has seen a dramatic increase i n the number of prosecutions r e l a t i n g to c o n f i d e n t i a l information and the computer industry i n the past 3 years. Regina v. Stewart (1983) 149 D.L.R. (3d) 583, 42 O.R. (2d) 255 (Ont. C.A. ) i s a t e s t case which raises the issue whether c o n f i d e n t i a l information can be the subject of t h e f t or fraud, and i s currently on appeal to the Supreme Court of Canada. An e a r l i e r Supreme Court of Canada decision i n Regina v.  McLaughlin [1980] S.C.R. 331 held that the unauthorized access to and interference with a computer did not constitute a crime under paragraph 287(1)(b) of the Criminal Code. In Regina v. Kirkwood (1983) 5 C.C.C. (3d) 393, 42 C.R. (2d) 65 the Ontario Court of Appeal used subsection 338(1) of the Criminal Code to convict a videotape co u n t e r f e i t e r . (The circumstances of videotape piracy and software piracy are quite s i m i l a r . ) In Regina v. Turner (Ont. H.C.) June 18, 1984 reported i n Case Comments (1984) 1 C.CL.R. 222, the accused were convicted of committing mischief to pr i v a t e property, being computer tapes, contrary to paragraph 387(4)(a) of the Criminal Code. See also Hammond, Grant R., Theft of Information (1984) 100 Law Quarterly 73 Review 252; Webber, C., Computer Crime; What Has Not Been Considered (1985) 2 C.C.L.R. 49; Finlay, J . , Problems with the "Property"  Concept i n Computer Crime L e g i s l a t i o n (1984) 1 C.C.L.R. 182; Green, B. M. The Empire St r i k e s Back; Criminal Remedies for Video Piracy (1984) 1 I.P.J. 1 . 6. (1960) 399 Pa. 569, 125 U.S.P.Q. 471 7. Id. 8. (1602) Cr. E l i z . 872; 78 ER. 1097. 9. Doerner v. B l i s s & Laughlin Indust. Inc. (1980) 2 S.C.R. 865, 54 C. P.R.(2d) 1, (S.C.C); Wong v. Cook (1979) 102 D.L.R. (3d) 616 (B.C.S.C). 10. R.V. Howard Smith Paper M i l l s L t d . (1957) S.C.R. 403, 8 D.L.R. (2d) 449, at 452. 10a. Chapter V discusses the doctrine i n depth. 11. Supra., note 2. 12. Supra., note 2. 13. For example, see CR. Hansen, J r . , Software D i s t r i b u t i o n , Remarketing  and Publishing Agreements (1984) 4 Computer Law Journal 625. 14. Source code or source programs must be contrasted to object code or object programs. The glossary for the (1983) Computers and the Law I n s t i t u t e materials (Continuing Legal Education Society of B.C.) provides the following explanations at pages 5:1:25 and 5:1:32: Source program: a computer program written i n symbolic language which w i l l be converted into an absolute language object program using a processor program. 74 Object code: absolute language output from a compiler or assembler which i s i t s e l f executable machine code or i s f u l l y complied and i s ready to be loaded into the computer. 15. M.W. Berwind and E.R. Martin, Research and Development Limited  Partnerships (1982) P r a c t i s i n g Law I n s t i t u t e , Computer Law Acquiring Computer Goods and Services 339. 16. F i n a n c i a l Post December 10th, 1983 page 28; F i n a n c i a l Post December 17th, 1983 at page 35. 17. Id. 18. For example, the model conditions of contract used by the B r i t i s h Columbia Hydro Authority i n acquiring computer systems sets out such a provision to protect the licensee. 19. Id. 20. Maguire v. Northland Drug Co. (1935) S.C.R. 412 at 416, (1935) 3 D.L.R. 521 (S.C.C.); Cope v. Harasimo (1964) 50 W.W.R. 639, (B.C.C.A.) 20a. Chapter V Section 2 discusses the Special Status of Employment Restraints. 21. Daniel T. Brooks, Agreements with Consultants and Registering  Copyrights i n Computer Software, (1982) P r a c t i s i n g Law I n s t i t u t e , Computer Law - Acquiring Computer Goods and Services at 52 to 57. 22. Id. 22a. Law Reform Commission of B r i t i s h Columbia, Report on Covenants i n Restraint of Trade (1984). 22b. Id., at p. 5. 22c. Id. 75 23. R. Grant Hammond, Quantum Physics, Econometric Models and Property  Rights to Information (1981) 27 M c G i l l Law Journal 47, at 58. 24. Id. note 23, at 55-56. 24a. L i b l i n g , D.F., The Concept of Property; Property i n Intangibles (1978) 94 Law Review Quarterly 103 at 103, 104 where the author argues that Anglo-Australian case law recognizes property rights i n intangibles based on the following p r i n c i p l e : An expenditure of mental or p h y s i c a l e f f o r t , as a r e s u l t of which there i s created an e n t i t y , whether tangible or i n t a n g ible, vests i n the person who brought the e n t i t y into being, a proprietary r i g h t to the commercial e x p l o i t a t i o n of that e n t i t y , which r i g h t i s separate and independent from the ownership of that e n t i t y . 25. B r a i t , Richard A., The Use of R e s t r i c t i v e Covenants i n the Employment  Contract (1981) 6 Queens Law Journal 414. 26. (1980) 101 D.L.R. (3d) 701. 27. Supra., note 25, at 417 28. See for example Oxman, J.C., I n t e l l e c t u a l Property Protection and  Integrated C i r c u i t Masks (1980) 20 Jurimetrics Journal 405; Lawlor,R.C, A Proposal f o r Strong Protection of Computer Programs  Under the Copyright Law (1979) 20 Jurimetrics Journal 18 29. Supra, note 16, at 55-56. 30. Sections B and C of t h i s Chapter w i l l i d e n t i f y recent Canadian decisions; see also George E. F i s k , Copyright Protection f o r Computer  Software and E l e c t r o n i c Games, for seminar t i t l e d Legal Protection f o r Computers, Software and E l e c t r o n i c Games published by Oyez Limited, January 14th, 1982, at page 8. 31. Patent Act, R.S.C. 1970, c. P-4. 32. Copyright Act, R.S.C. 1970, c. C-30. 76 33. For example, copyright protection has been applied to prevent the unauthorized videotaping of films i n Warner Bros. Seven Arts Inc. v.  CESM TV Ltd. (1971 ) 65 C.P.R. 215; and see Canadian Admiral Corp.  Ltd. v. Rediffusion Inc. (1954) Ex. C.R. 382. The Supreme Court of Canada has upheld the copyright i n a musical work even though the infringement took place a f t e r intervening productions v i a master tapes and then acetate masters. Compo Co. Ltd. v. Blue Crest Music  Inc. et a l . (1980) 105 D.L.R.(3d) 249. 34. Jeremy P h i l i p s and Michael Hoolahan, Employees' Inventions i n the United Kingdom Law Practice (Oxford,1982) at 1. 35. Supra, note 31, sec. 56(1). 36. For a general overview of the l e g i s l a t i o n see D.A. H i l l , Patents and  Computer-Related Subject Matter at p. 1 i n seminar t i t l e d Legal Protection for Computers, Software and E l e c t r o n i c Games published by Oyez Limited Jan 14th/82. 37. Supra, note 34; see also George Hunter and G i l b e r t S. Sharpe. Patent  Rights In An Employee's Invention; A Comparative Analysis and a Model  For Reform (1975) 23 Chitty's Law Journal 253. 38. (1981) 56 C.P.R. (2d) 204 (F.C.A.). 39. (1982) 63 C.P.R. (2d) 261 (S.C.C.). 40. Supra. note 38, at 206 41. Supra, note 36, at 7 r e f e r r i n g to Section 12.03.01(g) of the Canadian Patent O f f i c e Manual of Examining Procedures. 42. Supra. note 36, p. 8 42a. "Firmware" and "chip" are defined i n note 54. I t can be argued that firmware or P.R.O.M. (programmable read only memory) chips represent p h y s i c a l technology that i s patentable. However, the American experience suggests that t h i s argument must be treated cautiously. See Backer, S.A., Means-Plus-Function Claims i n Computer Related 77 Patent Applications i n the United States (1984) 5 Computer/Law Journal 25. Also, the American government has recently created a new form of l e g a l protection for chips instead of r e l y i n g upon patent law. See Semiconductor Chip Protection Act of 1984 (P.L. 98-620) amending T i t l e 17 of the U.S. Code by addition of Chapter 9 as outlined i n (1985) 1 Copyright Law Journal 1. 42b. Id. 43. R.S.C, 1970, c-C-30, as am. 43a. C o l i n Tapper, Computer Law (1982 Longman Group Ltd. 2nd Ed.) at 16. 43b. See for example Bulman Group Ltd. v. "One Write" Accounting Systems Ltd. (1982) 132 D.L.R. (3d) 104 at 111 (Fed. Ct. T r i a l Div.) enforcing an unregistered copyright i n accounting forms. 43c. Supra, note 43, sec 22. 43d. The issue of the l i a b i l i t y for damages of an outsider who receives c o n f i d e n t i a l information from an employee w i l l be examined i n Chapter VI - The C r i t i c a l Remedies for Breach of an Employee's Obligations. 43e. Supra, note 43, sec 5. 44. Supra, note 43a, at 18; and see supra note 30 George F i s k , Copyright  Protection f o r Computer Software and E l e c t r o n i c Games at 11. 45. Supra, note 14. 46. Supra, note 43, sec 3(1) (a). 47. Supra, note 43a. 48. National Commission on Technological Uses of Copyrighted Works, F i n a l Report 9 (1978), at 27. 49. Id. 78 50. Canadian Admiral Corp. Ltd. v. Rediffusion Inc. (1954) Ex. C.R. 382 at 386 which states that "for copyright to subsist i n a "work" i t must be expressed to some extent at least i n some material form, capable of i d e n t i f i c a t i o n and having a more or le s s permanent endurance." The reference to material form i s contained i n the preamble to sec. 3(1) of the Act. 50a. See note 54 f o r an explanation of these terms. 50b. Szibbo, A. , The Computer and Copyright i n Canada Materials for Copyright i n the 1980's published by The Continuing Legal Education Society of B.C. at Chapter 4, pg. 6, 7 and 30 (February 1985). 50c. Id. 51. George Fisk quoted i n Globe and Mail, Dec. 23, 1983, at B15; Mr. J u s t i c e Hughes i n the i n t e r l o c u t o r y decision i n Apple Computer Inc.  v. Computermat Inc. (1983) 75 C.P.R. (2d) 26 (Ont. H.C.) reached the same conclusion i n h i s judgement dated Dec. 6, 1983; see also Fisk, G. New Developments i n Software Copyright (1983) 1 Canadian Computer Law Reports 27. 52. For example, see B. Eischen, Revisions to the Copyright Act (1983) 1 Canadian Computer Law Reporter 25. 52a. Government of Canada, Consumer and Corporate Affairs/Department of Communcations (1984). 52b. Id., at pages 79-87. 52c. This was the opinion expressed by two p a n e l i s t s , Mr. Lance Turlock and Mr. Peter Grant, at the law seminar on "Copyright i n the 1980's" organized by the Continuing Legal Education Society of B.C. held on February 15th, 1985. 53. (1983) 75 C.P.R. (2d) 26 (Ont H.C.) 79 54. Supra, note 14, at 5.1.07 and 5.1.16 where the Glossary provides the following explanations: Firmware - a term usually r e l a t e d to microprogramming and those s p e c i f i c software i n s t r u c t i o n s that have been more or less permanently placed into control memory. An extension to a computer's basic command (ins t r u c t i o n ) repertoire to create a user-oriented i n s t r u c t i o n set. This extension to the basic i n s t r u c t i o n set i s done i n read-only memory and not i n software. The read only memory converts the extended u s e r - s p e c i f i c i n s t r u c t i o n s to the basic i n s t r u c t i o n s of the computer. Floppy disks - storage devices i n the form of small f l e x i b l e disks (about the s i z e of 45 rpm phonograph records) used for random access requirements i n c o n t r o l l e r s and CPU's and as a compact substitute for punched cards. A t y p i c a l floppy disk provides capacity for about 300,000 data bytes. Floppies were o r i g i n a l l y developed for low cost, low capacity data storage, and r e l a t i v e l y low data transfer rates. Also known as diskettes. Chips - microprocessors that are complete computers on a single chip of s i l i c o n . No larger than 1/2-inch square, they contain a l l the e s s e n t i a l elements of a c e n t r a l processor, i n c l u d i n g the control l o g i c , i n s t r u c t i o n decoding, and arithmetic processing c i r c u i t r y . To be u s e f u l , the microprocessor chip or chips are combined with memory and I 0 integrated c i r c u i t chips to form a "microcomputer", a machine almost as powerful as a minicomputer. They usually f i l l no more than a s i n g l e p r i n t e d c i r c u i t board. 55. Id. 56. (1982) 69 C.P.R. (2d) 122, 46 N.R. 311 (Fed. OA. ) . 57. Supra, note 54. 58. Supra, note 53. 59. (1984) 75 C.P.R. (2d) 281 (Ont H.C.) 60. Id. 61. Id., at p.282. 80 62. (1984), 80 C.P.R. (2d) 206, 12 D.L.R. (4th) 351 (Fed. Ct. T r i a l Div.) 63. Id., at p. 354 D.L.R. 63a. Id., at p. 354. 63b. Id., at p. 355. 63c. Globe and Mail, January 26, 1985 at p. B2. 63d. Id. 64. Supra, note 43a at 18. 64a. Supra, note 43, sec. 12(3). I t should be noted that the white paper on copyright r e v i s i o n c a l l e d "From Gutenberg to Telidon" supra note 52a, i n v i t e s p u b l i c comment on the issue of f i r s t ownership of copyright i n the employment r e l a t i o n s h i p , and b r i e f l y states the various arguments i n Appendix I I , pg 113-117. 64b. Supra, Chapter II at pg 17-20. 64c. [1978] 6 W.W.R. 512 at 517-18; (1978) 39 C.P.R. (2d) 234. 65. 17 U.S.C. 101, 117 (Supp. IV 1980) as amended by the Computer Software Copyright Act, at 1980, 94 Stat. 3015. 66. M.T. Mihm, Software Piracy and the Personal Computer; Is the 1980  Software Copyright Act E f f e c t i v e ? (1983) 4 Computer Law/Journal 171. 67. Id., at 192-193. 68. Kewanee O i l Co. V. Bicron Corp. 416 U.S. 470 (1974). 68a. Supra, note 43. 69. The statutory references to trade secrets i n Canada occur i n sec.45 of the Copyright Act supra, note 43 and perhaps i n d i r e c t l y i n the Trade Marks Act 1952-53, c.49 s. 7 which p r o h i b i t s any act or business p r a c t i c e contrary to honest i n d u s t r i a l or commercial usage 81 i n Canada, but see MacDonald v. Vapour Canada Ltd. (1976) 66 D.L.R. (3d) 1 (S.C.C). In the United States a considerable number of the states have passed trade secret laws. For a l i s t of states that prosecute the the f t of trade secrets see Jager, Melvin F., 1983 Trade Secrets Law Handbook (1983) i n Appendix F, at 333. 70. [1913] 2 Ch. 239, at 244-245. 71. Coco v. A.N. Clark Engineering Lt d . [1969] R.P.C 41. 72. Prince A l b e r t v. Strange (1849) 1 Mac. & G. at 25. 73. For a r e l a t i v e l y recent discussion of the types of breach of confidence see Deta Nominees Pty. L t d . v. Viscount P l a s t i c Products  Pty. L td. [1979] V.R. 167. 74. Seager v. Copydex [1967] 2 A l l E.R. 415 assessment of damages see [1969] R.P.C 250. 75. Id., note 74, at 416. 76. (1968) 67 C.P.R. (2d) 386. 77. Appd.in Slavutych v. Baker (1974) 41 D.L.R. (3d) 71, a f f ' d . S.C.C. (1975) D.L.R. (3d) 224; applied i n Chevron Standard Ltd. v.  Home O i l Co. (1980) 22 A.R. 451 (Alta.Ct.Q.B.); considered i n Stephenson v. Babiy Motors Ltd. [1978] 5 W.W.R. 645 (B.C.S.C) 78. [1949] O.R. 303 (H.C); affirmed [1950] O.R. 62, at 68-69. 79. (1976) 58 D.L.R. (3d) 352 (Ont. H.C.J.). 80. (1978) 79 D.L.R. (3d) 108 (Ont. H.C.J.). 81. (1974) 14 C.P.R. (2d) 197 (Ont. OA. ) . 82. Supra, Note 77. 82a. [1983] 6 W.W.R. 758, at 765-67 (Al t a . OA.). In t h i s case the Court concluded that the evidence did not j u s t i f y the imposition of co n f i d e n t i a l o b l i g a t i o n s . 82 83. [1982] 3 W.W.R. 427 (Al t a . C.A.). 84. [1973] 1 W.W.R. 97 (Sask. Q.B.) and [1977] 4 W.W.R. 112 (S.C.C.). 85. Supra, note 74. 86. Restatement of Torts 757 (1939). 86a. [1949] 2 D.L.R. 481 (Ont. H.C), affirmed [1950] 1 D.L.R. 601 (C.A.). 86b. (1980) 101 D.L.R. (3d) 701 (Ont. H.C). 86c. Id., at 706. 86d. [1969] R.P.C. 41 86e. Id., at 47. 86f. [1978] 3 A l l E.R. 193 (Ch.D.) The elements w i l l be i d e n t i f i e d and discussed i n Chapter IV, Section D. under the heading of The Employer's Proprietary Interest and the Reasonableness Test. 86g. Supra., note 86f, at 209-210. 87. Supra, note 74. 87a. J . Palmer, R. Resendes, "Copyright and the Computer" (1982) Consumer and Corporate A f f a i r s , Canadian Government. This report published the survey by M i l l e r (1977), at 94. 88. Supra., note 24 i n Chapter I. 89. The Japanese company Hi t a c h i was recently caught s t e a l i n g I.B.M. trade secrets i n an undercover " s t i n g " operation that involved the C.I.A. i n the United States. Fortune, Dec. 12, 1983; IBM's Counteroffensive i n Japan, December 23, 1983, p. 97, Lee Smith. "How IBM Stung H i t a c h i " , Fortune, March 7, 1983, David B. Tinnin, p. 50. 90. Chapter VI discusses remedies and the importance of in t e r l o c u t o r y injunctions for the protection of software. 91. See Gerald Brock, "The U.S. Computer Industry - A Study i n Market Power" at page 89 where the author i d e n t i f i e s the three s t r u c t u r a l 83 features of the computer industry that most a f f e c t p r i c e and product actions. The features are product d i f f e r e n t i a t i o n , concentration ( i . e . , I.B.M.), and t e c h n i c a l progress. 92. See Management Science America Inc., v. Cyborg Systems Inc. 6 C.L.S.R. 921 at 922 (1978) N.D. 111. where c o n f i d e n t i a l software was d i s t r i b u t e d to approximately 600 customers. 93. O'Brien v. Komesaroff (1981) 41 A.L.R. 259, at 266 (H.C. of Aust.) 94. O. Mustad & Son v. S. Allcock & Co. [1963] 3 A l l E.R. 416, at 418 (H.L.). 84 IV THE FIDUCIARY AND IMPLIED OBLIGATIONS OF AN EMPLOYEE Chapters IV and V w i l l discuss the s p e c i f i c information obligations that apply to s k i l l e d employees i n the computer industry. The preceding Chapter I I I has concluded that patent and copyright laws do not provide d e c i s i v e protection for information i n the computer industry. This analysis w i l l therefore focus upon the protection available to employers under the employment r e l a t i o n s h i p . The employment r e l a t i o n s h i p can impose three d i s t i n c t categories of l e g a l o bligations upon an employee: the implied o b l i g a t i o n s that a r i s e from the employment r e l a t i o n s h i p ; the o b l i g a t i o n s imposed by the common law i n the event that the employee i s viewed as a f i d u c i a r y ; and the express contractual obligations r e s u l t i n g from the employment agreement. This l a s t category w i l l be s p e c i f i c a l l y discussed i n Chapter V i n the context of the doctrine of r e s t r a i n t of trade and the enforcement of r e s t r i c t i v e covenants. These three categories of obligations for employees must be discussed separately due to the contrasting l e v e l of r e s p o n s i b i l i t y which each places upon an employee. An employer who protects h i s trade secrets by using c a r e f u l l y drafted r e s t r i c t i v e covenants, w i l l be, i n theory, e n t i t l e d to greater protection than i f he had r e l i e d s o l e l y upon implied o b l i g a t i o n s . S i m i l a r l y , senior l e v e l employees who are deemed to be f i d u c i a r i e s are subject to more onerous o b l i g a t i o n s than the lower l e v e l employees who operate under implied o b l i g a t i o n s . However, a l l three categories, impose a c e r t a i n degree of r e s p o n s i b i l i t y , upon an employee to maintain the c o n f i d e n t i a l i t y of the employer's information. There i s another l e g a l reason for discussing the i n t e r p l a y between implied, f i d u c i a r y and express obligations of an employee. Implied and 85 f i d u c i a r y o b l i g a t i o n s act as a backstop to the express contractual o b l i g a t i o n s . If a p a r t i c u l a r r e s t r i c t i v e covenant i s judged to be unreasonable, then the r e s u l t i s that the covenant i s wholly unenforceable. The unfairness of t h i s r e s u l t for the covenantee/employer i n part lead the Law Reform Commission of B.C. to recommend the p a r t i a l enforcement of r e s t r i c t i v e covenants. 1 However, i n the absence of t h i s reform, the e x i s t i n g law produces an a l l - o r - n o t h i n g p r o t e c t i o n for employers v i s - a - v i s express r e s t r i c t i v e covenants. 2 The ameliorating feature of the e x i s t i n g law i s that express covenants do not displace an employee's implied or f i d u c i a r y o b l i g a t i o n s . 3 If an express covenant i s struck down, Canadian courts then move e a s i l y to a review of an employee's remaining f i d u c i a r y or implied o b l i g a t i o n s . 4 As discussed i n the previous chapters, the d i f f i c u l t i e s which employers encounter i n attempting to protect t h e i r c o n f i d e n t i a l information and trade secrets are p a r t i c u l a r l y acute i n the computer industry. On the one side employers are forced into an increasing r e l i a n c e on secrecy and c o n f i d e n t i a l i t y to comply with the industry wide pr a c t i c e of the r e s t r i c t i v e l i c e n s i n g of software. On the other side, the changes i n technology have made the employers more and more vulnerable to the misappropriation of software. More p a r t i c u l a r l y , when s k i l l e d employees change jobs i n the same sector of the computer industry, the fear i s that they w i l l i n e v i t a b l y reveal previously acquired c o n f i d e n t i a l information to the new employer. The d i f f i c u l t y i s that f i d u c i a r y and implied o b l i g a t i o n s cannot override the employee's r i g h t to use h i s s k i l l s and knowledge i n competition with a former employer. The employee's i n t e r e s t s i n job m o b i l ity must be balanced against the protection of the employer's confidences and trade secrets. 86 Two conclusions w i l l be apparent at the end of t h i s chapter. F i r s t , the l e g a l l i m i t s of employee's f i d u c i a r y and implied obligations are s t i l l evolving. The precedents are not uniform nor predictable i n t h e i r a p p l i c a t i o n . Second, an employer achieves the strongest l e g a l protection f o r c o n f i d e n t i a l information with the use of express covenants; f i d u c i a r y and implied obligations are a secondary and l e s s e f f e c t i v e form of p r o t e c t i o n . A. Implied Obligations: Fiduciary o b l i g a t i o n s are imposed upon employees by the general common law. In contrast, implied obligations are most often considered as being the implied term of the employment contract. Thus, the law assumes that an employee has an impied o b l i g a t i o n of good f a i t h , honesty and l o y a l t y to his employer during the contract of service. An employer i s e n t i t l e d to damages for the breach of those duties. In State Vacuum Stores of Canada L t d . v. P h i l i p s et a l . , 5 the B r i t i s h Columbia Court of Appeal approved t h i s view of implied terms i n an employment agreement: The p r i n c i p l e that an u n f a i t h f u l employee may be answerable i n damages i s well established i n the decided cases although, as Lord Greene M.R. points out i n Hivac L t d . v. Park Royal S c i e n t i f i c Instruments  Ltd., [1964] 1 A l l E.R. 350, t h i s branch of the law may not yet have been f u l l y explored i n i t s remoter aspects. Bowen L.J. r e f e r s to the p r i n c i p l e i n t h i s language i n Lamb v. Evans, [1893] 1 Ch. 218 at p. 229: 'The common law, i t i s true, t r e a t s the matter from the point of view of an implied contract, and assumes that there i s a promise to do that which i s part of the bargain, or which can be f a i r l y implied as part of the good f a i t h which i s necessary to make the bargain e f f e c t u a l . What i s an implied contract or an implied promise i n law? I t i s that promise which the law implies and authorizes us to i n f e r i n order to give the transaction that e f f e c t which the p a r t i e s must have intended i t to have, and without which i t would be f u t i l e . ' 6 87 There have been numerous decisions i n both English and Canadian courts which have applied the same p r i n c i p l e s . 7 More s p e c i f i c a l l y , these implied o b l i g a t i o n s of the employee have been widely used to protect the c o n f i d e n t i a l i t y of an employer's information. So long as the employee knows (or ought to know) that he i s acquiring c o n f i d e n t i a l information, then the employee cannot use the information i n c o n f l i c t with the i n t e r e s t s of the employer. 8 This general o b l i g a t i o n of good f a i t h with respect to c o n f i d e n t i a l information c l e a r l y continues beyond the employment r e l a t i o n s h i p . 9 These general p r i n c i p l e s have not yet dealt with the key question f o r s k i l l e d employees i n the computer industry. What i s the d i v i d i n g l i n e between the employer's c o n f i d e n t i a l information and the s k i l l s , knowledge and general information that the employee can carry with him? What are the l i m i t s imposed upon employees by t h e i r implied obligations? F i r s t , during the term of employment an employee's o b l i g a t i o n s of good f a i t h and l o y a l t y do not permit a c t i v i t i e s that c o n f l i c t with the employer's i n t e r e s t s . 1 0 I t can even be argued that an employee cannot work for another employer i n his spare time, i f the part-time employment r a i s e s the strong l i k e l i h o o d that c o n f i d e n t i a l information w i l l be d i s c l o s e d . 1 1 Once the employment r e l a t i o n s h i p has ended, the employee i s free to use h i s acquired s k i l l s and knowledge i n competition with the former employer. Absent any express covenants or the imposition of f i d u c i a r y duties, the ex-employee's r e l a t i v e l y l i m i t e d r e s p o n s i b i l i t y i s to respect any c o n f i d e n t i a l or secret information provided by the ex-employer. In Herbert Morris L t d . v. S a x e l b y 1 2 Lord Atkinson said: 88 ... a man who goes into an o f f i c e i s e n t i t l e d to make use in any other o f f i c e , whether h i s own or that of another employer, of the knowledge which he has acquired i n the former of d e t a i l s of o f f i c e organisation ... the knowledge of the reasonable mode of general organization and management of the business of t h i s kind, and to make use of such knowledge, cannot be regarded as a breach of confidence ... although the person may have le a r n t i t i n the course of being taught h i s t r a d e ; 1 3 Lord Shaw further separated the employee's knowledge from the employer's trade secrets by saying that: ... a man's aptitudes, h i s s k i l l , h i s dex t e r i t y , h i s manual or mental a b i l i t y — a l l those things which i n sound ph i l o s o p h i c a l language are not objective, but subjective — they may and they ought not to be relinquished by a servant; they are not h i s master's property; they are h i s . own property; they are h i m s e l f . 1 4 These statements confirm that an employer faces a d i f f i c u l t evidentiary burden when the employer t r i e s to use implied o b l i g a t i o n s to protect c o n f i d e n t i a l information. The s o l i c i t a t i o n of customers i l l u s t r a t e s t h i s point. If the employer can demonstrate that an employee had dealt e x c l u s i v e l y with two major c l i e n t s as the employer's sole representative, then i t can be said that the employee has acquired information about these c l i e n t s which i s "s p e c i a l or p e c u l i a r " 1 5 to the employer. Thus, the employee can be l i a b l e f o r damages r e s u l t i n g from the s o l i c i t i n g of these two c l i e n t s immediately a f t e r termination of employment. 1 6 However, where the ex-employee i s simply using information that i s av a i l a b l e to a l l other competitors i n the market, then the ex-employee can compete f r e e l y against the former employer. 1? Since implied o b l i g a t i o n s are normally argued with respect to the lower-level, non-management and non-fiduciary employees, i t i s normally d i f f i c u l t to prove that such a junior employee has received s p e c i a l c o n f i d e n t i a l information. There i s another dimension to the employer's d i f f i c u l t i e s i n seeking to r e l y upon the protection of implied o b l i g a t i o n s . If the employer has 89 not thought i t necessary to use express covenants to protect h i s information, a court i s going to be r i g h t f u l l y suspicious about subsequent claims of c o n f i d e n t i a l i t y and proprietary r i g h t s . I f an employer possesses unique technology or unique software, then the employer must use express covenants to separate these proprietary trade secrets from the general information or know-how to be received by the employee. 1 8 In the case of P r i n t e r s & F i n i s h e r s L t d . v. Holloway et. al.19 the employer possessed a unique p r i n t i n g technology that was unknown to other competitors. The employer was e n t i t l e d to an i n j u n c t i o n to prevent an ex-employee from taking any documents or photographs that described the secret process. However, i n the absence of express covenants, the employer was unable to prevent the ex-employee from p u t t i n g h i s general knowledge of the unique process at the service of a competitor. As Cross J. stated: If Mr. E l l i o t t i s r i g h t i n thinking that there are features i n h i s process which can f a i r l y be regarded as trade secrets and which h i s employees w i l l i n e v i t a b l y carry away with them i n t h e i r heads, then the proper way for the p l a i n t i f f s to protect themselves would be by exacting covenants from t h e i r employees r e s t r i c t i n g t h e i r f i e l d of a c t i v i t y a f t e r they have l e f t t h e i r employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond a l l reasonable bounds. This comment ra i s e s a rather dubious d i s t i n c t i o n that i s sometimes drawn between the extent of implied and f i d u c i a r y o b l i g a t i o n s . ^ A f i n e reading of the cases can derive the p r i n c i p l e that, absent any express covenants, a non-fiduciary employee can use whatever information i s retained i n memory.21 The c o r o l l a r y i s that a f i d u c i a r y employee's o b l i g a t i o n s do extend to include matters merely remembered.22 This d i s t i n c t i o n i s of l i m i t e d value because i t misdirects a t t e n t i o n to the form of the information rather than to i t s content. The corr e c t approach i s to measure the s i g n i f i c a n c e of the information to the p a r t i e s and the 90 and the circumstances under which the information was received by the employee. The memory d i s t i n c t i o n ignores these underlying p o l i c y concerns. However, the dubious d i s t i n c t i o n regarding memory does emphasize the r e l a t i v e weakness of implied obligations to protect the employer's information. The preceding discussion points out that express covenants are the c r i t i c a l way to move beyond the rudimentary and uncertain protection of implied o b l i g a t i o n s . There i s another weakness with implied o b l i g a t i o n s . The t h e o r e t i c a l basis for implied obligations can be troublesome for employers, and e s p e c i a l l y f o r computer industry employers who deal with a unionized work force. The i n i t i a l paragraphs i n t h i s section noted that implied o b l i g a t i o n s are generally assume to ari s e d i r e c t l y from the contractual r e l a t i o n s h i p . 2 3 However, i t i s i n c o r r e c t to say that an employee's implied obligations depend t o t a l l y upon contract. In c e r t a i n cases the contractual theory has been supplanted by the equitable concepts of breach of confidence. Thus, i n Int e r n a t i o n a l Tools v. K o l l a r , the Ontario Court of Appeal extended the ob l i g a t i o n s of confidence to a t h i r d party outsider who stood to p r o f i t from any unrestrained breach of employment d u t i e s . 2 4 Another approach has been a r e j e c t i o n of the contractual basis for implied o b l i g a t i o n s . In Regina v. F u l l e r , 2 5 the Ontario Court of Appeal preferred a wider statement of the source of implied o b l i g a t i o n s . Mr. Jus t i c e MacKay f i r s t noted the case a u t h o r i t i e s that i d e n t i f i e d the implied terms as being a n c i l l a r y to the contract and observed: In Pearce v. Foster (1886), 17 Q.B.D. 536 at p. 539, Lord Esher, M.R., s a i d : "The ru l e of law i s , that where a person has entered into the p o s i t i o n of servant, i f he does anything incompatible with the due or f a i t h f u l discharge of h i s duty to h i s master, the 91 l a t t e r has a r i g h t to dismiss him. The r e l a t i o n of master and servant implies n e c e s s a r i l y that the servant s h a l l be i n a p o s i t i o n to perform his duty duly and f a i t h f u l l y , and i f by h i s own act he prevents himself from doing so, the master may dismiss him." Having regard to these a u t h o r i t i e s , while I think the duty could be said to be an implied term of both the contract of h i r i n g and the c o l l e c t i v e agreement, for the purpose of determining the j u r i s d i c t i o n of the board, I prefer to state i t as a duty established by the common law that i s inherent i n and attaches to the r e l a t i o n s h i p of master and servant. The r e l a t i o n s h i p of employer and employee being established, the duty attaches to the r e l a t i o n s h i p as a matter of law, whether there i s or i s not a c o l l e c t i v e agreement. 2 6 Another more recent decision of the Ontario Court of Appeal supports the notion that the implied o b l i g a t i o n s are established by the common law. In Bee Chemical Co. v. P l a s t i c Paint and F i n i s h L t d . , 2 7 c e r t a i n express r e s t r i c t i v e covenants were l i m i t e d to a post-employment period of three years. The defendants had engaged i n a flagrant use of t h e i r former employer's trade secrets throughout the three year period. Rather than t r y i n g to apply or extend the express l i m i t a t i o n period, the Court simply issued a permanent i n j u n c t i o n based upon the employee's implied o b l i g a t i o n s : We do not think we have any power to enforce the r e s t r i c t i o n s i n the agreements for any period longer than i s set out i n the agreements, and that Parker, J . , ought not to have done so. On the other hand, an in j u n c t i o n against the defendants r e s t r a i n i n g them from v i o l a t i o n of t h e i r common law obligations need not be subject to a three year or any other l i m i t a t i o n . In our view that i n j u n c t i o n should be permanent. 2 8 There are several important reasons f o r considering the source of the implied o b l i g a t i o n s . F i r s t l y , there may be d i f f e r e n t l i m i t a t i o n s on remedies depending whether an employee's l i a b i l i t y f o r misusing c o n f i d e n t i a l information arises from contract or from general equitable o b l i g a t i o n s . 2 9 92 Secondly, the contractual approach to implied terms may mean that t h i s protection i s not ava i l a b l e to an employer whose s k i l l e d computer employees are unionized. This possible c o n f l i c t a r i s e s from the Supreme Court of Canada's decisions i n McGavin Toastmaster v. Ainscough 3 0 and the e a r l i e r case of Syndicat Catholique des Employes de Magasins de Quebec,  Inc. v. Companie Paquet L t e e . 3 1 I t can be argued that these Supreme Court decisions have held that there can be no r i g h t or duties a r i s i n g out of the employer/employee r e l a t i o n s h i p except such as are spe l l e d out i n the c o l l e c t i v e agreement. 3 2 of course, such a r a t i o would only apply to those employment r e l a t i o n s h i p s already c e r t i f i e d under the c o l l e c t i v e bargaining process. This argument i s based upon c e r t a i n statements of the Supreme Court to the e f f e c t that the common law i s i r r e l e v a n t once a c o l l e c t i v e bargaining agreement comes into force between the employer and the union. For example, i n Syndicat Catholique, Judson J. i n the majority decision stated that: There i s no room l e f t f o r priv a t e negotiation between employer and employee. Ce r t a i n l y to the extent of the matters covered by the c o l l e c t i v e agreement, freedom of contract between master and i n d i v i d u a l servant i s abrogated. The c o l l e c t i v e agreement t e l l s the employer on what terms he must i n the future conduct his master and servant r e l a t i o n s . 3 3 Then l a t e r Laskin C.J.C., i n the McGavin Toastmaster decision stated: The r e a l i t y i s , and has been f o r many years now throughout Canada, that i n d i v i d u a l r e l a t i o n s h i p s as between employer and employee have meaning only at the h i r i n g stage and even then there are q u a l i f i c a t i o n s which a r i s e by reason of union s e c u r i t y clauses i n c o l l e c t i v e agreements. The common law as i t applies to i n d i v i d u a l employment contracts i s no longer relevant to employer-employee r e l a t i o n s governed by a c o l l e c t i v e agreement which, as the one involved here, deals with discharge, termination of employment, severance pay and a host of other matters that have been negotiated between union and company as the p r i n c i p a l p a r t i e s t h e r e t o . 3 4 93 Admittedly, these statements were p r i m a r i l y dealing with items s p e c i f i c a l l y covered i n the c o l l e c t i v e agreement, and therefore might not p r o h i b i t an implied o b l i g a t i o n as part of the contract of employment. However, the cases do reveal a p o t e n t i a l l e g a l problem for any employer who deals with unionized information workers. C e r t a i n l y , the cases point out that any employer w i l l have great d i f f i c u l t y i n enforcing an express agreement of non-disclosure signed by an i n d i v i d u a l employee outside of a c o l l e c t i v e agreement. As a side note, i t i s suggested that the problems of information protection i n the unionized s e t t i n g are wider than i s immediately obvious. The r e a l i t y i s that many of the la r g e s t computer i n s t a l l a t i o n s i n B r i t i s h Columbia are s t a f f e d i n the majority by unionized employees. Such i n s t a l l a t i o n s would include the Insurance Corporation of B.C (I.C.B.C.), B.C. Hydro, B.C.Systems Corporation, and B.C. Telephone. For example, i n October 1983 there were approximately 40 employees engaged i n operating the main computer i n s t a l l a t i o n at B.C.Hydro. Th i r t y of these employees were members of the O f f i c e and Technical Employees Union (O.T.E.U.).35 In summary, an employer i n the computer industry can r e l y upon the implied o b l i g a t i o n s of an employee f o r a degree of l e g a l protection, but such protection i s rudimentary. B. F i d u c i a r y Obligations: The f i d u c i a r y concept covers too many f a c t u a l s i t u a t i o n s to be given a comprehensive d e f i n i t i o n . Instead of looking for a r i g i d c l a s s i f i c a t i o n system, the courts examine the general c h a r a c t e r i s t i c s of f i d u c i a r y r e l a t i o n s h i p s : the power to act with respect to the property of 94 another; the reposing of t r u s t , and r e l i a n c e ; the independent power of one i n d i v i d u a l to bind another to le g a l transactions; the r e l a t i v e power inherent i n the nature of the re l a t i o n s h i p s themselves and the a b i l i t y of the p a r t i e s to look out f o r t h e i r own i n t e r e s t s . 3 6 Thus, the r e l a t i o n s h i p s that can be c l a s s i f i e d as f i d u c i a r y are not li m i t e d i n number. H i s t o r i c a l l y , the common law has recognized a f i d u c i a r y r e l a t i o n s h i p between truste e - b e n e f i c i a r y , director-company, promoter-company, s o l i c i t o r - c l i e n t , principal-agent, and partner-c o - p a r t n e r . 3 7 However, t h i s l i s t does not exhaust the categories of possi b l e f i d u c i a r i e s . If the circumstances reveal that a r e l a t i o n s h i p contains the necessary elements of t r u s t , r e l i a n c e and r e l a t i v e power, the court can impose a f i d u c i a r y o b l i g a t i o n . Such r e s p o n s i b i l i t i e s have been c l e a r l y imposed by the Supreme Court of Canada upon a l i m i t e d number of managerial employees. In Canadian Aero Service L t d . v. O'Malley, 3 8 Mr. Ju s t i c e Laskin (as he then was) recognized that employers impose great t r u s t , confidence and rel i a n c e upon c e r t a i n employees. When such circumstances occur, the employee then has the higher o b l i g a t i o n s of a f i d u c i a r y . No longer are the employee's obligations l i m i t e d to the implied o b l i g a t i o n of non-disclosure of c o n f i d e n t i a l information, or to the r e s t r i c t i o n against using c o n f i d e n t i a l information to compete against the employer. As a f i d u c i a r y , the employee must regulate h i s conduct so as not to be i n a p o s i t i o n of c o n f l i c t with the i n t e r e s t s of the employer. S p e c i f i c a l l y , J u s t i c e Laskin looked at the defendants' r o l e i n the organization: [T]hey acted i n those p o s i t i o n s (as president and v i c e -president) and t h e i r remuneration and r e s p o n s i b i l i t i e s v e r i f i e d t h e i r status as senior o f f i c e r s of Canaero. They were "top management" and not mere employees whose duty to t h e i r employer, unless enlarged by contract, consisted only of respect f o r trade secrets and for c o n f i d e n t i a l i t y of customer l i s t s . Theirs was a lar g e r , more exacting duty which, unless modified by statute or by contract (and there i s nothing of t h i s s o r t here) , was s i m i l a r to that owed to a corporate employer by i t s d i r e c t o r s . 3 9 95 Laskin then described the defendants' p o s i t i o n s as more akin to the f i d u c i a r y r o l e of agents rather than that of mere employees: Although they were subject to supervision of the o f f i c e r s of the c o n t r o l l i n g company, t h e i r p o s i t i o n s as senior o f f i c e r s of a subsidiary, which was a working organization, charged them with i n i t i a t i v e s and with r e s p o n s i b i l i t i e s f a r removed from the obedient r o l e of servants. It follows that O'Malley and Zarzycki stood i n a f i d u c i a r y r e l a t i o n s h i p to Canaero, which i n i t s generality betokens l o y a l t y , good f a i t h and avoidance of a c o n f l i c t of duty and s e l f - i n t e r e s t . Descending from the g e n e r a l i t y , the f i d u c i a r y r e l a t i o n s h i p goes at l e a s t t h i s f a r : a d i r e c t o r or a senior o f f i c e r l i k e O'Malley or Zarzycki i s precluded from obtaining for himself, e i t h e r s e c r e t l y or without the approval of the company (which would have to be properly manifested upon f u l l d i sclosure of the facts) , any property or business advantage ei t h e r belonging to the company or fo r which i t has been negotiating; and e s p e c i a l l y i s t h i s so where the d i r e c t o r or o f f i c e r i s a p a r t i c i p a n t i n the negotiations on behalf of the company. 4 0 The f i r s t paragraph c i t e d above sets out several important d i s t i n c t i o n s . F i r s t , i t r e i n f o r c e s the separation between the implied, f i d u c i a r y and express obligations of employees. In substance, the quotation describes the d i f f e r e n c e between implied and f i d u c i a r y duties. However, J u s t i c e Laskin was c a r e f u l to note that these categories could be "enlarged by c o n t r a c t " 4 1 , a c l e a r reference to the use of express r e s t r i c t i v e covenants. Second, the passage points out that a glossy impressive t i t l e f o r an employee does not convert him into an instant f i d u c i a r y . 4 2 The actual r e s p o n s i b i l i t i e s and i n i t i a t i v e s assigned to an employee are better i n d i c a t o r s of f i d u c i a r y status than the organizational rank or t i t l e . The r e s u l t i s that any senior employee, i n s p e c i a l circumstances of t r u s t and confidence, can now be found to be a f i d u c i a r y . The c l a s s i f i c a t i o n as a f i d u c i a r y must not be applied r i g i d l y , but once achieved, such obligations can extend beyond the end of the employment contract: 96 In holding that on the f a c t s found by the t r i a l Judge, there was a breach of f i d u c i a r y duty by the president and vice-president which survived t h e i r resignations I am not to be taken as l a y i n g down any rule of l i a b i l i t y to be read as i f i t were a statute. The general standards of l o y a l t y , good f a i t h and avoidance of a c o n f l i c t of duty and s e l f - i n t e r e s t to which the conduct of a d i r e c t o r or senior o f f i c e r must conform, must be tested i n each case by many factors which i t would be reckless to attempt to enumerate exhaustively. Among them are the factors of p o s i t i o n or o f f i c e held, the nature of the corporate opportunity, i t s ripeness, i t s s p e c i f i c n e s s and the d i r e c t o r ' s or managerial o f f i c e r ' s r e l a t i o n to i t , the mount of knowledge possessed, the circumstances i n which i t was obtained and whether i t was s p e c i a l or, indeed, even priv a t e , the f a c t o r of time i n the continuation of f i d u c i a r y duty where the alleged breach occurs a f t e r termination of the r e l a t i o n s h i p with the company, and the circumstances under which the r e l a t i o n s h i p was terminated, that i s whether by retirement or resignation or discharge.43 After the Canaero decision i n 1973, a number of Canadian cases have c l a s s i f i e d senior employees as f i d u c i a r i e s . 4 4 However, the courts have been cautious to avoid any unreasonable extension of the concept. As i n Alberts v. Mountjoy,45 the employee/fiduciary i s usually a trusted general manager or senior executive of long service with the corporate employer. A lower l e v e l employee i s not considered to be a f i d u c i a r y , unless the junior employee p a r t i c i p a t e s i n the breach of the f i d u c i a r y duties. Estey C.J.H.C. (as he then was) noted the diffe r e n c e between implied and f i d u c i a r y obligations as follows: In t h i s case the defendant Mount joy stood i n a f i d u c i a r y r e l a t i o n s h i p to the p l a i n t i f f and there was accordingly imposed upon him a "larger, more exacting duty" than a duty simply to respect h i s former employer's trade secrets and the c o n f i d e n t i a l i t y of i t s customer l i s t s . As well, where a defendant of lower rank such as the defendant Butt might have claimed immunity from the duties attaching to a f i d u c i a r y , he l o s t that advantage i n j o ining with Mountjoy i n the new business venture which s u c c e s s f u l l y diverted the business opportunity of hi s former employer and f i x e d him with the same f i d u c i a r y duty as Mountjoy. 4 6 97 The courts seem to be aware that widely extending f i d u c i a r y duties to lower ranking employees would cause other p o l i c y problems. In Nelson Burns & Co. v. Gratham Industries L t d . , 4 7 Mr. J u s t i c e Hughes rejected the f i d u c i a r y status for the defendant employees, and then urged care i n applying the Canaero deci s i o n : This case has been widely followed and has gone f a r to stimulate a tendency which can be discerned i n recent decisions to narrow the ground on which an employee can sa f e l y leave h i s job and at the other end of the scale upon which an employer can s a f e l y discharge h i s servant. The l a t t e r . has been i n d i f f i c u l t i e s f o r a longer time than the former because of the r a p i d l y growing popularity of actions for unjust di s m i s s a l . The p r i n c i p l e s of the marketplace, the laws of supply and demand, freedom of competition and freedom of action generally are always i n r e t r e a t before measures taken and doctrines developed i n the name of s o c i a l j u s t i c e , and i t may be said with some confidence that i f the tendencies I have referred to p e r s i s t both master and servant w i l l be locked into an enduring r e l a t i o n s h i p from which they can escape only at heavy c o s t . 4 8 Other commentators have c r i t i c i z e d the Canaero decision as leading to an emerging "unfairness p r i n c i p l e " to be applied to the obligations of f i d u c i a r y employees. The complaint i s made that f i d u c i a r y o b l i g a t i o n s are so vaguely defined and subjective that employees are l e f t without any guidance except that they must r e f r a i n from unfair conduct. 4 9 However, the o b j e c t i v i t y of these c r i t i c s i s q u e s t i o n a b l e . 5 0 In s p i t e of these j u d i c i a l and c r i t i c a l cautions, f i d u c i a r y o b l i g a t i o n s are c l e a r l y relevant to s k i l l e d employees i n the computer industry. A c h i e f programmer i n charge of a major software development pro j e c t meets many of the general c h a r a c t e r i s t i c s of a f i d u c i a r y . Such a p r o j e c t o r d i n a r i l y i s conducted i n confidence, i s normally an expensive corporate undertaking and i s usually of great s i g n i f i c a n c e to the employer's competitive p o s i t i o n i n the marketplace. Even though the chief 98 programmer might not be a senior employee of management rank, h i s important role i n the research and development e f f o r t more than o f f s e t s the lack of t r a d i t i o n a l status. At the present time, the majority of employees i n the industry probably do not s a t i s f y the general c h a r a c t e r i s t i c s of a f i d u c i a r y . However, as the c o n f i d e n t i a l i t y , expense, and business s i g n i f i c a n c e of software development s t e a d i l y increases, the f i d u c i a r y concept w i l l r a i s e the l e v e l of l e g a l o b l i g a t i o n s placed upon the key employees. In summary, f i d u c i a r y o b l i g a t i o n s impose . higher standards of c o n f i d e n t i a l i t y and good f a i t h upon employees than those required by the category of implied o b l i g a t i o n s . However, computer industry employers face two serious d i f f i c u l t i e s irT r e l y i n g upon the protection o f f e r e d by f i d u c i a r y theory. F i r s t , how does an employer know when a p a r t i c u l a r h i g h l y - s k i l l e d employee w i l l be c l a s s i f i e d as a f i d u c i a r y ? The preceding discussions has shown that the case law i s s t i l l evolving, and that f i d u c i a r y status depends upon a complex v a r i e t y of subjective f a c t o r s . Second, even i f an employee i s deemed to be a f i d u c i a r y , the employer must s t i l l prove the existence and l i m i t s of the c o n f i d e n t i a l information passed on to the employee. In other words, f i d u c i a r y o b l i g a t i o n s are not a r e t r o a c t i v e s o l u t i o n to an employer who has i n i t i a l l y f a i l e d to separate general employment information from the alleged c o n f i d e n t i a l information. The r e a l s o l u t i o n i s that the employer should have protected the c o n f i d e n t i a l information through,carefully drafted r e s t r i c t i v e covenants i n the employment contract. 99 C. Fiduciary Obligations and the B r i t i s h Columbia Software Industry The preceding discussion points out that many of the h i g h l y - s k i l l e d employees who are intimately connected with a major software development project are l i k e l y to be considered f i d u c i a r i e s . This proposition r a i s e s a number of unresolved p o l i c y issues when i t i s considered i n the context of the B.C. software industry. In e f f e c t , t h i s analysis w i l l conclude that a widening gap e x i s t s between the i n d u s t r i a l s t r a t e g i e s that are required for the success of t h i s f l e d g l i n g industry and the associated l e g a l theory. In summary, i f the B.C. software industry i s to grow and prosper, i t must share information, engage i n cooperative marketing, and avoid wasteful d u p l i c a t i o n of e f f o r t . Such a c t i v i t i e s r a i s e many unresolved c o n f l i c t s of i n t e r e s t for the key employees and managers who have a f i d u c i a r y status. F i r s t , an overview of the B.C. industry and the wider software market i s required. A recent report by Touche Ross & Co. provides the necessary data.51 In North America, a l l segments of the software market are expanding at a dramatic rate. Growth i s predicted to be i n excess of 30% per annum throughout the decade of the 1980's.^ 2 The Canadian market i s expected to grow from an estimated $608 m i l l i o n i n 1981, (the most recent year for which data was available) t o $2.3 b i l l i o n i n 1986, an average annual growth of 31 percent. The American market annual growth rate during t h i s period has been forecast at 34 percent - from $3.7 b i l l i o n (U.S.) i n 1981 to $16.2 b i l l i o n (U.S.) i n 1986. The American f i g u r e s exclude custom software which, i n 1981, was reported to be $1.5 b i l l i o n (U.S.). Thus, the t o t a l North American market, which i n 1981 was le s s that $6 b i l l i o n , (U.S.), i s estimated to be over $20 b i l l i o n (U.S.) by 1986.53 However, B.C. software suppliers r e l y mostly upon B.C. markets f o r t h e i r revenue (approximately 80% of gross revenues), and have only a minimal penetration of markets i n Eastern Canada and i n the United S t a t e s . 5 4 100 At the end of the research report, Touch Ross & Co. summarized the t y p i c a l B.C. software supplier. More than half of the companies reported revenues of less than $100,000 i n 1982, and employed less than 5 people.55 Such a corporation t y p i c a l l y : i s managed by a proprietor or small group of partners whose backgrounds and i n t e r e s t s are p r i m a r i l y t e c h n i c a l ; lacks the marketing knowledge and expertise required to compete strongly i n the package-oriented markets of the 80's; does not have s u f f i c i e n t finances or borrowing power to invest heavily e i t h e r i n extensive product development or i n marketing; has inadequate understanding of how to prepare and present a business plan which w i l l influence prospective sources of funds for product and marketing development; often invests time i n developing products which are s i m i l a r to others already developed which have competitive advantages; emphasizes doing functions, often to the exclusion of managing functions.56 This description of the t y p i c a l software supplier i n B.C. leads to a number of assumptions about l e g a l p r o t e c t i o n . F i r s t , the general lack of managerial expertise combined with the pronounced t e c h n i c a l o r i e n t a t i o n means that l e g a l protection i s generally ignored.57 such corporations r a r e l y make use of non-disclosure or non-competition agreements. Even i f such r e s t r i c t i v e covenants are i n i t i a l l y executed by the p a r t i e s , the covenants do not s p e c i f i c a l l y define c o n f i d e n t i a l information, and are not part of an ongoing program to maintain the secrecy of the information. This lack of regard for express covenants means that f i d u c i a r y obligations then become a more important l e g a l protection f o r the B.C. software supplier. A second assumption i s that many of the i n d i v i d u a l s involved i n these companies are l i k e l y to be c l a s s i f i e d as f i d u c i a r i e s . F i r s t , the general organization s t y l e i s e g a l i t a r i a n rather than h i e r a r c h i c a l . Information 101 i s shared f r e e l y among the i n d i v i d u a l s involved, rather than access to c o n f i d e n t i a l information being l i m i t e d to a need-to-know basis. Important s t r a t e g i c decisions are made by consensus, rather than by one single i n d i v i d u a l . This emphasis on a partnership s t y l e of operation means that the key people are l i k e l y to have multiple r o l e s as s k i l l e d employees/ o f f i c e r s and managers/directors. The degree of confidence, t r u s t , and r e l i a n c e placed upon such i n d i v i d u a l s may make them into f i d u c i a r i e s . Is the status of f i d u c i a r y an appropriate one for such individuals? What are the c o n f l i c t s i n i n t e r e s t produced by t h i s c l a s s i f i c a t i o n ? I n i t i a l l y , the f i d u c i a r y status i s consistent with industry emphasis on r e s t r i c t i v e l i c e n s i n g agreements f or the d i s t r i b u t i o n of software. These agreements transf e r software to users under s t r i c t obligations of confidence.58 software suppliers are therefore engaged i n the business of confidence are complimentary to these software trans f e r arrangements. However, f i d u c i a r y o b l i g a t i o n s are d i f f i c u l t to rec o n c i l e with broader i n d u s t r i a l s trategies that must be undertaken to assure the s u r v i v a l of the B.C. Industry. The Touche Ross & Co. report i s o l a t e d a l i s t of possible s t r a t e g i e s . As well, i t should be remembered that the report was commissioned j o i n t l y by the federal and p r o v i n c i a l governments, and w i l l undoubtedly be considered i n s e t t i n g i n d u s t r i a l p o l i c y . The remedial l i s t included, i n part: . Development of an Industry Marketing A s s o c i a t i o n . Networking Agreements Between Suppliers These informal agreements would deal with the problems of scarce resources and access to markets by encouraging cooperation i n product development and i n the pr o v i s i o n of support services. Organization of Industry-wide T r a i n i n g A c t i v i t i e s C o l l e c t i o n and Dissemination of Information on Products and  Market Developments R a t i o n a l i z a t i o n of the Industry Through Mergers59 102 It i s not suggested that an i n d i v i d u a l ' s f i d u c i a r y o b l i g a t i o n s cannot be reconciled with t h i s well intentioned i n d u s t r i a l action plan. However, the action plan emphasizes sharing of information f o r t r a i n i n g , marketing and product development, and the transfer of information through mergers. This basic premise that software companies should share and tr a n s f e r information i s not always consistent with basic f i d u c i a r y o b l i g a t i o n s . For example, consider the s k i l l e d experienced programmer who wishes to i n s t r u c t i n an industry-wide t r a i n i n g program. His corporate employer depends upon c o n f i d e n t i a l i t y to protect i t s software products. How can the a l t r u i s t i c i n s t r u c t o r discuss the d e t a i l s of these c o n f i d e n t i a l software programs with other programmers, and s t i l l not breach his f i d u c i a r y obligations? S i m i l a r i l y , software companies duplicate each other's development e f f o r t s due to a lack of sharing of information. Networking agreements and marketing associations are a l o g i c a l s o l u t i o n to avoid t h i s waste of scarce resources. But how can the manager of a software supplier openly discuss the intimate d e t a i l s of h i s company's development and marketing programs without compromising h i s f i d u c i a r y obligations? I t must be remembered these discussions w i l l be with competitors i n the same industry. Again, i t i s not suggested that these c o n f l i c t s are i r r e c o n c i l a b l e . Once the problem i s i d e n t i f i e d , the i n d i v i d u a l employee could obtain the employer's consent to the necessary disclosure i n a l i m i t e d forum. C o n f i d e n t i a l i t y agreements and security arrangements could be used to con t r o l the release of the information to a s p e c i f i c group of outsiders. Many such v a r i a t i o n s of t h i s nature could be used to resolve the c o n f l i c t . 103 However, i t i s suggested that such a sophisticated approach to industry-wide undertaking i s improbable. The suppliers are not presently using non-disclosure agreements to protect themselves i n t e r n a l l y . i t i s u n l i k e l y that the more remote, external threats of f i d u c i a r y c o n f l i c t s would change the present p r a c t i c e . Thus, the gap between the strategies for i n d u s t r i a l growth and the s t r a t e g i e s for l e g a l protection i s widening. Industry s u r v i v a l c a l l s f or elimination of duplicate e f f o r t and the sharing of v i t a l information on products, marketing and t r a i n i n g . At the same time r e s t r i c t i v e l i c e n s i n g arrangements and f i d u c i a r y obligations demand that the key employees involved meet s t r i c t o b l i g a t i o n s of c o n f i d e n t i a l i t y . The conclusion i s that many of these key employees w i l l i n c r e a s i n g l y be i n breach of t h e i r f i d u c i a r y o b l i g a t i o n s due to t h e i r ignorance of the law. 104 FOOTNOTES: CHAPTER IV 1. Law Reform Commission of B r i t i s h Columbia, Report on Covenants i n  Restraint of Trade (1984) at p. 5. 2. _Id. at p. 34-36 o u t l i n i n g the current p o s i t i o n i n law when a r e s t r i c t i v e covenant i s unenforceable. The theory of severance can arguably provide a court with a choice of covenants to enforce and thereby avoid leaving the covenantor t o t a l l y unfettered. See p. 63-69 for a discussion of overreaching and severance. 3. Chapter V at p. 115-17. 4. ^d.; see also Kent Drugs Ltd. v. Kronson et. a l . (1983) 78 C.P.R. (2d) 260 (Man. C.A.); Monarch Messenger Services L t d . v. Houlding (1984) 56 A.R. 147 (Alta. Ct. of Q.B.). 5. [1954] 3 D.L.R., at 621 (B.C.OA.). 6. Id., at 625. 7. Robb v. Green [1895] 2 Q.B. 315, at 320; Reliance Cordage Co. v.  Hett e r l y (1969) 5 D.L.R. (3d) 297, at 312-12 (Sask. Q.B.); Guyer O i l Co. et a l . v. Fulton et a l . [1976] 5 W.W.R. 356, at 367 (Sask. OA.) affirmed [1977] 2 S.C.R. 791; Investors Syndicate Ltd. v. V e r s a t i l e Investments L t d . (1982) 126 D.L.R. (3d) 451, at 467-8 (Ont. H.C.). 8. Saltman Engineering v. Campbell (1948) 65 R.P.C. 203, at 211-13. 9. Robin-Nodwell v. Foremost Developments (1966) 52 C.P.R. 244 (Al t a . S.O); Guyer O i l Co. v. Fulton [1976] 5 W.W.R. 356, at 367 (Sask. OA.) . 10. Supra., note 7; Genesta Mfg. Ltd. v. Babey et. a l . (1984) 48 O.R. (2d) 94 (Ont. H.C); Re Wosk's L t d . and Teamsters Union Local 351 (1984) 13 L.A.C. (3d) 64 (B.C.). 105 11. Hivac, L t d . v. Park Royal S c i e n t i f i c Instruments L t d . [1946] 1 A l l E.R. 350 (OA . ) . 12. [1916] 1 A.C. 688 (H.L.). 13. Id. a t 704. 14. Id. at 705. 15. Monarch Messengers Services L t d . v. Houlding (1984) 56 A.R. 147 (Al t a . Ct. of Q.B.) at p. 152. 16. Id., at p. 153. 17. Kent Drugs Ltd. v. Kronson (1983) 78 C.P.R. (2d) 260 (Man. OA.). 18. Chapter V at p. 137-141 discusses the d i s t i n c t i o n between trade secrets and know-how. 19. [1964] 3 A l l E.R. 731. 20. ^d. at p. 736. 21. DCF Systems L t d . v. Gellman (1979) 41 C.P.R. (2d) 145 at p. 157. Osier, J. of the Ontario High Court states that employees " i n the absence of r e s t r i c t i v e covenants, ... have a r i g h t i n such circumstances to make use of information they have retained i n t h e i r memories regarding former c l i e n t s or customers". 22. Nelson Burns & Co. Ltd. v. Gratham Industries Ltd. (1984) 150 D.L.R. (3d) (Ont. H.C.) at p. 711 c i t i n g A lberts v. Mount joy (1977) 79 D.L.R. (3d) 108 as authority f o r imposing c o n f i d e n t i a l i t y upon a f i d u c i a r y for matters retained i n memory. 23. Supra., notes 5 and 6. 24. (1968) 67 D.L.R. (2d) 386 (Ont. OA.) varying 56 D.L.R. (2d), at 289. 25. [1968] 2 O.R. 564 (OA . ) . 26. Id., at 567. 106 27. (1979) 47 C.P.R. (2d), at 133 (Ont. C.A.) Leave to appeal to S.C.C. dismissed on November 6, 1979. 28. Id., at 135. 29. This c l a s s i f i c a t i o n issue w i l l be discussed i n Chapter VI on C r i t i c a l Remedies for Breach of An Employee's Obligations. 30. (1975) 54 D.L.R. (3d) 1 (S.C.C). 31. (1959) 18 D.L.R. (2d) 346. 32. For example, see R o b i t a i l l e v. Vancouver Hockey Club L t d . (1979) 19 B.CL.R. 158, at p. 167 ( B . C S . C ) . 33. Supra., note 31, at 353-54. 34. Supra., note 30, at 6. 35. As per interview with Mr.Ken Wright, Security O f f i c e r , B.C. Hydro on a tour of the computer i n s t a l l a t i o n at 970 Burrard Street, Vancouver, B. C.. 36. Fridman, G.H.L., McLeod J.G. R e s t i t u t i o n , The Carswell Company Ltd. Toronto, 1982 at p. 569. 37. Id. , at 568-69. 38. (1974) 40 D.L.R. (3d), at 371. 39. Id., at 381. 40. Id., at 381-82. 41. Supra., Note 3 9. 42. Kent Drugs L t d . v. Kronson (1983) 78 C.P.R. (2d) 260 at 265 (Man. C. A.). 42a. For an updated summary of the a u t h o r i t i e s on t h i s point see B. Love  Ltd. v. Bulk S t e e l and Salvage Ltd. (No. 2) (1982) 141 D.L.R. (3d) 621 (Ont. H.C) at p. 625-6 s t a t i n g that a f i d u c i a r y cannot use c o n f i d e n t i a l information f o r h i s own benefit a f t e r the termination of employment. 107 43. Supra., note 38 at 391. 44. W.J. C h r i s t i e & Co. v. Green et a l . (1981) 121 D.L.R. (3d), at 472 (Man. C.A.); Schauenburg Industries L td. v. Borowski (1980) 101 D.L.R. (3d), at 701 (Ont.H.C); 309925 Ontario L t d . v. T y r r e l l (1982) 127 D.L.R. (3d), at 99 (Ont. H .C). 45. (1978) 79 D.L.R. (3d), at 108 (Ont. H.C). 46. Id. at page 119. 47. (1984) 150 D.L.R. (3d), a t 692 (Ont. H .C). 48. Id., at 711. 49. Atkinson, P.Y., Spencer, R.A. Fi d u c i a r y Duties Owed by Departing  Employees - The Emerging "Unfairness" P r i n c i p l e (1983) 8 C.B.L.J. 501. 50. The o b j e c t i v i t y of the authors i s questionable since at p. 510-12 they r e l y upon the discussion i n Nelson Burns & Co. L t d . v. Gratham  Industries L t d . et. a l . (1984) 150 D.L.R. (3d) 692 as the prime example of an 'incorrectly applied unfairness p r i n c i p l e . The authors conclude that the court denied costs to two defendants i n s p i t e of t h e i r success i n the l i t i g a t i o n . The authors a t t r i b u t e the court's motive to a moral d i s t a s t e f o r the defendant's l e g a l conduct. The authors f a i l to state that the p l a i n t i f f was successful i n an accompanying patent infringement action against the defendant's personal corporation. The p l a i n t i f f was also successful against a t h i r d co-defendant on a breach of r e s t r i c t i v e covenant. Thus, the T r i a l Judge exercised his d i s c r e t i o n and refused costs to a l l p a r t i e s except on the patent infringement issue. The authors also f a i l to state that P.Y. Atkinson was the counsel for the two defendants described i n the a r t i c l e as being "successful". 108 51. Touche Ross & Partners, Study of the B r i t i s h Columbia Software  Industry, March 1984 Research Report prepared for B.C. Ministry of Industry and Small Business Development, and the Federal Department of Regional Economic Expansion. See also Stuart, R.B. Micro Software  Marketing: A Focus on D i s t r i b u t i o n S t r a t e g i e s , Touche Ross & Partners, unpublished paper. 52. Id. at p. 52. 53. Id. at p. 53. 54. Id. 55. Id. 56. Ij3. at p. 51 . 57. The writer i s Chairman of the Computer Law Committee of the Commercial Law Subsection i n Vancouver, and a member of the Canadian Information Processing Society. Discussions with both lawyers and computer industry representatives from these groups confirms t h i s conclusion. 58. Supra., Chapter III at p. 40-41. 59. Supra., note 51 at p. 52.3. 109 V COVENANTS IN RESTRAINT OF TRADE The preceding chapter explored the implied and f i d u c i a r y obligations which are applicable to s k i l l e d employees i n the computer industry. Even though these obligations do provide varying degrees of protection for an employer's c o n f i d e n t i a l information, the l a s t chapter concluded that express covenants provide the most e f f e c t i v e p r o t e c t i o n . This chapter w i l l discuss the l i m i t s to the protection provided by express covenants. Since express covenants of c o n f i d e n t i a l i t y or non-disclosure are imposed by contract, the discussion w i l l not consider the alternate t h e o r e t i c a l sources of c o n f i d e n t i a l obligations such as equity, property, t r u s t or f i d u c i a r y r e l a t i o n s h i p s . 1 This issue of the source of c o n f i d e n t i a l obligations does ar i s e when an employee passes c o n f i d e n t i a l information to an outsider who i s not bound by contractual o b l i g a t i o n s . The extent of an employer's r i g h t s to claim damages from such a t h i r d party w i l l be reviewed i n Chapter VI dealing with c r i t i c a l remedies. The courts control the use of express r e s t r i c t i v e covenants v i a the doctrine of r e s t r a i n t of trade. In essence, t h i s doctrine i s a statement of s o c i a l p o l i c y . The Supreme Court of Canada i n 1935 aptly presented the competing tensions associated with employment covenants i n r e s t r a i n t of trade. Public p o l i c y , as interpreted by the Courts, requires on the one hand that employers be l e f t f r e e to protect from v i o l a t i o n t h e i r proprietary r i g h t s i n business, and on the other hand, that every man be l e f t free to use to his advantage his s k i l l and knowledge i n t r a d e 2 These competing tensions are easy to i d e n t i f y i n the computer industry. After t r a i n i n g and supervising an employee for a number of years, an employer i s economically damaged by the departure of that 110 employee. The loss i s aggravated when the employee then sets up a business that competes d i r e c t l y with the former employer. To avoid being used as a t r a i n i n g ground f o r future competitors, more sophisticated employers require new employees to agree to non-competition clauses i n the i n i t i a l employment contract. If the p o t e n t i a l employee i s to be given access to c o n f i d e n t i a l information, a prudent employer w i l l also require the employee to agree to a non-disclosure clause. These express covenants of non-competition and non-disclosure are used to prevent the release of c o n f i d e n t i a l information a f t e r the termination of employment. Such clauses are an employer's primary source of l e g a l p r o t e c t i o n against an employee who p o t e n t i a l l y could misuse the business's goodwill, customer l i s t s , trade connections or c o n f i d e n t i a l information. On the other hand, such widely defined r e s t r a i n t s can operate to make an employee the prisoner of the employer. Without the r i g h t to o f f e r h i s services to competing employers, an employee i s t i e d to the o r i g i n a l agreement. The pu b l i c i n t e r e s t s u f f e r s i f free competition i n the labour market i s impeded by the wide spread use of these types of r e s t r i c t i v e clauses. These competing i n t e r e s t s have challenged the courts i n B r i t a i n , Canada and the United States f o r over three hundred years. The p e r s i s t e n t struggle to maintain a reasonable balance between these contrary demands produced the doctrine of r e s t r a i n t of trade. A. Why Should Employers Use Express Covenants of Restraint? Under the doctrine of r e s t r a i n t of trade, the protection a v a i l a b l e to an employer i s l i m i t e d generally to goodwill and c o n f i d e n t i a l 11.1 information. This protection, which must meet the t e s t s of reasonableness, does not o r d i n a r i l y allow the employer to p r o h i b i t employees from l a t e r becoming competitors of the business. Lord Atkinson summarised the employer's p o s i t i o n i n the the case of Herbert Morris v. Saxelby where he stated: He i s undoubtedly e n t i t l e d to have his i n t e r e s t i n h i s trade secrets protected, such as secret processes of manufacture, which may be of vast value. And that p r o t e c t i o n may be secured by r e s t r a i n i n g the employee from divulging the secrets or p u t t i n g them to h i s own use. He i s also e n t i t l e d not to have h i s o l d customers by s o l i c i t a t i o n or such other means enticed away from him but freedom from a l l competition per se apart from both these things, however l u c r a t i v e i t might be to him, he i s not e n t i t l e d to be protected against. He must be prepared to encounter that even at the hands of a former employee. 3 The l i m i t s of the l e g a l protection that can be claimed for the c o n f i d e n t i a l information and for trade secrets w i l l be c l o s e l y examined i n the next sections of t h i s chapter. A major d i f f i c u l t y has always been the drawing of the l i n e between the employee's r i g h t to use h i s knowledge and s k i l l to compete with the employer and the r i g h t of the employer to protect h i s proprietary i n t e r e s t s . Thus, the employer must demonstrate that the covenant to be enforced only goes so far as to reasonably protect the employer's goodwill or trade secrets. Before the d e t a i l e d discussion of the underlying l e g a l p r i n c i p l e s , the incentives f o r the use of express covenants should be more c l o s e l y reviewed. Why i s i t imperative that a computer industry employer take r e s t r i c t i v e covenants from employees at the time of h i r i n g ? One contrary view i s that an employer i s automatically protected by the signing of the employment agreement even without express covenants. 112 Under the theory of implied obligations a l i m i t e d amount of protection i s available against former employees. As well, the preceding chapter noted that the Supreme Court of Canada has recently expanded the f i d u c i a r y duties of management l e v e l employees. In Canadian Aero Service L t d . v.  O'Malley et a l . , Laskin J . r e f e r s to the "general standards of l o y a l t y , good f a i t h and avoidance of a c o n f l i c t of duty and s e l f - i n t e r e s t to which the conduct of a d i r e c t o r or a senior o f f i c e r must conform,...". 4 However, the discussion i n Chapter IV concluded that f i d u c i a r y duties and implied o b l i g a t i o n s provide only minimal protection f o r computer industry employers. Instead, employers are compelled to use r e s t r i c t i v e covenants i n employment contracts f o r the following reasons. (i ) Wider i n t e r e s t s can be protected v i a the use of express covenants It i s easier f or a court to enforce a contractual undertaking, v o l u n t a r i l y entered into by the employee, than rather vague, general equitable o b l i g a t i o n s . So long as an express covenant i s reasonably necessary to protect the employer's i n t e r e s t s , a court w i l l enforce the r e s t r i c t i o n . A reasonable covenant can even be enforced by an outright p r o h i b i t i o n against an employee's r i g h t to compete, i f such a p r o h i b i t i o n i s j u s t i f i e d i n the circumstances. Both the Supreme Court of Canada i n the E l s l e y case 5, and the High Court of A u s t r a l i a i n Geraghty v. Minter 6 enjoined former employees and partners from outright competition i n order to enforce express covenants. Even though these cases f a c t u a l l y dealt with s o l i c i t a t i o n of customers by the ex-employee or ex-partner, the l e g a l r a t i o s are c l e a r l y applicable to the computer industry. As the E l s l e y 113 decision observed, the covenant was enforced to prevent the ex-employee from using "the s p e c i a l and intimate knowledge" which he had acquired i n the course of h i s employment.7 Thus, the c e n t r a l concern i s the protection of the employer's unique and valuable information. A s i m i l a r advantage f o r an employer appears i n those cases dealing with more l i m i t e d p r o h i b i t i o n s against the s o l i c i t a t i o n of customers by a former employee. If there was an express covenant against s o l i c i t a t i o n , then the employer can achieve a wider protection than would be available v i a f i d u c i a r y or implied o b l i g a t i o n s . For example, the decision of Estey, C.J.H.C., as he then was, i n Al b e r t s et a l . v. Mountjoy et a l . 8 points out the weaker p o s i t i o n of the employer who lacks s p e c i f i c covenants. Subject to c e r t a i n cases which hinge on the employee's a b i l i t y to memorize customers' names, a former employee, i n the absence of r e s t r i c t i v e covenants can s o l i c i t h i s previous employer's customers. 9 ( i i ) Express covenants a s s i s t i n proving the c o n f i d e n t i a l i t y of the  employer's information. Whether an employer i s seeking the enforcement of contractual or equitable o b l i g a t i o n s , the employer must s t i l l demonstrate the existence of c o n f i d e n t i a l information that deserves protection. If the employer cannot prove that the information was always treated as a secret, then the court can make contrary assumptions. In G. D. Searle & Co. v. C e l l t e c h  Ltd., before the English Court of Appeal, the p l a i n t i f f ' s claim f o r an inj u n c t i o n against i t s former employees was dismissed because i t had f a i l e d to bring home to i t s employees the secrets which they were to 114 preserve. Cumming-Bruce L.J. observed that "The usual procedure by which a business protects i t s e l f from competition from i t s employees i s a r e s t r i c t i v e covenant; that i s conspicuous by i t s absence i n the relevant c o n t r a c t s . " 1 0 Thus, the employer must fashion h i s own l e g a l protection f o r c o n f i d e n t i a l information. In the absence of an express covenant, the courts w i l l not imply a r e s t r a i n t of trade that i s t a i l o r e d to the s p e c i f i c commercial needs of the employer. 1 0 a ( i i i ) The awareness and deterrent value of express covenants. There i s a d i r e c t value derived from putting the employee on notice regarding obligations, of secrecy. By h i g h l i g h t i n g the employee's ob l i g a t i o n s of c o n f i d e n t i a l i t y , express clauses have f a r more impact on laypeople than the vague implied or f i d u c i a r y duties. Each employee who reads h i s employment contract p r i o r to termination notes the post-employment r e s t r i c t i o n s . Supervisors can r e i n f o r c e t h i s awareness by continued references to the clauses. If an employee seeks l e g a l advice before accepting another job, the r e s t r i c t i o n s w i l l be s p e c i f i c a l l y mentioned i n the l e g a l opinion. There i s also a deterrent value r e l a t i v e to any prospective employer who i s i n t e r e s t e d i n h i r i n g the employee. Job applicants who are unencumbered by r e s t r i c t i v e covenants are favoured over those applicants who appear to be i n breach of a covenant. Aside from any e t h i c a l constraints, employers are reluctant to h i r e an i n d i v i d u a l whose former employer might be e n t i t l e d to bring i n j u n c t i o n proceedings. 115 F i n a l l y , there i s a deterrent value with respect to outside t h i r d p a r t i e s who might t r y to obtain a business' c o n f i d e n t i a l information. Once the employee i s aware of the express o b l i g a t i o n s of secrecy, then any t h i r d party w i l l l i k e l y be aware of security precautions. Such knowledge on the part of the outsider may allow the employer to obtain an i n j u n c t i o n . 1 1 The t h i r d party may also be subject to the c r i m i n a l law provisions that have been prosecuted more rigorously i n recent c o n f i d e n t i a l information c a s e s . 1 2 (iv) Injunctions can be issued more e a s i l y f o r express covenants. Once an express covenant has passed the t e s t s of reasonableness, the court then turns to the remedy that w i l l most e f f e c t i v e l y protect the employer's i n t e r e s t . I f the employer i s worried about h i s trade secrets, the normal remedy i s an i n t e r l o c u t o r y i n j u n c t i o n to prevent immediately any u n f a i r use or unauthorized d i s c l o s u r e . 1 3 The more s p e c i f i c a l l y an express clause defines the trade secret, the greater are the employer's chances of being granted an i n t e r l o c u t o r y or permanent i n j u n c t i o n . The courts w i l l r e s i s t any claim for a broadly worded i n j u n c t i o n since the employees r i g h t to compete and to earn a l i v e l i h o o d must also be respected. A common d r a f t i n g p r a c t i c e adopted by employers i s to define narrowly a s e r i e s of express covenants i n the employment agreement. Even i f one or two of the clauses are struck down as being too wide, then i t i s hoped that the other more l i m i t e d provisions w i l l be e n f o r c e d . 1 4 (v) Express covenants do not displace implied or f i d u c i a r y o b l i g a t i o n s . An employer i s not forced to choose between express covenants or the protection provided by the general obligations of an employee. It i s 116 suggested that the decision of Farwell J . i n T r i p l e x Safety Glass Co. v. S c o r a h 1 5 properly states the r e l a t i o n s h i p between an express clause and the implied obligations. In t h i s p a r t i c u l a r case, the express clause provided that the "said records knowledge or information gleaned or discovered by the Assistant Chemist s h a l l be the exclusive property of the Company."16 The court refused to enforce the express covenant since i t f a i l e d to d i s t i n g u i s h the employer's trade secrets from the know-how that could be l e g i t i m a t e l y possessed by the employee. However, Farwell J . then held that the employee was s t i l l under c e r t a i n implied o b l i g a t i o n s i n s p i t e of the f a i l u r e of the express clause. S p e c i f i c a l l y , Farwell J . stated " i t cannot be that, because a servant covenants i n h i s contract of service to behave properly and honestly towards h i s employer and that contract of service as a whole i s too wide to be enforceable, he i s thereby e n t i t l e d to be as dishonest and to act as u n f a i r l y as he pleases towards h i s employer. That obviously cannot be so and that contention 17 does not a f f o r d a good answer to the P l a i n t i f f s ' c l a i m . " 1 ' In 1981 the Ontario High Court i n Investors Syndicate L t d . v.  V e r s a t i l e Investments Ltd.18 refused to imply another term a f t e r an express covenant was defeated. The decision of Mr. J u s t i c e Reid i n i t i a l l y appears to be i n c o n f l i c t with the r a t i o of T r i p l e x Safety Glass. However, Mr. J u s t i s e Reid made i t c l e a r that he was being asked to imply a term that would replace the express term already declared to be void. Even i f such a narrowly based term could be implied, Reid J . noted that the same p u b l i c p o l i c y objections would apply to s t r i k e i t down. 1 9 More importantly, the Ontario Court of Appeal subsequently rejected any 117 suggestion that there i s no scope f o r common law remedies once an express clause has been declared i n v a l i d . 2 0 (vi) Express covenants e s t a b l i s h an employer's claim to inventions. In chapter I I I the current p o s i t i o n on the pro t e c t i o n of software v i a patent and copyright laws was presented. In general, these statutes are not completely e f f e c t i v e i n es t a b l i s h i n g an employer's r i g h t s to software or any other information r e l a t e d discovery. However, an employer should not ignore the marginal b e n e f i t s of these laws. When disputes between employers and employees a r i s e over ownership of patent or copyrights, the wording of the employment contract normally decides the outcome. In the absence of express covenants, the issue r e s t s on the implied or f i d u c i a r y o b l i g a t i o n s placed upon the employee. For example, Hunter and Sharpe reviewed the patent rules on employee inventions and came to the following conclusion:22 The basic premise insofar as ownership of an invention i s concerned i s the same i n the English, Canadian and American instances. In a n u t s h e l l , inventions belong to t h e i r inventor, and the r i g h t s of others must be derived from an assignment or l i c e n s e granted by the inventor or h i s successors, u n t i l such time as the patent expires. Reduced to the s i t u a t i o n of the employed inventor, or the employee who invents, the invention belongs to the inventor and the employer's i n t e r e s t therein a r i s e s by v i r t u e of the inventor* s obligations incident to h i s employment c o n t r a c t . " The Copyright Act also s p e c i f i c a l l y r e f e r s to agreements of copyright between an employer and employee.24 To take e f f e c t i v e advantage of the copyright presumption, an employer should s p e c i f i c a l l y see that the ownership issue i s s e t t l e d i n the employment agreement. 118 This review of the relevant factors leads to a summary conclusion. There are compelling l e g a l and p o l i c y reasons for an employer to take express covenants of non-disclosure and non-competition from an employee at the time of engagement. B. S p e c i a l Status of Employment Restraints: Chapter III explored four factors that are creating unanticipated imbalances i n the employment relationships.25 Three of these new f a c t o r s were created or influenced by the strong s h i f t to an information based economy. Thus, the problems involved with the increasing commercial r e l i a n c e on secrecy, the confusion over ownership of software, and the p o l i c y objections to property r i g h t s i n information present a mixture of s o c i a l and l e g a l concerns. However, the fourth f a c t o r i d e n t i f i e d i n Chapter III i s more s t r i c t l y l i m i t e d to the law. This f a c t o r dealt with the existence of p o l i c y biases i n our current law. In e f f e c t , i s the s p e c i a l bias for employees i n the doctrine of r e s t r a i n t of trade an imappropriate bias for the computer industry? This employee bias has a lengthy h i s t o r y . Heydon notes that the theory of r e s t r a i n t of trade arose h i s t o r i c a l l y i n respect to three types of contracts.26 I n i t i a l l y recognised by the English courts i n the eighteenth century, the three categories allowed reasonable r e s t r a i n t s f o r the protection of goodwill a f t e r the sale of a business, for the p r o t e c t i o n of a partnership against the competition of a former partner, and for the protection of an employer against a present or former employee.27 As Heydon observes, the r e s t r a i n t s imposed on an employee were only reasonable i f they did no more than "prevent an employee s t e a l i n g away the employer's customers or revealing h i s secrets."28 119 This separation of the three types of r e s t r a i n t s permitted the courts to confer a s p e c i a l status on employment r e s t r a i n t s . Thus, Canadian courts demand a higher standard of proof to enforce an employment r e s t r a i n t than for a r e s t r a i n t that protects the goodwill i n a business. As early as 19.35, the Supreme Court of Canada held that judges should be more rel u c t a n t to enforce an employer and employee covenant than when the covenant r e l a t e d to business goodwill.29 This thinking was rooted i n the j u d i c i a l awareness of the i n e q u a l i t y i n bargaining power that existed i n most employment r e l a t i o n s h i p s . Lord Denning expressed the j u d i c i a l concerns well i n the 1957 case of M.& S. Drapers v. Reynolds: During the past 40 years the courts have shown a reluctance to enforce covenants of t h i s s o r t . They r e a l i s e that a servant has often very l i t t l e choice i n the matter. If he wants to get or keep h i s employment, he has to sign the document which the employer places before him; and he may do so without f u l l y appreciating what i t may involve. Moreover, i f these covenants were given f u l l force, they would tend to reduce h i s freedom to seek better conditions, even by asking for a r i s e i n wages: because i f he i s not allowed to get work elsewhere, he i s very much at the mercy of h i s employe r.3 0 This higher burden of proof has recently been applied by the Supreme Court of Canada. In 1978, Mr. J u s t i c e Dickson i n the E l s l e y case31 had to categorize a p a r t i c u l a r covenant i n order to decide what standard of proof was appropriate. The decision was that the r e s t r i c t i v e covenant, i n order to be enforceable, had to "stand up to the more rigorous t e s t s applied i n an employer/employee context."32 120 There are some serious questions about the continued v a l i d i t y of t h i s anti-employer bias. More p a r t i c u l a r i l y , can such a bias be j u s t i f i e d f o r the s k i l l e d employee i n the computer industry? The arguments i n favour of the d i s t i n c t i o n have been summarised as follows: ( i ) i n the case of an employment contract there i s usually i n e q u a l i t y of bargaining power between the p a r t i e s and the employee has no e f f e c t i v e say as to the terms of h i s employment (excluding the case of unions and c o l l e c t i v e bargaining) . ( i i ) by giving up h i s r i g h t to compete an employee may be lo s i n g h i s only asset, for l i t t l e remuneration. The s e l l e r of a business, however, w i l l have the c a p i t a l raised from i t s sa l e . ( i i i ) when a business i s sold i t would often be valueless without a covenant not to compete. An employee's labour, however, remains valuable whether or not he l a t e r competes. (iv) the existence of a post-employment r e s t r a i n t increases an employer's power over h i s employee since i t removes from the employee's threats of resignation much of t h e i r bargaining strength. (v) the existence of post-employment r e s t r a i n t s diminishes competition, d i s t o r t s the market and r e s u l t s i n economic ine f f i c i e n c e s . 3 3 Should the r e s t r a i n t of trade doctrine continue to be applied with a standard of proof favouring the employee? In most information r e l a t e d sectors of the economy, these t r a d i t i o n a l arguments are somewhat unconvincing. Computer operators, programers, integrated c i r c u i t designers, and data processing managers are t y p i c a l information employees who can move e a s i l y from employer to employer due to a lack of t r a i n e d personnel. Where experienced employees are i n short supply, i t i s d i f f i c u l t to argue an i n e q u a l i t y i n bargaining power. Perhaps the inexperienced employee w i l l not be able to negotiate f r e e l y h i s i n i t i a l employment contract, but 121 t h i s d i s a b i l i t y i s eliminated as soon as the employee acquires marketable s k i l l s . In addition, the modern information employee r a p i d l y acquires other negotiating arguments than that of resignation. A key programmer or a project manager who has been given access to h i s employer's c o n f i d e n t i a l software has acquired c e r t a i n leverage over h i s employer. Such information always has a value to competitors i n s p i t e of r e s t r i c t i v e covenants. An information employee might also gain knowledge of the technological s e c u r i t y systems and access codes that protect an employer's software and data bases. An employee's threat to p u b l i c i z e the d e t a i l s of these systems must be taken s e r i o u s l y . The costs of changing the s e c u r i t y systems i s worrisome f o r the employer, but an even greater concern i s the p o t e n t i a l damage to the employer's business reputation. Employers such as f i n a n c i a l i n s t i t u t i o n s , time sharing bureaus, u t i l i t i e s and numerous branches of government must maintain p u b l i c confidence i n the i n t e g r i t y of t h e i r s e c u r i t y systems. The f i n a l r e s u l t i s that the modern information employer i s i n c r e a s i n g l y vulnerable to the loss of a trusted employee. F i f t y years ago, a t y p i c a l i n d u s t r i a l employer could l i m i t access to h i s trade secrets, and normally experienced a low turnover rate for h i s work force. Today, a software developer uses the law of trade secrets as h i s primary l e g a l protection. However, such a developer can hardly keep the secrets hidden from the very employees who . are responsible f o r the production and marketing of the software. In summary, there are two major developments that r e j e c t a biased standard of proof i n favour of the modern information employee. F i r s t , high s k i l l e d information employees are sophisticated and independent i n d i v i d u a l s who move frequently and e a s i l y between employers. L i t i g a t i o n 122 to protect an employer's i n t e r e s t s against such i n d i v i d u a l s i s expensive and d i s r u p t i v e enough without being faced with an exaggerated burden of proof. Second, the information employer i s far more dependant upon h i s key employees for the success of h i s business, and f a r more vulnerable to the loss of c o n f i d e n t i a l information. For these reasons, i t can be argued that the bias of proof i n favour of the employee should be rejected i n the computer industry. In p r a c t i c e , the courts may a c t u a l l y pay l i t t l e serious attention to the higher standard of proof f o r employment r e s t r a i n t s . The d i f f e r e n t standard for enforcement of employment r e s t r a i n t s may not be a severe hardship f o r information employers. Although the employer's burden i s discussed, t h i s i n i t i a l d i s t i n c t i o n i s seldom a c r i t i c a l turning point for employment r e s t r a i n t s . The courts emphasize the reasonableness of the p a r t i c u l a r covenant far more than the vague general standards of proof. So long as the employer c l e a r l y proves that the employee had access to trade secrets, to c o n f i d e n t i a l information or to business connections, the courts w i l l allow a reasonable protection for those i n t e r e s t s . The Supreme Court of Canada's decision i n the E l s l e y c a s e 3 4 i l l u s t r a t e s t h i s point. E l s l e y had been the manager of a general insurance business for over seventeen years, and had dealt e x c l u s i v e l y with the customers. At issue was the adequacy of a n o n - s o l i c i t a t i o n clause for the protection of the intimate and s p e c i a l knowledge acquired by the employee. Mr. J u s t i c e Dickson observed that "Whether a r e s t r i c t i o n i s reasonably required for the protection of the covenantee can only be decided by considering the nature of the covenantee's business and the nature and character of the employment. "35 In the end, E l s l e y was 123 p r o h i b i t e d from e s t a b l i s h i n g h i s own business or working f o r others so as to be able to use the s p e c i a l knowledge to capture the customers of h i s former employer. Such a broad covenant was the only type of r e s t r a i n t that could reasonably protect the employers s p e c i a l v u l n e r a b i l i t y to the loss of that employee.36 Instead of dwelling upon evidentiary burdens, Mr. J u s t i c e Dickson stressed that each employment r e s t r a i n t must viewed i n l i g h t of the business r e l a t i o n s h i p between the p a r t i e s : It i s important, I think, to r e s i s t the i n c l i n a t i o n to l i f t a r e s t r i c t i v e covenant out of an employment agreement and examine i t i n a disembodied manner, as i f i t were some strange s c i e n t i f i c specimen under microscopic scrutiny. The v a l i d i t y , or otherwise, of a r e s t r i c t i v e covenant can determined only upon an o v e r a l l assessment, of the clause, the agreement within which i t i s found, and a l l of the surrounding circumstances.37 The court was strongly influenced by the f a c t s that E l s l e y had managed the business for seventeen years and had thereby acquired a l l of the d e t a i l s of the business. This strong i d e n t i f i c a t i o n of the general manager with the business j u s t i f i e d a much higher degree of protection f o r the employer. Thus, the doctrine of r e s t r a i n t of trade recognizes that an employer can be much more vulnerable with respect to a management l e v e l employee than to one i n a salesman's p o s i t i o n . The same reasoning would apply to employees who are granted varying degrees of access to c o n f i d e n t i a l information. A higher degree of access would then j u s t i f y a higher degree of r e s t r a i n t . The Supreme Court of Canada's reasoning i n the E l s l e y case indicates that the i n i t i a l burden of proof i n employment r e s t r a i n t cases i s of r e l a t i v e l y l i t t l e importance. Far greater weight i s given to the precise 124 i n t e r e s t s that the employer claims to be protecting, and to the reasonableness of the protection. Therefore, the s p e c i a l status of employment r e s t r a i n t s i s l a r g e l y a t h e o r e t i c a l rather than a p r a c t i c a l bias i n favour of the employee. C. What i s a Restraint of Trade? What i s meant by a r e s t r a i n t of trade? How have the Courts defined such a r e s t r a i n t i n the context of the employment r e l a t i o n s h i p ? In 1920, the English Court of Appeal started from the basic p r i n c i p l e that every person has the r i g h t to f r e e l y contract for the d i s p o s i t i o n of t h e i r s k i l l s and knowledge. Thus, a general d e f i n i t i o n of a r e s t r a i n t of trade then became the following: A contract whereby a r e s t r a i n t i s imposed upon the l i b e r t y of an i n d i v i d u a l to earn hi s l i v i n g or exercise h i s c a l l i n g , or i n other words, a contract whereby the i n d i v i d u a l l i b e r t y of action i s i n t e r f e r e d with and c o n t r o l l e d i s a contract i n r e s t r a i n t of t r a d e . 3 8 This early statement of a r e s t r a i n t of trade has been accepted by more recent a u t h o r i t i e s . For example, Cheshire and F i f o o t ' s "Law of Contract uses a s i m i l i a r wording whereby, "A contract i n r e s t r a i n t of trade i s one by which a party r e s t r i c t s h i s future l i b e r t y to carry on h i s trade, business or profession i n such manner and with such persons as he chooses". 3 9 Several recent cases i n Canada and B r i t a i n have distinguished between e x i s t i n g r e s t r a i n t s and future r e s t r a i n t s . In t h i s context, a r e s t r a i n t of trade can only e x i s t i f an i n d i v i d u a l contracts to give up some l e g a l r i g h t which he already possesses. Thus, an express covenant that e i t h e r l i m i t s the scope or the geographical area of an employee's a c t i v i t i e s during employment i s not a r e s t r a i n t of trade. S i m i l a r l y , i n a 125 non-employment case, an i n d i v i d u a l who purchases a piece of property that i s already subject to r e s t r i c t i v e covenants has not given up a l e g a l r i g h t . Such a purchaser cannot argue that the r e s t r i c t i v e covenants are i n r e s t r a i n t of trade.40 In an example that i s relevant to the computer industry, a l i c e n s i n g agreement that provides f o r the payment of r o y a l t i e s past the expiry of a r e l a t e d patent i s not a r e s t r a i n t of trade.41 None of the covenantors i n the preceding three examples were giving up a future r i g h t to carry on t h e i r trade or business. However, the courts are not e a s i l y mislead by the various disguises placed upon r e s t r a i n t s of trade. They examine the substance of the contractual arrangement, and not just the wording of the p a r t i c u l a r covenant. The Law Reform Commission points out that the following employment covenants have both been held to be i n r e s t r a i n t of trade.42 a) a s t i p u l a t i o n that c e r t a i n payments were subject to the r e c i p i e n t ' s conduct not being detrimental to the payor's i n t e r e s t s invoked to prevent the r e c i p i e n t from taking employment elsewhere,43 ; b) a requirement that t r a i n i n g expenses be repaid should the employee leave,44; However, a s t i p u l a t i o n that commissions due and owing should not be paid i f a salesman took employment elsewhere, was enforceable against the covenantor. 4 5 Generally the r e s t r a i n t of trade doctrine applies to non-disclosure or non-competition clauses that are invoked by the employer a f t e r the termination of the employment r e l a t i o n s h i p . A more s p e c i f i c and unusual a p p l i c a t i o n i s the control of the employee's off-duty a c t i v i t i e s during the r e l a t i o n s h i p . Two questions are thereby r a i s e d . Can the doctrine of r e s t r a i n t of trade be applied to moonlighting by the employee, and i f so, under what circumstances can the doctrine be used to set aside covenants? 126 The i n i t i a l d i f f i c u l t y i n applying the doctrine during the employment period arises from the concept of a r e s t r a i n t of trade. As previously mentioned, the accepted d e f i n i t i o n i s that as used by Chesire and F i f o o t whereby a r e s t r a i n t of trade i s a r e s t r i c t i o n on future l i b e r t y to carry on a trade, business or profession. Accordingly, the notion of freedom of contract allows an i n d i v i d u a l to accept employment r e s t r i c t i o n s i n return f o r an employer's promise of compensation.46 Thus, one early English case s p e c i f i c a l l y r u l e d that the doctrine could not be applied to any employment covenant where the r e s t r a i n t was confined to the employment period.47 The e a r l i e r Canadian a u t h o r i t i e s were not as s p e c i f i c i n l i m i t i n g the doctrine, but instead analysed the problem using the servant's contractual obligations.48 Except where a servant's outside a c t i v i t i e s put him i n a c o n f l i c t with the duty of l o y a l t y and good f a i t h owed to the master, the servant's spare time was not subject to the control of the master.49 These e a r l i e r p o s i t i o n s have now been c l a r i f i e d by several a u t h o r i t a t i v e English decisions. It now appears that the doctrine can apply during an employment period, but only under c e r t a i n l i m i t e d circumstances. In Instone v. A. Schroeder Music Publishing Co., a young composer entered into a f i v e year employment contract whereby he agreed to t r a n s f e r to the publisher h i s world copyright i n a l l compositions produced during that period.50 On appeal to the House of Lords, Lord Reid stated that: Any contract by which a person engages to give h i s exclusive services to another f o r a period necessarily involves extensive r e s t r i c t i o n during that period of the common law r i g h t to exercise any lawful a c t i v i t y he chooses i n such manner as he thinks best. Normally the 127 doctrine of r e s t r a i n t of trade has no a p p l i c a t i o n to such r e s t r i c t i o n s : they require no j u s t i f i c a t i o n . But i f contractual r e s t r i c t i o n s appear to be unnecessary or to be reasonably capable of enforcement i n an oppressive manner, then they must be j u s t i f i e d before they can be enforced. In the Instone case and i n C l i f f o r d Davis Management L t d . v. W.E.A. Records Ltd.,52 a subsequent decision of the Court of Appeal, the r e s t r i c t i v e covenants i n favour of music publishers were set aside. The employment agreements i n both cases were sharply biased i n favour of the employers, and grossly inadequate compensation was promised to the employees. In the C l i f f o r d Davis judgment, Lord Denning r e f e r r e d to the unconscionability of the contract as part of the grounds to set aside the offensive clauses. Therefore, the general conclusion must be that the doctrine of r e s t r a i n t of trade normally does not apply so as to i n v a l i d a t e r e s t r a i n t s confined to the employment period. The l i m i t e d exception occurs when the r e s t r a i n t s are so extensive and unfair as to i n v i t e the court to i n t e r f e r e . Given t h i s d e f i n i t i o n of a r e s t r a i n t of trade, how do the Courts achieve the balance between the r i v a l i n t e r e s t s of employer and employee? The i n i t i a l modern authority i s Lord Macnaghten's statement i n the Nordenfeldt case:53 The p u b l i c have an i n t e r e s t i n every person's c a r r y i n g on h i s trade f r e e l y : so has the i n d i v i d u a l . A l l interference with i n d i v i d u a l l i b e r t y of action i n trading, and a l l r e s t r a i n t s of trade themselves, i f there i s nothing more, are contrary to p u b l i c p o l i c y , and therefore void. That i s the general r u l e . But there are exceptions: r e s t r a i n t s of trade and in t e r f e r e n c e with i n d i v i d u a l l i b e r t y of a c t i o n may be j u s t i f i e d by the s p e c i a l circumstances of a p a r t i c u l a r case. I t i s s u f f i c i e n t j u s t i f i c a t i o n , and indeed i t i s the only j u s t i f i c a t i o n , i f the r e s t r i c t i o n i s reasonable - reasonable, that i s , i n reference to the i n t e r e s t s of the p a r t i e s concerned and reasonable i n 128 reference to the i n t e r e s t s of the p u b l i c , so framed and so guarded as to a f f o r d adequate protection to the party ,in whose favour i t i s imposed, while at the same time i t i s i n no way i n j u r i o u s to the p u b l i c . 5 4 This formulation of the law on r e s t r a i n t of trade has been c l e a r l y accepted i n both the English and Canadian courts.55 In the l a s t s i x years alone, the Supreme Court of Canada has twice used Lord Macnaghten's statements as representing the appropriate p r i n c i p l e s of l a w . ^ Given t h i s widespread agreement on the basic approach, what are the l e g a l tests that emerge from these au t h o r i t i e s ? The Ontario Court of Appeal i n Tank L i n i n g Corp. v. Dunlop I n d u s t r i a l L t d . recently set out a four stage inqu i r y that i s required by the doctrine of r e s t r a i n t of trade.57 Mr. J u s t i c e B l a i r noted that the proper questions were: (1) [I]s the covenant under review i n r e s t r a i n t of trade?; (2) [I]s the r e s t r a i n t one which i s against p u b l i c p o l i c y and, therefore, void?; (3) [C]an the r e s t r a i n t be j u s t i f i e d as reasonable i n the i n t e r e s t s of the p a r t i e s ? ; [and] (4) [C]an i t also be j u s t i f i e d as reasonable with reference to the i n t e r e s t s of the public?58 The subsequent sections of t h i s chapter w i l l apply t h i s four part inqu i r y to those employers and employees who are involved i n the computer industry. The f i r s t question to decide i s whether the r e s t r a i n t a c t u a l l y forms a r e s t r a i n t of trade, and t h i s issue has already been discussed. As postulated i n the Tank Lining case59, the element of public p o l i c y i s the second question addressed by the courts i n dealing with a r e s t r a i n t of trade. Then, the court should ask whether the r e s t r a i n t of trade i s so offensive as to be void by reason of public p o l i c y . 129 However, when dealing with employment r e s t r a i n t s , i t i s quite normal for courts to bypass t h i s second question without much serious consideration. This lack of attention to the public p o l i c y element r e s u l t s from countless employment cases have which have assumed that employment r e s t r a i n t s are prima f a c i e void.60 Recent Canadian and English a u t h o r i t i e s are suggesting that t h i s f a i l u r e to separate the public p o l i c y element from the subsequent t e s t s of reasonableness w i l l adversely a f f e c t the doctrine of r e s t r a i n t of trade. For example, Cheshire and Fifoot61 argue t h i s point by r e f e r r i n g to the House of Lords decision i n Esso Petroleum Co. v. Harper's Garage  (Stourport) Ltd.62 This case involved the a p p l i c a t i o n of the doctrine of r e s t r a i n t of trade to new marketing and sales arrangements c a l l e d solus agreements. The authors emphasise that r e s t r a i n t of trade theory developed as a doctrine of p u b l i c p o l i c y , and that the "changing face of commerce must always be borne i n mind. R e s t r i c t i o n s which i n an e a r l i e r age were c l a s s i f i e d as r e s t r a i n t s of trade may, i n the d i f f e r e n t circumstances of today, have become 'part of the accepted pattern of structure of trade' as encouraging rather than l i m i t i n g t r a d e . " 6 3 In e f f e c t , the courts could use the p u b l i c p o l i c y element to recognize the unique c o n f i d e n t i a l i t y problems associated with the development of software. The Ontario Court of Appeal i n the Tank L i n i n g case s p e c i f i c a l l y adopted the cautions of Cheshire and F i f o o t , and then c a r e f u l l y d istinguished the element of p u b l i c p o l i c y from the t e s t of reasonableness i n the public interest.64 i n summary, these a u t h o r i t i e s are cautioning against r i g i d i t i e s i n the doctrine of r e s t r a i n t of trade. To ignore the 130 i n i t i a l t e s t of p u b l i c p o l i c y r i s k s l i m i t i n g the doctrine's a b i l i t y to r e f l e c t changes i n economic conditions. But i t i s doubtful that the p u b l i c p o l i c y on employment r e s t r a i n t s w i l l soon change. The conclusion must remain that covenants which r e s t r i c t competition by an employee against h i s former employer are prima f a c i e v o i d . 6 5 D. The Employer's Proprietary Interest and the Reasonableness Test The core of the doctrine of r e s t r a i n t of trade has always been the reasonableness of the l i m i t a t i o n being placed upon the • employee. To determine the v a l i d i t y of the r e s t r a i n t , the courts look at the nature of the employer's i n t e r e s t being protected, the geographic scope of the r e s t r a i n t and the duration of the r e s t r a i n t . The employer's protected i n t e r e s t i s the s p e c i a l focus of t h i s section. Chapters III and IV, d e a l t with the importance of c o n f i d e n t i a l i t y and secrecy i n the computer industry. Chapter III explained that most software i s d i s t r i b u t e d v i a r e s t r i c t i v e l i c e n s i n g agreements which impose obli g a t i o n s of confidence upon the l i c e n s o r s . Subsequently, Chapter IV pointed out the weaknesses i n r e l y i n g upon an employee's implied or f i d u c i a r y obligations to protect c o n f i d e n t i a l information. Thus, employers i n the computer industry should be keenly i n t e r e s t e d i n using express covenants to protect t h e i r trade secrets. This section examines the l i m i t s to the proprietary i n t e r e s t that a computer industry employer i s allowed to protect under the doctrine of r e s t r a i n t of trade. What types of employer's i n t e r e s t s q u a l i f y f o r the protection? An overview of the law was presented i n Routh v. J o n e s ; 6 6 131 In the absence of sp e c i a l circumstances, an employer has no such proprietary i n t e r e s t as e n t i t l e s him to pro t e c t i o n from the competition of h i s former servant per se, nor can a former servant be re s t r a i n e d from turning to account h i s own business or professional s k i l l s , although that s k i l l was acquired while he was i n the service of h i s former master. On the other hand, where the circumstances are such that the servant has, by vi r t u e of h i s engagement, been put i n the p o s i t i o n of learning h i s master's trade secrets, or of acquiring a s p e c i a l or intimate knowledge of the a f f a i r s of the customers, c l i e n t s or patients of h i s master's business or of means of influence over them, there e x i s t s a subject-matter of contract, a p r o p r i e t -ary i n t e r e s t or goodwill i n the matter which i s e n t i t l e d to protection, since otherwise the master would be exposed to u n f a i r competition on the part of his former servant - competition flowing not so much from the personal s k i l l of the a s s i s t a n t as from the intimacies and knowledge of the master's business acquired by the servant from the circumstances of t h i s employment." This statement summarizes the law being applied to employer's i n t e r e s t s i n Canada today. In general terms, the i n t e r e s t must be recognised by the courts as a proprietary i n t e r e s t : commercial or business advantages are i n s u f f i c i e n t to s a t i s f y the requirement. At the present time, the case law defines three general types of proprietary i n t e r e s t s that the employer i s allowed to protect. These are business connections or customer goodwill, c o n f i d e n t i a l information r e l a t i n g to the business, and any trade secrets revealed to the employee. Each of these three types w i l l be reviewed i n turn: 1) P r o t e c t i o n of Employer's Business Connections At f i r s t glance, t h i s type of employer's i n t e r e s t does not appear to involve any r i g h t s to c o n f i d e n t i a l information. In t h i s area, the employer simply wants to protect his business and customers from a competing former 132 employee. There does not have to be the l o s s of a customer l i s t , nor does the employee has to have removed other c o n f i d e n t i a l documents. Rather, the employee have been dealing d i r e c t l y with the employer's customers, and thereby has achieved a p o s i t i o n of great personal influence with the customers. However, the employee's p o s i t i o n of influence r e a l l y means that the employee has acquired a s p e c i a l type of information that i s unavailable to competitors. As noted i n Routh v. Jones67 the employer i s e n t i t l e d to be protected from the unfair competition that i s based on ex-employee's intimate knowledge of the business. It should be noted that such knowledge f a l l s short of the status of trade secrets or c o n f i d e n t i a l information. Laskin J. (as he then was), dealt with t h i s type of case i n Cameron v. Canadian Factors Corp. Ltd.68 In the majority decision for the Supreme Court of Canada, Laskin J. observed: The present case i s untrammelled by any contention of wrongful appropriation of a customer or c l i e n t l i s t , or of the wrongful use of trade secrets or c o n f i d e n t i a l information. Nor does i t engage the l i n e of cases dealing with the sale of a business or of good w i l l whose value at the time of the transaction depends on the purchaser being e n t i t l e d to i t s exclusive use. I t r a i s e s simply the p r i n c i p l e on which Courts act against contractual undertakings by an employee not to compete, and I embrace i n t h i s l a s t phrase the p r o h i b i t i o n s i n paras. 2 and 3 of the contract l e t t e r . That p r i n c i p l e , whether under the C i v i l Code provisions as to p u b l i c order (as i n a r t s . 13 and 990) or under the common law, i s the a p p l i c a t i o n of a r u l e of reason to a balancing of the i n t e r e s t s of the employer and the erstwhile employee i n repsect of the need of the former for p r o t e c t i o n of h i s business and of the l a t t e r f o r economic m o b i l i t y , i n the l i g h t of a p o l i c y that discourages l i m i t a t i o n s on personal freedom, and, s p e c i f i c a l l y , on freedom of 69 economic or employment opportunity. 133 Most r e s t r a i n t of trade cases i n v o l v i n g employees w i l l not present t h i s s t r a i g h t forward choice between the employee's r i g h t to compete and the employer's r i g h t to protect h i s business. Instead, the usual case presents at l e a s t some minimal threats to the trade secrets or c o n f i d e n t i a l information possessed by the employer. However, the Canadian  Factors case shows that an employee does not possess an absolute r i g h t to compete: the employer's proprietary r i g h t s i n h i s business w i l l also be protected. Western Inventory Service L t d . v. Sager70 (ont. H.C.) and Western  Inventory Service L t d . v. F l a t t 7 1 (B.C.S.C.) are two other examples of recent cases where an employer's non-confidential r e l a t i o n s h i p s with i t s customers were protected against the unfair influence of former employees. 2) Protection of an Employer's Interest i n C o n f i d e n t i a l Information The e a r l i e r discussion i n Chapter III dealt with the general requirements for the existence of c o n f i d e n t i a l information.72 The discussion also commented on the d i s t i n c t i o n s between c o n f i d e n t i a l information and trade s e c r e t s . 7 3 Although i n most business s i t u a t i o n s the terms can be used synonymously, a non-business e n t i t y cannot hold trade secrets. Accordingly, the categories have been discussed separately i n t h i s chapter, even though there are many s i m i l a r i t i e s i n the basic p r i n c i p l e s of law. Canadian courts recognize that an employer has proprietary r i g h t s to information r e l a t e d to the business. In many of these cases, no d i s t i n c t i o n i s drawn between trade secrets and c o n f i d e n t i a l information. Thus, In Management Recruiters of Toronto L t d . v. Bagg,74 a departing 134 employee who removed 3 2 job orders and 148 prospect f i l e s was subject to a r e s t r a i n i n g i n j u n c t i o n . The order was granted to prevent the employee from u t i l i z i n g t h i s information i n breach of an express c o n f i d e n t i a l i t y and non-disclosure clause.75 Computer Centre Personnel L t d . v.  Lagopulas76 applied the p r i n c i p l e s i n Routh v. Jones77 to employees who had acquired the s p e c i a l or intimate knowledge of the a f f a i r s of the employer's customers. These cases i l l u s t r a t e the second major area i n the continuum of an employer's proprietary i n t e r e s t s . Although such employees may also have had a strong personal influence over the employer's customers,the biggest threat to the employer arose from the employee's u n r e s t r i c t e d access to important business information. As noted previously, u n i v e r s i t i e s , government o f f i c e s , s o c i e t i e s and other non-profit organizations must claim a proprietary i n t e r e s t i n c o n f i d e n t i a l information rather than t r y i n g to e s t a b l i s h a claim to trade secrets. 3) Protection of an Employer's Rights to Trade Secrets Since trade secret theory was generally reviewed i n Section D of Chapter II I , t h i s section w i l l deal with trade secrets s p e c i f i c a l l y regarding employees i n the computer industry. The employer must f i r s t prove that i t i s the legitimate owner or holder of the trade secret.78 Although t h i s point seems obvious, the Ontario Court of Appeal i n 1972 dismissed an appeal f o r the enforcement of a r e s t r i c t i v e covenant on the simple grounds that the p l a i n t i f f was not the owner of the proprietary i n t e r e s t r e q u i r i n g protection.79 More importantly, the information that the employer seeks to protect must be proved to be a trade secret. 135 What types of information q u a l i f y as an employer's trade secret? Heydon provides these examples of trade secrets: What i s included under "trade secrets"? The standard examples are processes, formulae, information about customers (e.g. t h e i r names and d e t a i l s useful i n compiling advertisements about them) , information the f i r s t p u b l i c a t i o n of which has value, workable s c i e n t i f i c ideas and p h y s i c a l objects produced by the use of the employer's time, money or labour i n future (e.g. advertisement 80 p r i n t i n g blocks, order books, plans or drawings). Thus, i n the recent Ontario decision i n Management Recruiters of Toronto L t d . v. Bagg 8 1> 32 job orders and 148 prospect f i l e s q u a l i f i e d f o r prot e c t i o n because the information was highly valued i n the industry and c l o s e l y guarded. The courts have even extended trade secret protection to a single secret number (an optimum heat t r a n s f e r c o e f f i c i e n t ) . 8 2 S i m i l a r i l y , i n the computer industry, software i s developed and marketed i n secrecy, and requires considerable investments of time and money. This leads to software being d i s t r i b u t e d as a trade secret. But an employer cannot make software into a tirade secret simply by naming i t to be so. Using an analogous example, not a l l customer l i s t s can q u a l i f y as trade secrets. In T.S. Taylor Machinery Co. L t d . v.  Beggar, the Manitoba Court of Appeal rejected an employer's proprietary i n t e r e s t i n i t s customer l i s t where a l l of the p l a i n t i f f ' s customers were well known to i t s competitors.83 Instead, the court recognized that the employer had a legitimate non-confidential i n t e r e s t i n i t s customers due to the employee's considerable personal influence with the customers. 8 4 The analogy of customer l i s t s also shows that an employer cannot claim a trade secret i n software i f the information was independently developed by an employee. Thus, an employer's proprietary i n t e r e s t i n 136 i t s own business or trade connections cannot be enlarged to include previous customers of the employee. If customers follow an employee i n t o an employment r e l a t i o n s h i p , the same customers can again follow the employee a f t e r he departs from the relationship.85 In the same way, an employer cannot claim a proprietary i n t e r e s t i n customer l i s t s developed by an independent sales representative who l a t e r becomes an employee. 8 6 In addition to customer-related information, an employer can claim proprietary i n t e r e s t s i n information r e l a t i n g to manufacturing processes, production developments and unpatented inventions.87 i n the context of the computer industry, t y p i c a l trade secrets would include:. a) Software (object code and source code) b) Documentation associated with software (user manuals, flow charts) c) Designs, drawings and models d) Internal s p e c i f i c a t i o n s and t e s t i n g , e d i t i n g procedures e) Customer l i s t s f) Market information covering financing, p r i c i n g p o l i c i e s and p r i c e l i s t s g) Bidding p o l i c i e s and procedures h) Data and data bases i ) Employee discoveries or inventions j) Work r e l a t e d ideas or c o n c e p t s 8 8 In any industry, information must have been continuously maintained as a secret i n order to q u a l i f y as a trade secret. Any proprietary claim i s destroyed i f the secrets were revealed through open marketing of the product. Once the secret was exposed by sale of the product, the information passed into the pu b l i c domain and can be used by anybody, 137 i n c l u d i n g the former employee who received the o r i g i n a l secret.89 An employer can protect product information p r i o r to p u b l i c s a l e , but secrecy must have been maintained during the development period.90 This reasoning does not preclude c a r e f u l l y c o n t r o l l e d product d i s t r i b u t i o n to the p u b l i c i n order to maintain the obligations of secrecy.91 Where an employer has allowed frequent v i s i t o r s i n t o the workshop area to view the alleged secret, and has f a i l e d to advise employees i n writing of the need for s e c u r i t y , no proprietary trade secret can be claimed.92 A f t e r the c o n f i d e n t i a l i t y i s l o s t , enforcement of a r e s t r i c t i v e non-disclosure clause against the employee i s no longer possible.93 However, the i n t e n t i o n a l appropriation of c o n f i d e n t i a l information by e i t h e r employees or outsiders r a i s e s the p o s s i b i l i t y of c r i m i n a l prosecution under recent Canadian authorities.94 4) Know-How versus Trade Secrets In popular usage, the term know-how means the " p r a c t i c a l knowledge of how to do or accomplish something with smoothness and e f f i c i e n c y ; a b i l i t y to get something done with a minimum of wasted e f f o r t ; accumulated p r a c t i c a l s k i l l or expertness."95 The concept i s p o t e n t i a l l y h e l p f u l since i t defines a type of information that can be possessed and c a r r i e d by a s k i l l e d employee. If the employee's ownership of h i s personal knowledge can be defined, then the l e g a l l i m i t s to an employer's proprietary i n t e r e s t s i n information can be c l a r i f i e d . Both the American and B r i t i s h courts have approached an employer's proprietary r i g h t s using t h i s d i s t i n c t i o n . 138 Much has been written i n l e g a l a r t i c l e s about the s i m i l a r i t i e s and differences that e x i s t between these two concepts.96 Yet a completely s a t i s f a c t o r y l e g a l d e f i n i t i o n of know-how does not e x i s t . Dessemontet, i n an exhaustive t r e a t i s e on the l e g a l protection of know-how i n the U.S.A., decided that know-how was a matter of knowledge rather than one of manual s k i l l . 9 7 He noted that many American writers l i m i t e d know-how to secret information, but i n the end admitted to a hopeless confusion with the many d i f f e r e n t l e g a l d e f i n i t i o n s . 9 8 S i m i l a r l y , Wheeler recently reviewed a number of the American decisions dealing s p e c i f i c a l l y with trade secret protection i n computer software.99 Her conclusion h i g h l i g h t s t h i s c r i t i c a l problem: "Because of the uncertain d i v i d i n g l i n e between the employer's protectable r i g h t s i n a s p e c i f i c program design or combination and the programmer's s k i l l and experience, the cases in v o l v i n g trade secret p r o t e c t i o n i n the computer industry employment r e l a t i o n s h i p present p a r t i c u l a r l y d i f f i c u l t questions. Courts, while attempting to balance these competing i n t e r e s t s , have been unable to achieve a uniform and equitable s o l u t i o n . " 1 0 0 The Anglo-Canadian courts have not yet dealt with the s p e c i f i c issue of an employee's know-how i n computer software. Moreover, the general d i s t i n c t i o n s that currently e x i s t do not o f f e r much guidance. For example, Lord Shaw's judgment i n Herbert Morris, Limited v. S a x e l b y 1 0 1 provides a broad d i s t i n c t i o n between objective knowledge that belongs to the employer, and subjective knowledge that i s the property of the employee. Trade secrets, the names of customers, a l l such things which i n sound p h i l o s o p h i c a l language are denominated objective knowledge - these may not be given away by a servant; they are h i s master's property, and there i s no r u l e of p u b l i c i n t e r e s t which prevents a tr a n s f e r of 139 them against the master's w i l l being restrained. On the other hand, a man's aptitudes, h i s s k i l l , h i s dex t e r i t y , h i s manual or mental a b i l i t y - a l l those things which i n sound p h i l o s o p h i c a l language are not objective, but subjective - they may and they ought not to be relinquished by a servant; they are not h i s master's property; they are h i s own property; they are h i m s e l f . 1 1 5 2 Such a broad d i s t i n c t i o n separates the two extremes of information, but r e a l l y doesn't help a court to determine the claims to the p r a c t i c a l knowledge that l i e s between. Wheeler summarizes t h i s problem i n the computer industry by reference to a 1978 action against an ex-employee/programmer. "Key employees have access to items of c o n f i d e n t i a l business information, many of which are often assimilated into t h e i r general knowledge. If a second employer asks a computer programmer to develop a program to solve a p a r t i c u l a r problem, t h i s programmer w i l l undoubtedly draw upon the knowledge and experience gained while with the f i r s t employer. If the employee uses c o n f i d e n t i a l information of h i s f i r s t employer to solve the second employer's problem, i t i s conceivable that the second employer could acquire some of the f i r s t employer's trade s e c r e t s . " 1 0 3 Another more pragmatic approach to t h i s problem was taken by Cross J. i n P r i n t e r s and F i n i s h e r s L t d . v. Holloway.104 This decision suggests that the court can be guided by a reasonable employee's view of the ownership question. Thus, a court can recognize an employer's r i g h t to a l l information which "can f a i r l y be regarded as a separate part of the employee's stock of knowledge which a man of ordinary honesty and i n t e l l i g e n c e would recognize to be the property of h i s o l d employer and not h i s own to do as he l i k e s with.""105 Following t h i s reasoning, an employer's proprietary r i g h t s to know-how would end where the reasonable employee f e l t free to use the information as h i s own property. In the words of Cross J . , "The law w i l l defeat i t s own object i f i t seeks to 140 enforce i n t h i s f i e l d standards which would be r e j e c t a b l e by the ordinary man."106 Other courts have used t h i s approach to r e s t r a i n an employee whose primary function was to coordinate research, 107 or to refuse an i n j u n c t i o n where the employee himself was c l e a r l y adhering to t h i s same separation of property rights.108 However, t h i s d i s t i n c t i o n between an employee's general knowledge and the s p e c i a l i z e d knowledge belonging to the employer cannot be applied to the computer industry. Given that a software company's ent i r e product l i n e are sold as trade secrets, how does the reasonable employee separate his know-how from the employer's trade secrets? It should also be noted that s k i l l e d programmers also become highly s p e c i a l i z e d i n c e r t a i n software designs. If the programmer i s successful, h i s s p e c i a l i z a t i o n i s then r e f l e c t e d i n the s p e c i a l i z e d software products sold by the employer. i Both the employer and the employee are dependent upon the same s p e c i a l i z e d pool of knowledge. In summary, the writer agrees with a recent conclusion drawn by Hammond. His view i s that the d i s t i n c t i o n between general and s p e c i a l i z e d knowledge, or between know-how and trade secrets has been rendered almost meaningless i n the computer industry.109 In summary, the concepts of know-how and trade secrets cannot provide i n f a l l i b l e r u l e s f o r choosing between the r i g h t s of employers and employees. Ultimately, courts w i l l always have to i d e n t i f y the employer's proprietary i n t e r e s t s by paying c a r e f u l a ttention to the p a r t i e s , t h e i r conduct and to the industry within which the business operates. There remains one other d i s t i n c t i o n that i s vaguely r e l a t e d to the preceeding discussion of know-how. At various times English and Canadian 141 courts have r e f e r r e d to the employee's r i g h t to use whatever information that he can carry i n h i s memory. I n i t i a l l y , the memory tes t was used i n England to separate an employer's casual information from information which required an organized e f f o r t to accumulate and copy.110 Then several early courts i n the Western provinces, i n c l u d i n g the B r i t i s h Columbia Court of Appeal, adopted a more l i t e r a l version. So long as the ex-employee had not made any written l i s t s , the employee was permitted to use whatever information he could memorize. 111 Subsequent courts i n England and Canada continue to re f e r to the memory t e s t , although a more recent q u a l i f i c a t i o n states that an employee cannot appropriate c o n f i d e n t i a l information or trade secrets v i a memorization.112 The memory t e s t for determining proprietary r i g h t s i n information must be rejected as a r t i f i c a l and inappropriate. E l e c t r o n i c f i l i n g , disk storage, personal computers and data transmission v i a telephone l i n e s are examples of modern technology that permit e f f o r t l e s s d u p l i c a t i o n of information. The scope of an employee's proprietary r i g h t s should not be determined by the amount of e f f o r t required nor by the method by which the information i s appropriated. More broadly, focusing upon the employee's a b i l i t y to memorize ignores the public p o l i c y r u l e of the doctrine of r e s t r a i n t of trade. The r e a l concern must be to balance the protection of the employer's c o n f i d e n t i a l information against the employee's r i g h t to compete f r e e l y . 5) Other Related Proprietary Interests Software l i c e n s i n g agreements must be considered f o r t h e i r impact on the proprietary r i g h t s of employers. As noted i n Chapter I I I , software 142 vendors t r a n s f e r t h e i r products v i a l i c e n s i n g agreements Which t r e a t the software as a proprietary trade secret. While the software vendor can l e g i t i m a t e l y claim to hold a proprietary i n t e r e s t , what i s the p o s i t i o n of the licensee? The software user's p o s i t i o n must be considered since i t i s c o n t r a c t u a l l y obligated to protect the developer's trade secret. Usually the vendor or developer requires that the user place i t s own employees under obl i g a t i o n s of confidence. More cautious vendors even go so far as to sign c o n f i d e n t i a l i t y contracts d i r e c t l y with the user's agents, consultants or employees to eliminate p r i v i t y of contract problems.113 F i r s t , the software l i c e n s i n g agreements o r d i n a r i l y do not d i r e c t l y create a r e s t r a i n t of trade. The vendor and the user do not normally contract to r e s t r i c t any future l i b e r t y to trade. Employers who v o l u n t a r i l y exchange mutual r e s t r i c t i v e covenants that l i m i t future dealings, such as i n Tank Leasing Corp. v. Dunlop I n d u s t r i a l l 14 or Kores  v. Kolokl15, are the exceptions rather than general commercial p r a c t i c e . The s i g n i f i c a n t questions a r i s e with the software users who have placed t h e i r employees under obl i g a t i o n s of confidence. Such an employer cannot claim to be protecting i t s own proprietary i n t e r e s t pursuant to the doctrine of r e s t r a i n t of trade. What the software user i s r e a l l y t r y i n g to protect i s i t s own r i g h t to continued use of the software. If the user's o b l i g a t i o n s of confidence are broken by a user's employee, then the software l i c e n c e can usually be terminated by the u n i l a t e r a l act of the vendor. Thus an unanswered question i n Canadian law e x i s t s . Can a software licensee claim a s u f f i c i e n t l y wide proprietary i n t e r e s t i n i t s use of software, so that i t can protect the software against a former employee? 143 One r e l a t e d purpose of an express covenant, i n the s i t u a t i o n being discussed, would be to place the employee(s) under the more general equitable and f i d u c i a r y o b l i g a t i o n s of confidence. Once the employee knows that the software represents a trade secret that belongs to the vendor, then the vendor has some hopes of d i r e c t a c t i o n against the employee and outside parties.116 However, t h i s point s t i l l does not answer the proprietary i n t e r e s t status of the licensee. Certain j u d i c a l comments r e l a t i n g to the scope of the in t e r e s t s covered by the doctrine have arisen i n A u s t r a l i a n cases i n v o l v i n g o i l companies and r e s t r i c t i v e sales agreements. A l i m i t i n g p o s i t i o n was i n i t i a l l y taken by the t r i a l court i n Mobil O i l A u s t r a l i a L t d . v. McKenzie. 117 It was said that "the i n t e r e s t s must be i n the nature of proprietary r i g h t s and ... a commercial i n t e r e s t , as d i s t i n c t l y from one inv o l v i n g some r i g h t of property, would not, unless the l e g a l p r i n c i p l e s already applied should be extended, be sufficient."118 Then the High Court of A u s t r a l i a expanded the scope of the p r o t e c t i b l e i n t e r e s t s i n Amoco A u s t r a l i a Pty. L t d . v. Rocca Bros. Motor Engineering Co. Ltd.119 The comments of the High Court i n the Amoco case were adopted by the Ontario Court of Appeal i n Stephens v. Gulf O i l Canada Ltd.120 I t i s not i n doubt, i n my opinion, that Amoco was e n t i t l e d i n the circumstances to obtain the b e n e f i t of a trade t i e i n a i d of the recoupment of i t s investment and i n a i d of t r a i n i n g i n t e r e s t s a r i s i n g out of i t s agreement to supply i t s products to Rocca. The question i s whether or not the term of the t i e , considered i n conjunction with the convenants to which I have referred, was greater than was reasonably 121 necessary. 1 ^ 1 In e f f e c t , these decisions appear to conclude that commercial or trading i n t e r e s t s can be recognized as an adequate basis for the 144 doctrine. Thus, a strong argument can be made that a software user's investment and trading i n t e r e s t i n the l i c e n s i n g agreement are s u f f i c i e n t grounds f o r p r o t e c t i o n under the doctrine of r e s t r a i n t of trade. In summary, an employer can claim proprietary r i g h t s i n h i s business connections, and i n h i s c o n f i d e n t i a l information and trade secrets. For the modern employer, who i s either using or developing software, the l a t t e r category increases d a i l y i n importance. However, the d i s t i n c t i o n that the common law i n s i s t s on drawing between know-how and trade secrets i s of l i t t l e value to the computer industry. E. Reasonableness Between the Employer and Employee Once a court s a t i s f i e s i t s e l f that a computer industry employer has a legitimate i n t e r e s t to protect, the court then turns to the reasonableness of the protection being claimed. In e f f e c t , does the r e s t i c t i v e covenant achieve an e f f e c t i v e balance between protecting the employer's information and preserving the employee's future l i b e r t i e s ? However, the balancing of the i n t e r e s t s of employer and employee cannot be a s t r a i g h t compromise. Since p u b l i c p o l i c y d i r e c t s that a l l employment r e s t r a i n t s are prima f a c i e void, then the covenant must be j u s t i f i e d as being a reasonable r e s t r a i n t . The r e s t r i c t i o n can only go so f a r as to adequately protect the employer's i n t e r e s t . If the covenant exceeds reasonable l i m i t s i n e i t h e r the scope of protection, i n the duration of the covenant or i n the geographic extent, then the r e s t r a i n t w i l l be void and unenforceable. 145 How does a court answer these questions of reasonableness? The o v e r a l l answer must be that the court . looks c l o s e l y at the p a r t i c u l a r f a c t s of each employment r e l a t i o n s h i p . Each d e c i s i o n must be highly dependent upon the evidence presented by the p a r t i e s . Littlewood's  Organization L t d . v. Harris i l l u s t r a t e s t h i s subjective approach.122 The Court enforced a covenant not to work for one s p e c i f i c competitor i n the f i r s t twelve months a f t e r termination. Given the nature of the industry, and the p a r t i c u l a r nature of the c o n f i d e n t i a l information possessed by the employee, the Court's conclusion was that such a convenant has the only way of p r o t e c t i n g the employer's position.123 With such a l e v e l of s u b j e c t i v i t y , the common law has not developed any s p e c i f i c r u l e s to guide the courts on reasonableness. However, there are a number of general p r i n c i p l e s r e l a t i n g to the t e s t . F i r s t , e arly cases developed the rule that the adequacy of the consideration given to the employee was immaterial. 124 & more general statement appears i n Lord Parker's decision i n Herbert Morris Limited v.  Saxelby, where he stated that the court should not "weigh the advantages accuring to the conventor against the disadvantages imposed by the restraint."125 The r e l a t i v e hardship to the employee was not c r i t i c a l i n determining whether the r e s t r a i n t was reasonable. Today's courts also de-emphasize the advantages or disadvantages to the covenantor. The accepted general approach i s s t i l l whether the r e s t r i c t i o n only goes so f a r as to p r o t e ct the i n t e r e s t of the employer. However, the hardship to the employer and the adequacy of the consideration has received some j u d i c i a l a t tention i n more recent years. Lord Macnaghten had included a dictum i n the Nordenfelt case to the e f f e c t that the court may have greater freedom to hold r e s t r a i n t s as unreasonable 146 where there has been inadequate consideration.126 Lord Reid, i n Esso  Petroleum Company Limited v. Harpers Garage (Stourport), Ltd., approved t h i s dictum.127 Second, the r e l a t i v e obligations undertaken by both p a r t i e s strongly influenced the Court of Appeal and subsequently the House of Lords i n Instore v. A. Schroeder Music Publishing Co.128 The case bordered on unconscionability due to the i n e q u a l i t y i n bargaining power between the p a r t i e s and the t o t a l l y inadequate consideration promised to the employee. On the basis of t h i s extreme set of f a c t s , the r e s t r i c t i v e covenant was set aside due to the r e l a t i v e unfairness of the bargain. This decision and associated non-restraint of trade cases such as the B r i t i s h Columbia Court of Appeal's judgment i n Harry v. Kreutziger (an unconscionable sale of a f i s h boat)129, lead the Law Reform Commission to conclude that the courts have expressly adopted "tests of fairness and c o n s c i o n a b i l i t y to determine the reasonableness of covenants i n r e s t r a i n t of t r a d e " . 1 3 0 Heydon maintains that the r e l a t i v e bargaining powers of the p a r t i e s have been considered i n other ways. The author states that a shortage of s k i l l e d labour, the bargaining power of a strong union, or the negotiating s k i l l s of the convenantor, have a f f e c t e d a court's decision on reasonableness.131 The time for judging the reasonableness of the r e s t r a i n t was between the p a r t i e s has been agreed to be the time of the granting of the covenant.132 The B r i t i s h Columbia Court of Appeal e a r l i e r applied t h i s p r i n c i p l e i n Green v. Stanton. 133 The court further held that reasonableness i n the p u b l i c i n t e r e s t must also be judged at the time the 147 employer received the covenant.134 These p r i n c i p l e s were accepted by the Supreme Court of Canada i n Doerner v. B l i s s & Laughlin Industries Ltd."*35 (i) Duration and Geographic Extent of R e s t r i c t i v e Covenants These two elements require separate consideration i f an employer's goodwill and customers are being protected. Customer l i s t s change as time progresses, and customers are also spread throughout d i f f e r e n t geographical areas. The reasonableness of a r e s t r a i n t must be tested against each element. Where an employer's i n t e r e s t concerns c o n f i d e n t i a l information or trade secrets, then the two elements can be discussed together. Non-disclosure i s the primary protection f o r trade secrets: as soon as the information i s revealed to the p u b l i c , the secret disappears. Therefore, the duration of the non-disclosure r e s t r a i n t ranks as the primary t e s t of reasonableness, and any geographic r e s t r a i n t means very l i t t l e . Once again, t e s t i n g the reasonableness of any r e s t r a i n t must be a highly i n d i v i d u a l i z e d exercise. However, a court looks at c e r t a i n p e c u l i a r facts when the employer claims protection for a trade secret i n software. Reference i s made to a recent American decision since reported Canadian cases have not as yet dealt with r e s t r i c t i v e covenants being applied to protect software. In the United States, the case of Analogic  Corporation v. Data T r a n s l a t i o n , Inc., e t . a l . , was appealed to the Supreme J u d i c i a l Court of Massachusetts i n 1976.136 The p l a i n t i f f corporation had h i r e d two employees to develop a high speed data a c q u i s i t i o n module which took eighteen months to complete with development costs i n excess of $100,000. These employees subsequently l e f t the employ of Analogic and, with a t h i r d person formed the defendant company to develop a s i m i l a r data 148 a c q u i s i t i o n module. When leaving Analogic, both former employees executed termination agreements which provided, i n t e r a l i a , that they were not taking any documents or materials belonging to Analogic. The t r i a l court found that these defendants d i d use drawings, documents and a sample of the p l a i n t i f f ' s module. The defendant's development costs to produce a copy of the p l a i n t i f f ' s module were l i m i t e d to $2,500.00. The defendant corporation had then marketed i t s version of the module at a p r i c e comparable to, or less than, the p l a i n t i f f 1 s . 1 3 7 Restraint of trade p r i n c i p l e s s i m i l a r to those previously reviewed i n t h i s chapter were applied by the Massachusetts Court. I t was held that a covenant r e s t r i c t i n g competition w i l l be enforced to protect a trade secret i f i t " i s reasonably l i m i t e d i n time and space, and i s consonant with the p u b l i c interest."138 The court of f i r s t instance entered judgement of $12,714.75 against the defendants and issued a perpetual i n j u n c t i o n against t h e i r manufacturer and d i s t r i b u t i o n of the module. The defendants appealed. The duration of the inj u n c t i o n was the key issue on the appeal. I n t e r e s t i n g l y , the case was remanded back to the lower t r i b u n a l i n order to c l a r i f y and add e s s e n t i a l facts to the record. In so doing, the appeal court made the following observations: - Our holding today i s not to be inter p r e t e d to require that the duration of an in j u n c t i o n be i n f l e x i b l y determined by the amount of time necessary to reverse engineer the p l a i n t i f f ' s device without improper use of trade secrets. But evidence as to t h i s time period i s one fac t o r which should be considered i n determining the reasonableness of the scope of such an inj u n c t i o n . Of course, defendants who have w i l f u l l y attempted to p r o f i t through v i o l a t i o n on a 149 c o n f i d e n t i a l r e l a t i o n s h i p need not be placed i n as good a p o s i t i o n as other honest competitors. - The p l a i n t i f f i s e n t i t l e d to have i t s trade secrets protected at l e a s t u n t i l others i n the trade are l i k e l y , through legitimate business procedures, to have become aware of these secrets. And even then the defendants should not be permitted a competitive advantage from t h e i r avoidance of the normal costs of invention and d u p l i c a t i o n . Where the defendants have saved substantial expense by improperly using c o n f i d e n t i a l information i n creating t h e i r product, the ultimate cessation of an i n j u n c t i v e order might well be conditioned on t h e i r payment of an appropriate sum to the p l a i n t i f f . 1 3 9 In summary, the court i n the Analogic case wanted hard f a c t u a l evidence against which to t e s t the reasonableness of the in j u n c t i o n . Canadian courts require the same f a c t u a l depth i n dealing with the reasonableness of duration and geographic l i m i t a t i o n s . Once the evidence i s provided, then the courts w i l l allow an adequate l e v e l of protection. An outright p r o h i b i t i o n of competition has even been granted by both the Canadian and English courts, once the t e s t of reasonableness has been met.140 F. The P u b l i c Interest and Employment Restraints A post employment r e s t r a i n t can be attacked on the grounds that the public i n t e r e s t w i l l be harmed by i t s enforcement. To prove harm to the p u b l i c i n t e r e s t , a covenantee must f i r s t i d e n t i f y the extent of t h i s vague term. Unfortunately for such a l i t i g a n t , the case law on t h i s point i s rather unsettled. Cheshire & F i f o o t admits to a c e r t a i n confusion by s t a t i n g that "The concept of p u b l i c i n t e r e s t admits of no precise d e f i n i t i o n , and i s not s u r p r i s i n g that at times i t has been allowed a l a t i t u d e which i t i s d i f f i c u l t to defend."141 150 The case law that defines the p u b l i c i n t e r e s t divides into two general streams of authority.142 Both l i n e s of cases acknowledge that a t h e o r e t i c a l difference may e x i s t between what i s reasonable between the p a r t i e s and what may be reasonable i n the p u b l i c i n t e r e s t . The r e a l d i v i d i n g argument a r i s e s over whether the court should properly consider economic and s o c i a l evidence as d e f i n i n g the p u b l i c i n t e r e s t . A t r i o of cases represents the more r e s t r i c t i v e view of the public i n t e r e s t . In Esso Petroleum Co. L t d . v. Harper's Garage (Stourport) Ltd., Lord Pearce observed that the separate t e s t s of reasonableness might be merged. There i s not, as some cases seem to suggest, a separation between what is, reasonable on grounds of p u b l i c p o l i c y and what i s reasonable as between the p a r t i e s . There i s one broad question: i s i t i n the i n t e r e s t s of the community that t h i s r e s t r a i n t should as between the p a r t i e s , be held to be reasonable and enforceable?143 This l i m i t e d view of the element of p u b l i c i n t e r e s t was followed by the statements of Ungoed-Thomas, J. i n Texaco Lt d . v. Mulberry F i l l i n g S t a t i o n L t d . 1 4 4 But what i s meant by reasonableness with reference to the i n t e r e s t s of the public? I t i s part of the doctrine of r e s t r a i n t of trade which i s based on and di r e c t e d to securing the l i b e r t y of the subject and not the utmost economic advantage. I t i s part of the doctrine of the common law and not of economics. So i t must, of course, r e f e r to i n t e r e s t s as recognizable and recognized by law. But i f i t r e f e r s to the i n t e r e s t s of the p u b l i c at large, i t might not only involve balancing a mass of c o n f l i c t i n g economic, s o c i a l and other i n t e r e s t s which a court of law might be i l l - a d a p t e d to achieve; but, more important, i n t e r e s t s of the p u b l i c at large would lack s u f f i c i e n t l y s p e c i f i c formulation to be capable of j u d i c i a l as contrasted with unregulated personal decision and a p p l i c a t i o n - a decision varying as Lord Eldon LC put i t , l i k e the length of the chancellor's foot. 151 The decision continued by observing: If my analysis and approach are correct, unreasonable-ness i n the i n t e r e s t s of the pu b l i c r e f e r s to the i n t e r e s t s of the pu b l i c as recognised i n a p r i n c i p l e or proposit i o n of law and not the i n t e r e s t s of the p u b l i c at large. The questions which such unreasonableness r a i s e s would thus not be whether the r e s t r a i n t might be le s s i n a d i f f e r e n t organizaion of industry or society or whether the a b o l i t i o n of the r e s t r a i n t might lead to a d i f f e r e n t organization of industry or society, and thus, on balance of many considerations, to the economic or s o c i a l advantage of the country, but whether the r e s t r a i n t i s i n f a c t i n our industry and society as at present organized, and with reference to which our law operates, unreasonable i n the p u b l i c i n t e r e s t as recognised and formulated i n such p r i n c i p l e or p r o p o s i t i o n of law.145 Both the Esso case and the statements of Ungood-Thomas J. were applied by the Ontario Court of Appeal i n Stephens v. Gulf O i l Canada Ltd.146 Thus, the Court of Appeal tested possible i n j u r y to the p u b l i c i n t e r e s t against the basic proposition underlying the r e s t r a i n t of trade doctrine i . e . , that a l l men have the r i g h t to trade f r e e l y subject to reasonable r e s t r a i n t s to protect other proprietary interests.147 S p e c i f i c a l l y , the Court of Appeal was r e j e c t i n g an economics oriented approach to r e s t r a i n t of trade that was adopted by the t r i a l judge.148 Henry J. i n the lower court, had accepted economic evidence as to the industry wide impact of dealer agreements. He therefore came to the conclusion that such agreements were i n d i v i d u a l l y contrary to the p u b l i c i n t e r e s t ; since the c o l l e c t i v e e f f e c t of many of these agreements would be anti-competitive.149 The Court of Appeal dealt with Henry J.*s approach by quoting a statement from Cheshire and F i f o o t that "Reason and j u s t i c e would seem to prescribe that an agreement, reasonable 152 between the p a r t i e s , should not be upset f o r some fancied and problematical i n j u r y to the public w e l f a r e . " 1 5 0 In summary, t h i s t r i l o g y of cases lead one l e g a l commentator to observe that the reasonableness of a r e s t r i c t i v e covenant was no longer subject to two separate t e s t s . The conclusion was that "the d i s t i n c t i o n s between what i s reasonable between the p a r t i e s and what i s reasonable on the grounds of public p o l i c y i s f a l l i n g i n t o disuse."151 The Stephens decision even aroused some unusually impassioned statements of support. Fridman strongly applauded the decision of the Court of Appeal as avoiding "the walk along the slippery path that eventually leads to the negation of law and the abduction of the r u l e of law."152 The second l i n e of authority on the l i m i t s of the public i n t e r e s t takes a more expansive view of the court's r o l e . Following Henry J.'s approach i n the Stephen's case, 153 these a u t h o r i t i e s argue that i n j u r y to the p u b l i c i n t e r e s t can be tested against s o l i d economic and s o c i a l evidence. The t e s t should not be l i m i t e d to any i l l - e f f e c t s already expressed i n a propo s i t i o n of law. The highest Canadian authority to date i s the Ontario Court of Appeal i n Tank L i n i n g Corp. v. Dunlop I n d u s t r i a l Ltd.154 i n a unanimous decision of the three member Court, B l a i r J.A. disapproved of the r e s t r i c t i v e approach and made the following f o r c e f u l , although o b i t e r d i c t a comments: Nevertheless, I cannot r e f r a i n from expressing my concern that r e s t r i c t i n g consideration of the p u b l i c i n t e r e s t to economic and s o c i a l e f f e c t s which i n some fashion have acquired the status of l e g a l dogmas, might r e s u l t i n the doctrine l o s i n g i t s u t i l i t y as a valuable instrument for adjusting t h i s branch of the law to changing economic and s o c i a l conditions. 153 and subsequently stated that: It seems to me that s i t u a t i o n s can be imagined where a r e c i p r o c a l r e s t r i c t i v e covenant r e s u l t i n g i n the complete termination of a business enterprise might produce economic and s o c i a l e f f e c t s demonstrably harmful to the p u b l i c i n t e r e s t . The cessation of business might, f o r example, deprive the nation or a region of an e s s e n t i a l industry, an important source of wealth and employment or v i t a l technology. Such harmful e f f e c t s would be d i f f i c u l t to ignore even though they might not be included i n those expressed i n propositions of law which tend to be concerned with abhorrence of monopoly or the advancement of freedom to trade and competition.^55 As B l a i r J.A. noted i n h i s comments, the Supreme Court of Canada has not as yet dealt s p e c i f i c a l l y with the l i m i t s of the p u b l i c i n t e r e s t . In 1981, i n the Doerner case, Mclntyre J . , ruled that the conduct of the 1 5fi covenantee was a relevant matter that a f f e c t e d the p u b l i c i n t e r e s t . However, the covenantor was a l l e g i n g that the covenantee was engaging i n corrupt and monopolistic p r a c t i c e s . Such conduct would have been i n breach of the p r i n c i p l e s of the law already expressed i n statute. Other lower court decisions on r e s t r i c t i v e covenants appear to have considered economic and s o c i a l benefit arguments. In Sherk v. Horwitz, the Ontario High Court not only looked at the number of o b s t e t r i c i a n s p r a c t i c i n g i n an area, but held that d i s r u p t i n g the patients' r e l a t i o n s h i p with a doctor was i n j u r i o u s to the p u b l i c i n t e r e s t . 157 In Baker v. L i n t o t t , the Alberta Court of Appeal allowed an appeal to enforce a r e s t r i c t i v e covenant since no harm to the p u b l i c i n t e r e s t i n a reasonable l e v e l of choice i n the de l i v e r y of health care services had been demonstrated.158 The B r i t i s h Columbia Supreme Court s i m i l a r l y recognized 154 a wider p u b l i c i n t e r e s t when i t refused to refused to compel a drug store to close where i t was the sole source of supply f o r 2000 l o c a l residents.159 A s i m i l a r j u d i c i a l trend to a more l i b e r a l acceptance of economic evidence i s taking place i n cases under the Combines Inv e s t i g a t i o n Act.160 The Supreme Court of Canada has expressed i t s acceptance of economic evidence to prove detriment to the p u b l i c interest.161 The Supreme Court r u l i n g i s i n c l e a r contrast to the t r i a l judge who expressed willingness to ignore any economic implications: Considering, f i r s t , "The market structure" - I believe myself on safe ground by s t a t i n g that our Canadian decisions "have con s i s t e n t l y refused to be diverted by economic or t h e o r e t i c a l arguments about when a market begins or ends and f i n d the existence of a market from the p a r t i c u l a r f a c t s of a case," as submitted by the Crown, i n i t s b r i e f . " 1 6 2 Two other recent cases under the Act i n d i c a t e that the courts are increasingly w i l l i n g to consider expert evidence on the appropriate economic p r i n c i p l e s to be applied. In the decision to convict Hoffman-La Roche Inc. of predatory p r i c i n g contrary to sec. 34 (1) (c), Linden J . of the Ontario High Court was i n t e r p r e t i n g the meaning of "unreasonably low p r i c e s " and stated, "Economic theory cannot control the l e g a l determination of reasonableness, but i t i s c e r t a i n l y relevant." As a consequence the court i n the decision r e f e r r e d to the evidence of two economic experts and subsequently selected the more f l e x i b l e approach advocated by one of the experts. 163 An even more open a t t i t u d e to economic evidence on the part of both the court and the R. T.P.C. i s provided by the i n t e r l o c u t o r y a p p l i c a t i o n i n Bombardier L t d . v.  R e s t r i c t i v e Trade P r a c t i c e s Commission. This case discussed the admissability of expert economic evidence and the production of the expert's reports. Cattanach J. noted that the key issue was whether the 155 exclusive dealing adopted by Bombardier lessened or was l i k e l y to lessen competition s u b s t a n t i a l l y i n a market and then commented: I would expect that whether competition has been lessened i s a f a c t and as such concrete evidence could be adduced to so prove i f i t had occurred. However, whether exclusive dealing i s l i k e l y to s u b s t a n t i a l l y lessen competition i s a future occurrence and can only be established to be l i k e l y as the inexorable consequence of sound and i r r e f u t a b l y established economic principles.164 It must be admitted that cases that apply the c r i m i n a l law provisions of the Combines Investigations Act are not binding precedents f o r c i v i l actions under the doctrine of r e s t r a i n t of trade. However, i t i s suggested that combines l e g i s l a t i o n and the doctrine of r e s t r a i n t of trade share the same roots i n s o c i a l p o l i c y . The more l i b e r a l approach taken by the cases c i t e d under the Combines Investigation Act should be persuasive precedents for r e s t r a i n t of trade cases. The close r e l a t i o n s h i p between these two areas of the law was explored by B l a i r J.A. i n Tank L i n i n g Corporation L t d . v. Dunlop I n d u s t r i a l Products L t d . 1 6 5 I t i s obvious that the covenant i n r e s t r a i n t of trade i n t h i s case would not be l i k e l y to i n v i t e prosecution under the Combines Investigation Act, because i t does not a t t a i n criminal proportions nor confer market dominance on the p a r t i e s . I t does not follow, however, that the covenant could not be regarded as unreasonable with reference to the p u b l i c i n t e r e s t under the Nordenfelt doctrine. This recognized by s.39 [rep. & sub. i b i s . , s. 18(1) of the Act which provides: 39. Except as otherwise provided i n this Part, nothing i n this Part shall be construed to deprive any person of any c i v i l right of action. Where any agreement c l e a r l y contravenes the Act, i t w i l l be automatically struck down under the second branch of the Nordenfelt t e s t as occurred i n Weidman v. Shragge, supra. In other cases where an agreement f a l l s short of offending the s t r i c t c r iminal standards of the Act, i t w i l l s t i l l have to face the t e s t of the broader considerations of p u b l i c i n t e r e s t applicable i n c i v i l actions. In summary, the l i m i t s of the p u b l i c i n t e r e s t under the r e s t r a i n t of trade doctrine remains a l e g a l issue that can only be s e t t l e d by the 156 Supreme Court of Canada. The most recent a u t h o r i t i e s appear to favour the more l i b e r a l i n t e r p r e t a t i o n . The doctrine might ultimately require an assessment of the e f f e c t of an employment agreement on economic and s o c i a l conditions i n v o l v i n g the p u b l i c . In Heydon's words, "the doctrine may be at the threshold of one of i t s greatest advances."166 G. OTHER CONSIDERATIONS 1. Onus of Proof i n L i t i g a t i o n of Covenants: Well s e t t l e d p r i n c i p l e s of law apply to a s c e r t a i n the reasonableness of r e s t r i c t i v e covenants. The English and Canadian a u t h o r i t i e s have adopted the same l e g a l framework for the j u s t i f i c a t i o n of an employment r e s t r a i n t . "The onus i s on the party seeking to enforce the contract ... to e s t a b l i s h that i t i s reasonable i n the i n t e r e s t s of the p a r t i e s . The onus for e s t a b l i s h i n g that i t i s not reasonable i n the p u b l i c i n t e r e s t i s on the party opposing enforcement..."167 Similar agreement ex i s t s as to the appropriate time to judge the reasonableness of the r e s t r a i n t . "[T]he question of reasonableness of a covenant must be considered with reference to the time that covenant i s given."168 This reference point does not e n t i r e l y preclude a court from looking at developments which occurred a f t e r the formation of the contract. However, attention must be given only to f a c t s which were reasonably i n the p a r t i e s ' expectations. Cheshire and F i f o o t cautions that [T] he court must s c r u t i n i z e the r e s t r a i n t as at the date when the contract was made i n the l i g h t of the circumstances then e x i s t i n g and also i n the l i g h t of what at that date might possibly happen i n the future. The temptation to consider what i n f a c t has happened by the time of the t r i a l must be r e s i s t e d , f o r a contract containing a r e s t r a i n t alleged to be excessive must be e i t h e r i n v a l i d ab i n i t i o or v a l i d ab inito.169 157 In the context of employment r e s t r a i n t s , onus of proof does not operate as a s t r i c t l e g a l burden. The covenantor's or covenantee's case i s not tested against a r i g i d standard of proof. Instead, the r u l e s of onus of proof r e a l l y d i r e c t the p a r t i e s attention to the f a c t u a l evidence that w i l l be required to either enforce or set aside the convenant. As the House of Lords o r i g i n a l l y stated i n Herbert Morris L t d . v. Saxelby, "[T]he onus of proving such circumstances must, of course, r e s t on the party a l l e g i n g them. When once they are proved, i t i s a question of law f o r the decision of the judge whether they do or do not j u s t i f y the r e s t r a i n t . There i s no question of onus one way or another." 1 70 Thus, the r e a l burden on the covenantee i s to show that circumstances are such that the court should conclude that the r e s t r a i n t i s reasonable. The covenantor's burden i s to demonstrate a context i n which the court can conclude that the p u b l i c i n t e r e s t would be harmed by the r e s t r a i n t . 1 7 1 The covenantee's onus of proof also extends to the scope of the employer's i n t e r e s t being protected.172 Demonstrating that the r e s t r a i n t i s reasonable between the p a r t i e s cannot be l i m i t e d to time and geographical l i m i t a t i o n s . As discussed e a r l i e r i n t h i s chapter, the employer/covenantee must prove a l l of the required elements of c o n f i d e n t i a l information or trade secrets.173 Such proof allows the court to conclude that the employer has a legitimate i n t e r e s t to protect. Next, the court can determine whether the r e s t r a i n t only goes so far as to adequately protect the employer's i n t e r e s t . Heydon argues that courts have generally applied s t r i c t standards i n considering whether a covenantee holds a trade secret that i s worthy of prote c t i o n . This statement apparently applies on a general basis to Commonwealth courts, since the author r e l i e s on a v a r i e t y of e a r l i e r 158 A u s t r a l i a n , Canadian and B r i t i s h cases.174 However, t h i s generalization only has l i m i t e d value. The p a r t i c u l a r ' facts of each case are far more important than any r u l e on onus of proof. For example, i n E l e c t r i c  Reduction Co. of Canada L t d . v. Crane, the Ontario High Court s h i f t e d the onus of proof to the defendant covenantor. The reverse onus was adopted due to the suspicious circumstances i n which the defendant received the employer's c o n f i d e n t i a l information.175 S i m i l a r l y , i n Management Recruiters of Toronto v. Bagg176 the facts that the employee had removed a large number of f i l e s r e l a t i n g to job o f f e r s and prospects allowed the court to conclude that the employer had c o n f i d e n t i a l information that deserved prote c t i o n . One f i n a l point on the employer's onus of proof should be mentioned. Is there a d i f f e r e n t onus of proof for express covenants than f o r breaches of f i d u c i a r y obligations? This chapter has previously discussed the f a c t s that prove the existence of c o n f i d e n t i a l information and has r e f e r r e d to the h e l p f u l decision of Megarry V.C. i n Thomas Marshall (Exports) L t d . v. Guinle.177 However, does proving the existence of c o n f i d e n t i a l information and the t r a n s f e r of that information to the employee s a t i s f y the employer's onus of proof? Can the employer also argue that the employee's possession of the information properly leads to the conclusion that the information w i l l be d i s c l o s e d or misused? Many cases that make t h i s argument deal with alleged breaches of an employee's f i d u c i a r y or implied duties and must be distinguished.178 As i n Hivac v. Park Royal S c i e n t i f i c Instruments Ltd.179 the Courts w i l l protect an employer against deliberate and harmful actions undertaken by employees. Such actions v i o l a t e an employee's o b l i g a t i o n s of f i d e l i t y . 1 8 0 159 However, such cases are not decided on the same l e g a l basis as the enforcement of covenants i n r e s t r a i n t of trade. Express covenants are considered to be prima f a c i e void because they r e s t r i c t the employee's use of h i s own s k i l l s and personal knowledge. Thus, i n the case of Chevron Standard Limited v. Home O i l Co. L t d . and Leeson, the court rejected the idea of a " p o s s i b i l i t y of misuse doctrine."181 The former employee, Leeson, possessed c o n f i d e n t i a l information, but emphatically denied that he would use i t for the benefit of h i s new employer. Since Leeson was not a trustee or d i r e c t o r , he was not subject to the onerous duty of avoiding any engagement "which possibly may c o n f l i c t with the i n t e r e s t s of those whom he i s bound to protect." Instead, Moore J . of the Alberta Queen's affirmed that the onus of proof rested upon the former employer. There must be more than a mere p o s s i b i l i t y of misuse t o s e t t l e l i a b i l i t y on a party. Suspicion of misuse of c o n f i d e n t i a l information i s i n s u f f i c i e n t - there must be r e a l evidence. Chevron has not s a t i s f i e d i t s burden of proof with respect to the matters alleged i n the statement of claim.182 160 FOOTNOTES; CHAPTER V 1. See The Law Commission Breach of Confidence (1981) at p. 18-19; North P.M. Breach of Confidence: Is There a New Test? (1972) J.S.P.T.L. 149 at 149; Gurry, F. Breach of Confidence (1984) unpublished materials at p. 6. 2. Maguire v. Northland Drug Co. L t d . [1935] 3 D.L.R. 521, at 524 per Dysart J , (S.C.C.). 3. [1916] 1 A.C. 688, at 702. 4. (1973) 40 D.L.R.(3d) 371, at 391. 5. E l s l e y v. J.G. C o l l i n s Ins. Agencies L t d . (1978) 83 D.L.R. (3d) 1 (S.C.C.) 6. A s i m i l a r reasoning was displayed by the High Court of A u s t r a l i a i n Geraghty v. Minter (1979) 26 A.L.R. 141. The case involved the enforcement of a non-competition clause a f t e r the d i s s o l u t i o n of a partnership. The covenantee partner had also received the ri g h t s to the goodwill of the partnership, and claimed that the non-competition clause was the only p r a c t i c a l means of protecting the goodwill. Even though the Court noted the t h e o r e t i c a l differences between employment and partnership r e s t r a i n t s , the r e a l concern was to allow a reasonable p r o t e c t i o n f o r the covenantee. The clause was enforced. 7. Supra, note 5 at p. 8. 8. (1977) 16 O.R. (2d) 682, 79 D.L.R.(3d) 108, at 112-113 (Ont. H.C.). 9. Baker v. Gibbons [1972] 2 A l l E.R. 759; Diamond Stylus Bauden v.  P r e c i s i o n Diamonds [1973] R.P.C. 675. 10. [1982] 8 F.S.R. 92, at 101. 10a. Read v. Wright (1963) 45 W.W.R. 108 (B.C.S.C.). 11. I n t e r n a t i o n a l Tools v. K o l l a r (1968) 67 D.L.R. (2d) 386 (Ont. C.A.), varying 56 D.L.R. (2d) 189. 161 12. Regina v. Kirkwood (1983) 148 D.L.R. (3d) 323; Regina v. Stewart (1982) 138 D.L.R. (3d) 73 (Ont. H.C.) (1983) 149 D.L.R. (3d) 583 (Ont. C.A.). See Chapter I I I Footnote 5 f o r a d d i t i o n a l references. 13. Chapter VI reviews the injunction remedy. 14. See the useful discussion of severance and overreaching i n the Report  on Covenants i n Restraint of Trade, (1984) Law Reform Commission of B.C. at p. 63-71. 15. (1938) 55 R.P.C. 21 (Chancery Div.) 16. Id., at 23. 17. Id., at 28. 18. (1981 ) 12 6 D.L.R. (3d) 451 (Ont.H.C.) 19. Id., at 468. 20. (1983) 149 D.L.R. (3d) 46 at p. 50. 21. Supra, Chapter III Sections B and C. 22. George Hunter and G i l b e r t S. Sharpe, Patent Rights In An Employee- Invention: A Comparative Analysis and a Model For Reform (1975) 23 Ch i t t y ' s Law Journal 253. 23. Id., at 261. 24. Supra, Chapter I I I , at note 64a. 25. Supra, Chapter I I I at p. 40-45. 26. Heydon, J.D. The Restraint of Trade Doctrine (1971 London, Butterworths) at 20. 27. Id. 28. Id. ' 29. Supra, note 2. 30. [1957] 1 W.L.R. 9, at 18. 31. Supra, note 5. 32. Supra, note 5, at 6. 162 33. B r a i t , Richard A., The Use of R e s t r i c t i v e Covenants i n the Employment  Contract (1981) 6 Queens Law Journal 414, at 419. 34. Supra, note 5. 35. Supra, note 5, a t 7. 36. Id. 37. Supra, note 5, at 5-6. 38. Hepworth Manufacturing Company Limited v. Ryott [192 0] 1 Ch. 1, at 33 (C.A.). 39. Cheshire and F i f o o t Law of Contract, (10th E d i t i o n 1981), at p. 351. 40. Esso Petroleum Co. L t d . v. Harper's Garage (Stourport) L t d . [1968] A.C.269, at 309; Stephens v. Gulf O i l Canada L t d . (1976) 65 D.L.R. (3rd) 193, at 203 (Ont. C.A.). 41. Culzean Inventions L t d . v. Midwestern Broom Co. L t d . [1984] 3 W.W.R. 11 (Sask. Q.B.) A number of U.S. cases have also considered whether l i c e n s i n g r o y a l t i e s are enforceable even a f t e r the p u b l i c d i s c l o s u r e of the lice n s e d trade secret. Aronson v. Quick Point P e n c i l Co. 440 U.S. 257 (1979) and see Case Comment (1978) E.I.P.R. 28. 42. Law Reform Commission Report on Restraint of Trade (1984) at p. 19. 43. Furlong v. Burns & Co. (1964) 43 D.L.R. (2d) 689 (Ont. H.C.); Taylor  v. McQuickin, (1968) 2 D.L.R. (3d) 463 (Man. Q.B.); B u l l v.  Pitney-Bowes L t d [1966] 3 A l l E.R. 384 (Q.B.); Henrikson v. Tree  Island S t e e l Co. L t d . , (1983) 45 B.C.L.R. 115 (B.C.S.C.) 44. C o l o n i a l Broadcasting System L t d . v. R u s s e l l , (1964) 48 D.L.R. (2d) 242 (Nfld. S.C.). 45. I n g l i s v. Great West L i f e Assurance Co., (1942) 1 D.L.R. 99 (Ont. C.A.). 163 46. Supra, note 39. 47. Warner Brothers Pictures Inc. v. Nelson [1936] 3 A l l E.R. 160. 48. Thwaites v. McKillop (1925) 29 O.W.N. 122 (OA.); Bennett-Pacaud Co.  v. Dunlop, [1933] O.R. 246 (OA.) 49. Sheppard Publishing Co. v. Harkins, ( 1905) 9 O.L.R. 504 (OA.) 50. [1974] 3 A l l E.R. 616. 51. Id. at 622. 52. [1975] 1 W.L.R. 61, [1975] A l l E.R. 237. 53. Nordenfeldt v. Maxim Nordenfeldt Guns and Ammunition Company Limited [1894] A.O 535 (H.L.). 54. Id., at 565. 55. Lord Macnaghten"s statement was not immediately accepted by the House of Lords i n the Nordenfeldt decision, but was expressly adopted by the House of Lords i n Mason v. Provident C l o t h i n g and Supply Company  Limited [1913] A.O724. See also the more recent a p p l i c a t i o n i n Esso  Petroleum Co. L t d . v. Harper's Garage (Stourport) Ltd. [1968] A.O 269, at 299-3 00 per Lord Reid. For an e a r l i e r Canadian authority, see Maguire v. Northland Drug Co. L t d . Supra, note 2. 56. E l s l e y et a l . v. J.G. C o l l i n s Ins. Agencies L t d . [1978] 2 S.C.R. 916, 83 D.L.R. (3d) 1, 36 C.P.R. (2d) 65 at 5 D.L.R. per J u s t i c e Dickson; Doerner et a l . v. B l i s s & Laughlin Industries Inc. et a l . [1980] 2 S.C.R. 865, 117 D.L.R. (3d) 547, at 551 D.L.R. 57. (1983) 140 D.L.R. (3d) 659, at 663-64. 58. Id. 59. Supra, notes 57 and 58 f o r the four questions. 164 60. See Western Inventory Service L t d . v. Sager (1983) 148 D.L.R.(3d) 434, at 439 (Ont. H.C) where Mr. J u s t i c e Krever l i s t s 16 propositions of law applicable to the doctrine of the r e s t r a i n t of trade and employment r e s t r a i n t s . No mention i s made of the element of pub l i c p o l i c y . 61. Cheshire and F i f o o t ' s Law of Contract (1981 10th edition) at 354-55. 62. [1968] A.C. 269, [1967] 1 A l l E.R. 699. 63. Supra, note 61. 64. Supra, note 57, at 668-69. 65. Supra, note 61, at 355. 66. [1947] 1 A l l E.R. 179, at 181. Apld. M i l l s et a l . v. G i l l [1952] O.R. 257, at 260; C r a i g Agency of Ontario L t d . v.Bennett e t . a l . (1977) 74 D.L.R. (3d) 562, at 569 (Ont. H.C.). 67. Id. 68. (1971 ) 18 D.L.R. (3d) 574 (S.C.C). 69. Id., at 585. Laskin J. c i t e d Attwood v. Lamont [1920] 3 K.B. 571, and Maquire v. Northland Drug Co. L t d . [1935] 3 D.L.R. 521 i n support of h i s summary of the law. 70. (1983) 148 D.L.R. (3d) 434 (Ont. H.C). 71. (1979) 45 C.P.R. (2d) 206 (B.C.S.C.). 72. Supra,See Chapter II Section D. 73. Id. 74. (1971 ) 15 D.L.R. (3d) 604 (Ont. H . C ) . 75. Id., a t 607. 76. (1976) 58 D.L.R. (3d) 352 (Ont. H.C.) at 359-60. 165 77. Supra, note 66. 78. Onus of Proof under the Doctrine of Restraint of Trade i s reviewed i n par t G of t h i s Chapter. 79. Sherk v. Horwitz (1973) 31 D.L.R. (3d) 152, at 153 (Ont. C.A.). 80. Supra, note 26 at p. 86-87. 81. Supra, note 74. 82. I n d u s t r i a l Furnaces L t d . v. Reaves [1970] R.P.C. 605 (Ch. Div.) . 83. (1969) 67 W.W.R. 246, at 254 (Man. C.A.). 84. Id. 85. Northern Messenger & Transfer L t d . v. Fabbro (1964) 45 D.L.R. (2d) 73 (Man. Q.B.). 86. Cantol v. Brodi Chemicals L t d . (1978) 94 D.L.R. (3d) 265, 42 C.P.R. (2d) 1 11 (Ont. H.C.) . 87. R.I. C r a i n L t d . v. Ashton [1949] 2 D.L.R. 481, at 485-86 (Ont. H.C), a f f ' d [1950] 1 D.L.R. 601 (Ont. C.A.). 88. This l i s t was prepared by the author as part of materials for the 1985 Computers and Law I n s t i t u t e March 11th/12th 1985 Continuing Legal Education Society of B.C. (as yet unpublished) 89. Supra, Note 87 at 488-89. A r e l a t e d example i s Mustad v. Doson [1963] R.P.C. 97 where the owner of information applied for a patent and d i s c l o s e d i t to the world. The information i n the patent s p e c i f i c a t i o n was no longer protected as c o n f i d e n t i a l . 90. Robin-Nodwell Mfg. L t d . v. Foremost Developments L t d . and Nodwell (1966) 52 C.P.R. 244 (A l t a . S . C ) . 91. In Paul v. Southern Instruments [1964] R.P.C. 118, the p l a i n t i f f was able to suc c e s s f u l l y enforce obligations of secrecy against customers who leased phone answering machines. 166 92. Supra. Note 90 at 250-51. 93. Id. 94. Supra. Chapter III at Fn. 5 f o r relevant cases and recent a r t i c l e s . 95. Webster, Third International Dictionary S p r i n g f i e l d , Mass. 1969. 96. B r a i t , Richard A. The Use of R e s t r i c t i v e Covenants i n the Employment  Contract (1981) 6 Queens Law Journal 414, at 423-424; Jager, Melvin F. Trade Secrets Law Handbook, (1983) at 95-99.; Finlayson, George D. R e s t r i c t i v e Covenants, Trade Secrets, and Wrongful Dismissal, Law Society of Upper Canada Special Lectures 1976 Employment Law 251, at 261-62. 97. F. Dessemontet, The Legal Protection of Know-how i n the United States of America, (1976 2nd Ed i t i o n , t ranslated by H.W. Clarke), at 15-16. 98. Id. 99. Wheeler L. Trade Secrets and the S k i l l e d Employee i n the Computer  Industry (1983) 61 W.U.L.Q. 823 a t 839-43. 100. Id. at p. 43. 101. [1916] 1 A.C. 688 (H.L.). 102. Id., at 714. 103. Supra, Note 99 at 823 Fn. 7 r e f e r r i n g to G i l l e t t e Co. v. Williams 360 F. Supp. 1171 at 1176-78 (1973) D. Connecticut. 104. [1964] 3 A l l E.R. 731 (Ch. D. ) . 105. Id., a t 735. 106. Id., at 736. 107. Commercial P l a s t i c s L t d . v. Vincent [1965] 1 Q.B. 623 (C.A.). 108. Chevron Standard Limited v. Home O i l Company Limited and Leeson [1982] 3 W.W.R. 427 (Al t a . C.A.), at p. 446 when the employee's 167 d i s t i n c t i o n between p r i v i l e g e d knowledge and portable knowledge was accepted by the court. 109. Hammond, G.R. Law and the Misappropriation of Valuable Commercial  Information i n the Computer Age. Sept. 24, 1984 unpublished materials c i r c u l a t e d at University of Toronto conference i n Oct. 1984 at p. 267. 110. Louis v. Smellie (1895) 11 T.L.R. 515. 111. Waite's Auto Transfer L t d . v. Waite [1928] 3 W.W.R., Ice Delivery  Co. v. Peers and Campbell [1926] 1 D.L.R. 1176 (B.C.C.A.). 112. Supra, note 90, at 249, Tasco Telephone Answering Exchange Ltd. 113. D. Wedge, The A c q u i s i t i o n of Packaged Software: An Overview (1984) Canadian Computer Law Reporter 39, at 45. 114. (1983) 140 D.L.R. (3d) 659 (Ont. C.A.). 115. Kores Manufacturing Co. L t d . v. Kolok Manufacturing Co. L t d . [1958] 2 A l l E.R. 65, (C.A.). 116. Supra, note 11. 117. [1972] V.R. 315. 118. Id., at 318. 119. (1973) 1 Aust. L.R. 385 (Aust. H . C ) . 120. (1976) 65 D.L.R. (3d) 193 (Ont. C.A.). 121. Id., at p. 209. 122. (1977) 1 W.L.R. 1472. See also Greer v. Sketchly [1979] I.R.L.R. 445 at 447 (C.A.). 123. Id. 124. Heydon, J.D. The Restraint of Trade Doctrine, (1971) at p. 20-21. 125. [1916] 1 A.O 688, at 707. 168 126. [1894] A.C. 535 (H.L. ) at 300-301. 127. [1968] A.C. 269 (H.L.) at 300-301. 128. [1974] 1 A l l E.R. 171 at 177-78 (C.A.), affirmed [1974] 3 A l l E.R. 616 (H.L.). 129. (1978) 95 D.L.R. (3d) 231 (BCCA). 130. Supra, note 42 a t 68-69. 131. Supra, note 26 at 344-45. 132. H.F. Clarke L t d . v. Thermidaire Corp. L t d . (1973) 33 D.L.R. (3d) 13 at p. 22, reversed 54 D.L.R. (3d) 385., (SCO . 133. (1969) 6 D.L.R. (3d) 680 at 687. 134. Id. 135. (1981) 117 D.L.R. (3d) 547 at 556. 136. 358 N.E. 2d 804 (1976), Supreme J u d i c i a l Court of Mass. 137. Id. , a t 806-07. 138. Id. ' 139. Id., at p. 805-08. 140. Littlewoods Organization L t d . v. H a r r i s , [1977] 1 w.L.R. 1472; E l s l e y  e t . a l . v. J.G. C o l l i n s Ins. Agencies L t d . , [1978] 2 S.C.R. 916. 141. Supra, note 3 9 at 358. 142. The p u b l i c i n t e r e s t i n c o n f i d e n t i a l information i s also being explored i n other areas than the doctrine of r e s t r a i n t of trade. For example, the public i n t e r e s t has been recognized as a defence i n a breach of confidence actions: Fraser v. Evans [1969] 1 A l l E.R. 8; Hubbard v. Vosper [1972] 1 A l l E.R. 1023; I n i t i a l Services Ltd.  v. P u t t e r i l l [1968] 1 QB 396; The pu b l i c i n t e r e s t also has resulted i n a d i f f e r e n t l e g a l treatment of government secrets rather than 169 p r i v a t e proprietory trade secrets. Commonwealth of A u s t r a l i a v.  John F a i r f a x & Sons Pty L t d . State Secrets, Copyright and Breach of  Confidence [1981] 8 E.I.P.R. 243; N i c o l A. Breach of Confidence and  the Media [1981] 12 E.I.P.R. 348; Gurry F. Breach of Confidence -Part B/Tensions and Competing Interests - The Pu b l i c Interest 29 (unpublished materials). 143. [1968] A.C. 269, at 324 (H.L.). 144. [1972] 1 A l l E.R. 513. 145. Id., at 526-27. 146. (1976) 65 D.L.R. (3d) 193 (C.A.). 147. Id., at 213. 148. (1974) 45 D.L.R. (3d) 161 (Ont. H.C). 149. Id., at 200. 150. Supra, note 39 at 213. See also Macaulay v. Schroedor Music  Publishing Co. L t d . [1974] 3 A l l E.R. 616 (H.L) at 626 where Lord Diplock degraded the importance of economic theory and stressed the element of f a i r n e s s between the p a r t i e s . 151. Finlayson, George D. " R e s t r i c t i v e Covenants, Trade Secrets, and  Wrongful Dismissal" Law Society of Upper Canada Special Lectures 1976 Employment Law, at 259. 152. Fridman, G.H.L. "Some Polemical Thoughts on the Subject of  Rest r a i n t of Trade" The Canadian Business Law Journal at 312-13. 153. Supra, note 146. 154. (1980) 149 D.L.R. (3d) 659 (C.A.). 155. Id., at 674. 170 156. (1981) 117 D.L.R. (3d) 547, at 553-54 (S.C.C.). 157. (1971 ) 25 D.L.R. (3d) 675 (Ont. H.C), upheld on other grounds at (1972) 31 D.L.R. (3d) 152. 158. (1983) 141 D.L.R. (3d) 571, at 572-73 ( A l t a . C.A.). 159. Marathon R e a l i t y Co. L t d . v. Bedford's Drug Store (1980) 25 B.C.L.R. 102 (B.C.S.C). 160. R.S.C. 1970, c. C-23, 552, 33. 161. R. v. K.C. I r v i n g L t d . (1977) 72 D.L.R. (3d) 83, a t 92-94 (S.C.C). 162. (1974) 16 C.C.C. (2d) 49, at 79. 163. Regina v. Hoffman-La Roche Ltd. 1980 48 C.P.R. (3d) 145, at 180. 164. (1980) 48 C.P.R. (2d) 248, at 251. 165. Supra, note 57 a t 671. 166. Heydon, J. D. "Recent Developments i n Restraint of Trade" (1975) 21 McGill Law Journal, 325. 167. Tank L i n i n g Corp. v. Dunlop I n d u s t r i a l L t d . (1983) 140 D.L.R. (3d) 659, a t 665 (Ont. C.A.); E l s l e y v. J.G. C o l l i n s Ins. Agencies Ltd. (1978) 83 D.L.R. (3d) 1, at 9 (S.C.C); Herbert Morris L t d . v.  Saxelby [1916] 1 A.O 689, a t 707. 168. Doerner e t . a l . v. B l i s s and Laughlin Industries Inc. e t . a l . (1981) 117 D.L.R. (3d) 547, at 556 (S.C.C); Stephens v. Gulf O i l Canada  L t d . e t . a l . (1975) 65 D.L.R. (3d) 193 (Ont. OA.); A.-G. A u s t r a l i a  v. Adelaide Steamship Co. Ltd. [1913] A.O 781, a t 797. 169. Supra, note 39 at 359. 170. [1916] A.O 689, a t 707. 171. See Hiebert v. P a c i f i c Petroleums L t d . (1980) 50 C.P.R. (2d) 41, at 43-44; Pe t r o f i n a Canada L t d . v. Gionet (1973) 9 N.B.R. (2d) 65, at 69. 171 172. There i s a lack of case authority dealing with t h i s point, but the l o g i c of the conclusion i s supported by Heydon, J . D. "Recent  Developments i n Restraint of Trade" (1975) 21 M c G i l l Law Journal, 325 supra, note 139, at 44. B r a i t , Richard A. "The Use of  R e s t r i c t i v e Covenants i n the Employment Contract" (1981) 6 Queens Law Journal 414, at 437-38. 173. Consolidated T e x t i l e s v. Central Dynamics L t d . (1974) 18 C.P.R. (2d) 1, at 11. 174. Heydon, J . D. "Recent Developments i n Res t r a i n t of Trade" (1975) 21 McGill Law Journal, 325 at 336-3 7. 175. (1958) 29 C.P.R. 134, at 136 (Ont. H.C.). 176. (1970) 15 D.L.R. (3d) 684 (Ont. H.C). 177. [1978] 3 A l l E.R. 193 (Ch. D. ) . 178. Chapter IV dealt with Implied and Fiduciary Obligations. 179. Hivac v. Park Royal S c i e n t i f i c Instruments L t d . [1946] Ch. 169 (C.A.). 180. Id. 181. [1980] 5 W.W.R., 624 at 666-67 ( A l t a . Q.B.), affirmed [1982] 3 (Al t a . OA.) . 182. Id. 172 VI THE CRITICAL REMEDIES FOR BREACH OF AN EMPLOYEE'S OBLIGATIONS As discussed i n the previous chapters, the obligations of a s k i l l e d employee i n the computer industry to h i s employer a r i s e from separate categories of implied, f i d u c i a r y and express o b l i g a t i o n s . The remedies that are a v a i l a b l e to deal with a breach of an o b l i g a t i o n depend p r i m a r i l y upon the source of the o b l i g a t i o n . Thus, breach of the express terms of an employment contract lead to the well defined p r i n c i p l e s of damages set out i n Hadley v. Baxendalel and subsequent decisions.2 Thus, an employee who v i o l a t e s an express r e s t r i c t i v e covenant w i l l be l i a b l e i n damages f o r a l l the losses that were reasonably foreseeable to the p a r t i e s at the formation of the contract. Where the implied o b l i g a t i o n s are considered to be implied terms of the contract, the same rules on contractual damages w i l l apply.3 The B r i t i s h Columbia Court of Appeal has s i m i l a r i l y stated that damages for breach of an employee's f i d u c i a r y o b l i g a t i o n s are to be assessed on the same basis as any other breach of c o n t r a c t . 4 However, there are c e r t a i n remedial issues that are c r i t i c a l f o r an employer i n the computer industry. F i r s t , what damages can be awarded against a t h i r d party who p a r t i c i p a t e s i n or b e n e f i t s from an employee's breach of confidence? Secondly, what are the appropriate p r i n c i p l e s f o r an i n t e r l o c u t o r y i n j u n c t i o n to r e s t r a i n an employee from breaches of a r e s t r i c t i v e covenant? T h i r d l y , can the courts grant exemplary or p u n i t i v e damages against an employee f o r a breach of employment obligations? These three remedial questions have been selected for t h e i r great importance to the p a r t i c u l a r circumstances of the computer industry. Their relevance w i l l be explained i n each s p e c i f i c s e c t i o n . 173 The assumption that these issues are of a p a r t i c u l a r l y c r i t i c a l nature to the industry does not mean that a var i e t y of other remedies are not relevant. Remedies such as Mareva injunctions5, permanent injunctions6, constructive trusts7, Anton P i l l e r orders8, accounting f o r p r o f i t s 9 and del i v e r y up10 are a l l p o t e n t i a l l y a p p l i c a b l e to redress the losses suffered by employers i n the computer industry. However the very number and complexity of these p o s s i b l e remedies has lead to a concentration on the three most c r i t i c a l remedial issues: 1. Damage Awards against a T h i r d Party Who Benefits From an Employee's  Breach of Confidence Remedies against t h i r d party outsiders are c r u c i a l for an employer i n the computer industry. An employee may breach express covenants of c o n f i d e n t i a l i t y by appropriating software and then s e l l i n g the program to a t h i r d party competitor.11 i f the employee then disappears, the normal contractual remedies of damages or inj u n c t i o n based upon the breach of contractual o b l i g a t i o n s are i r r e l e v a n t . The employer's concern i s to either prevent the competitor's use of the software v i a an in j u n c t i o n , or else to claim compensation i n damages i f the competitor has already made successful use of the software. If i t i s assumed that the competitor's actions amount to a breach of an o b l i g a t i o n of confidence, 12 then what p r i n c i p l e s of damages apply to such a breach? F i r s t , i t appears that the courts, i n the absence of express contract or property r i g h t s , are exercising the concurrent j u r i s d i c t i o n of equity i n r e s t r a i n i n g breaches of confidence.13 This was also the conclusion of the Law Commission's report on Breach of Confidence14 a f t e r reviewing cases such as Prince A l b e r t v. Strange15 and Morrison v. Moat.16 174 If c o n f i d e n t i a l information can invoke the purely equitable powers of the courts, then the remedies for breach of confidence w i l l not be always subject to common law l i m i t a t i o n s . Instead, equity can impose i t s own substantive j u r i s d i c t i o n to protect information i n those s i t u a t i o n s where the absence of contract or property r i g h t s has removed the case from the common law. Fullagar J . of the Supreme Court of V i c t o r i a expressed t h i s concept i n a recent trade secret case as follows: I t must also be constantly borne i n mind that equity acts i n personam upon the defendant, that i t i s only unconscionable conduct that equity w i l l r e s t r a i n or v i s i t with i t s other remedies, and that equity only extends any remedy at a l l where i t i s s a t i s f i e d both that i t i s just i n a l l the circumstances to extend i t and that there are no remedies a v a i l a b l e at common law (e.g., by reason of property at common law or of some common law contract) which are i n a l l the circumstances 17 adequate. Strong Canadian authority exists for the court's r i g h t to award equitable damages. This authority upholds the view that breach of confidence i s an i l l u s t r a t i o n of equity acting i n i t s substantive capacity. In E l s l e y v. J.G. C o l l i n s Insurance Agencies Ltd., a unanimous decision of the Supreme Court of Canada, the p r i n c i p l e i s given that: "a p l a i n t i f f may have a r i g h t to damages i n equity i n addition to an inju n c t i o n i f he can e s t a b l i s h h i s entitlement under the appropriate equitable considerations." 18 Dickson J. (as he then was) traced the Court's power to award damages i n equity i n the province of Ontario back to the Lord Cairns' Act of 1858. Section 21 of t h i s l e g i s l a t i o n provided: Where the court has j u r i s d i c t i o n to entertain an ap p l i c a t i o n for an inj u n c t i o n against a breach of a covenant, contract or agreement, or against the commission or continuance of a wrongful act, or for the s p e c i f i c performance of a covenant, contract or 175 agreement, the court may award damages to the party i n j u r e d either i n addition to or i n s u b s t i t u t i o n for the i n j u n c t i o n or s p e c i f i c performance, and the damages may be ascertained i n such manner as the court d i r e c t s , or the court may grant such other r e l i e f as i s considered j u s t . 1 9 The B r i t i s h Columbia Supreme Court has considered whether the Lord Cairns Act, 1858, i s part of the law of B r i t i s h Columbia. In Arbutus Park  Estates v. F u l l e r Toy J. decided that the Lord Cairns' Act 1858 (Imp) i c.27, was adopted i n B r i t i s h Columbia by v i r t u e of the English Law Act, R.S.B.C. 1960, Chapter 129.20 The current statutory authority i s now section 2 of the Law and Equity Act chap. 224 R.S.B.C. 1979. As a r e s u l t of these a u t h o r i t i e s , the courts i n B r i t i s h Columbia have the power to award equitable damages. Authority from other j u r i s d i c t i o n s supports t h i s conclusion on the e f f e c t of the Lord Cairns' A c t . 2 0 a Having concluded that our courts have the power to grant damages i n a purely equitable capacity, what p r i n c i p l e s should be followed i n c a l c u l a t i n g the award? Fortunately, the Supreme Court of Canada has presented some f l e x i b l e guidelines to a s s i s t the lower courts. In the unanimous decision i n E l s l e y v. J.G. C o l l i n s Insurance Agencies L t d , Dickson J . suggested that usually the common law p r i n c i p l e s could be followed to determine equitable damages: It w i l l generally be appropriate to adopt i n equity rules s i m i l a r to those applicable at law: Spry, Equitable Remedies '1971', at page 552-554. This i s so not because the court i s obliged to apply analogous l e g a l c r i t e r i a , but because the amount of compensation which would s a t i s f y the loss suffered, and which the court considers just and equitable to be paid, u s u a l l y happens to be equivalent to the amount of l e g a l damages which would be a p p r o p r i a t e . 2 1 However, Mr. J u s t i c e Dickson did not want the recommended use of the common law damage rules to be interpreted as a l i m i t a t i o n on the substantive power of equity i n a breach of confidence action. 176 Accordingly, the court c a r e f u l l y pointed out that: The award i s s t i l l governed, however, by general equitable considerations which would not apply i f the p l a i n t i f f were seeking damages at law rather than i n equity. These considerations might serve, for example, to reduce the amount due to such f a c t o r s as delay or acquiescence. * However, the general guidelines noted above s t i l l leave many damage re l a t e d questions unanswered. Lord Denning's de c i s i o n i n Seager v.  Copydex23 points out the t h e o r e t i c a l and pragmatic confusion that a court can create. The case involved a p l a i n t i f f who d i s c l o s e d c o n f i d e n t i a l information r e l a t i n g to an invention to the defendant's o f f i c e r s during the course of negotiating a market contract. The negotiations ended without the defendant's entering i n t o a contract with the p l a i n t i f f . However, the defendant then used the p l a i n t i f f ' s information as the basis upon which to develop and market i t s own product. The p l a i n t i f f was successful and received a lump sum damage award from the Court. Lord Denning based the protection afforded the p l a i n t i f f upon "the broad p r i n c i p l e of equity that he who has received information i n confidence s h a l l not take unfair advantage of i t . He must not make use of i t to the prejudice of him who gave i t without obtaining h i s consent."24 Aft e r deciding that the p l a i n t i f f was protected by equity, the judgement turned to the c a l c u l a t i o n of the p l a i n t i f f ' s damages. Lord Denning's unfortunate choice was to view the unauthorized use of c o n f i d e n t i a l information as analogous to the t o r t of conversion. Since the conversion analogy meant that the p l a i n t i f f had been deprived of h i s property, the l o g i c a l remedy was then e i t h e r to return the property to the p l a i n t i f f or to compel the defendant to pay a royalty for 177 i t s use. Since the defendants had used the p l a i n t i f f ' s information to manufacture t h e i r own product, Lord Denning awarded damages ca l c u l a t e d as a r o y a l t y c a p i t a l i z e d i n t o a lump sum award. To complete the analogy with the t o r t of conversion, Lord Denning concluded that the damage award "would be regarded as a r e a l o utright purchase of the c o n f i d e n t i a l information".25 In other words, a f t e r the payment of the damage award, the defendants became the new owners of the information. Fortunately, Canadian courts have not as yet followed t h i s portion of Denning's judgment. The analogy to the t o r t of conversion i s quite unsatisfactory as the l e g a l basis for damages i n v o l v i n g c o n f i d e n t i a l i t y and the misappropriation of software. Lord Denning's approach assumes that information i s i n d i v i s i b l e , l i k e a c h a t t e l , and can only belong to one owner. However, information such as software can be e a s i l y duplicated and be possessed by multiple owners. If Lord Denning's reasoning was applied to a software misappropriation, the p l a i n t i f f would t h e o r e t i c a l l y be barred from using the software a f t e r f i n a l judgment. Having paid the damages, the defendant would be the new owner. Such a r e s u l t also puts the p l a i n t i f f i n an i l l o g i c a l p o s i t i o n as t o the future use of the software. A basic premise of a trade secret i s that i t ceases to e x i s t as soon as the information enters the p u b l i c domain. Mass marketing of the software by the defendant could e f f e c t i v e l y end the secret. However, the p l a i n t i f f would then be the only person prohibited from using the software. Another objection to the t o r t i o u s analogy i s that i t implies a system of compulsory l i c e n s i n g or compulsory t r a n s f e r of information. The Seager v. Copydex damage award forced the o r i g i n a l holder of the c o n f i d e n t i a l information to s e l l the information at market p r i c e to an 178 unlawful appropriator. The p r a c t i c a l consequences of such a court judgement would shock the software industry. In e f f e c t , a software vendor would be giving up an immediate market edge f o r a future lump sum damage award. These t h e o r e t i c a l and pragmatic problems lead the Law Commission i n the United Kingdom to recommend a new statutory t o r t for breach of confidence. In part, the recommendation was based upon t h e i r analysis of the "uncertainties or inadequacies" i n the e x i s t i n g remedy of damages. 2 6 A s i m i l a r conclusion was recently put forward by the I n s t i t u t e of Law Research and Reform i n Alberta. In i t s February, 1984 report on Protection of Trade Secrets27. the I n s t i t u t e r e f e r r e d to the u n c e r t a i n t i e s caused by the d i f f e r e n c e ( i f any) between equitable and l e g a l damages. In a summary of the e x i s t i n g law, the I n s t i t u t e stated "the Courts have not firmly resolved how far l i a b i l i t y can or should be imposed upon t h i r d party r e c i p i e n t s of the c o n f i d e n t i a l information"28, and then concluded that "the remedial problems which t h i s cause of action creates make i t very d i f f i c u l t to advise c l i e n t s with any r e a l confidence".29 The I n s t i t u t e proposes two a l t e r n a t i v e d r a f t b i l l s to provide statutory protection against the non-authorized appropriation of trade secrets.30 In e f f e c t , the I n s t i t u t e i s recommending that unauthorized r e c i p i e n t s of a trade secret should be subject to a statutory t o r t a c t i o n . 2. Interlocutory Injunctions to Restrain Breaches of a R e s t r i c t i v e  Covenant The i n t e r l o c u t o r y i n j u n c t i o n ranks as the most important remedy to protect a software trade secret against ex-employees. Given the intense competition i n the software marketplace and the speed with which a software product becomes outdated, s t r i c t secrecy during product development must be maintained. The i n t e r l o c u t o r y i n j u n c t i o n i s the l e g a l 179 remedy that best preserves an employer's desire to be f i r s t i n t o the market with a new product. American a u t h o r i t i e s support the view that wide spread marketing of software does not necessarily destroy the trade secret by reason of p u b l i c a t i o n . Provided that customers receive the software under ob l i g a t i o n s of confidence (as i n r e s t r i c t i v e l i c e n s i n g agreements), the trade secret i s preserved.31 Given the wide spread d i s t r i b u t i o n of software, an in t e r l o c u t o r y injunction must be viewed as the most e f f e c t i v e remedy to deal with an outright instance of software p i r a c y . Any misappropriation could quickly lead to the marketing of a vendor/ employer's software i n a t h i n l y disguised format. The employer's primary concern w i l l be to stop the erosion of h i s market as soon as possible v i a the i n j u n c t i o n remedy. A strong monetary disin c e n t i v e exists for an employer considering a t r i a l and a damage award instead of the i n j u n c t i o n remedy. Even i f the former employees have ex i g i b l e assets i n the j u r i s d i c t i o n , the damage awards f o r breach of contract only provide a t h e o r e t i c a l recoupment of lo s s . A successful p l a i n t i f f must s t i l l pay for the expense of l i t i g a t i o n . In p a r t i c u l a r , court costs are incr e a s i n g l y inadequate to o f f s e t l e g a l fees. The editor of the Advocate recently observed that court costs today i n B.C. only recover approximately 10%-20% of l e g a l fees connected with l i t i g a t i o n . 3 2 The backlog i n our c i v i l courts combines with the expense of l i t i g a t i o n to increase the importance of i n t e r l o c u t o r y r e l i e f . C i v i l cases i n B r i t i s h Columbia are currently experiencing delays of between 12 to 16 months from the date the action i s set down for t r i a l to the actual court date. These delays do not include the p r i o r time involved i n the 180 i n i t i a l preparation, pleadings and examinations for discovery.33 The short product l i f e of software, the expense of l i t i g a t i o n and court delays mean that an i n t e r l o c u t o r y i n j u n c t i o n i s often determinative of the p a r t i e s ' r i g h t s . Given the importance of the i n t e r l o c u t o r y i n j u n c t i o n remedy for an employer i n the computer industry, what are the grounds upon which Canadian courts w i l l grant t h i s r e l i e f ? This question can only be answered by p l a c i n g the i n j u n c t i o n remedy i n a h i s t o r i c a l perspective. An i n j u n c t i o n was o r i g i n a l l y issued by a Court of Equity to protect an equitable r i g h t against a c l e a r l y c o n f l i c t i n g l e g a l r i g h t or t i t l e , or else i n a case where the l e g a l r i g h t s and remedies a v a i l a b l e to a party were c l e a r l y inadequate. 3 4 The r o l e of the i n t e r l o c u t o r y i n j u n c t i o n was to preserve the status quo between the p a r t i e s p r i o r to the actual t r i a l of the issues. This l i m i t e d view of the function of an i n t e r l o c u t o r y i n j u n c t i o n r e f l e c t e d several f a c t o r s . F i r s t l y , the volume of l i t i g a t i o n was r e l a t i v e l y low so that the Chancery D i v i s i o n could deal with any action without undue delay. Secondly, the disputes were mainly over private property. The cases were usually unaffected by p u b l i c p o l i c y issues such as the r e s t r a i n t of trade. An i n t e r l o c u t o r y i n j u n c t i o n was therefore not c r i t i c a l l y important to the p a r t i e s . The courts accordingly demanded a high standard of proof for the granting of an i n t e r l o c u t o r y i n j u n c t i o n : 1) The p l a i n t i f f had to demonstrate a strong prima f a c i e case (on the balance of p r o b a b i l i t i e s ) that both the r i g h t existed and that i t had been inf r i n g e d ; 2) The p l a i n t i f f then had to demonstrate ir r e p a r a b l e damage meaning that monetary damages obtained at t r i a l would not adequately compensate him; 181 3) The p l a i n t i f f f i n a l l y had to show that the balance of convenience favoured the granting of the i n j u n c t i o n . 3 5 The high volumes of l i t i g a t i o n experienced by the courts of Chancery i n the 196 0s and 197 0s pointed out the r i g i d i t y and inadequacy of these i n j u n c t i o n requirements. Neither the l i t i g a n t s nor the courts could a f f o r d the delays and high costs associated with the sheer numbers of what were c a l l e d m i n i - t r i a l s by a f f i d a v i t . Also, d e f i n i n g injunctions as a private property remedy l e f t the courts i l l - e q u i p p e d to deal with issues of p u b l i c and economic importance.36 In 1975 the House of Lords decision i n American Cyanamid Company v.  Ethicon Ltd.37 sought to e s t a b l i s h a speedier and more e f f e c t i v e i n j u n c t i o n framework. By e s t a b l i s h i n g a lower threshold of proof for the granting of injunctions, the court t r i e d to avoid the then e x i s t i n g process which amounted to a miniature t r i a l . Lord Diplock noted that courts were i n e f f e c t t r y i n g cases at an early stage "on e v i d e n t i a l material d i f f e r e n t from that on which the actual t r i a l w i l l be conducted".38 To reduce the overloading of the i n t e r l o c u t o r y process, the House of Lords held that only two f a c t o r s need be considered with regard to a p l a i n t i f f ' s i n j u n c t i o n a p p l i c a t i o n . The court should determine f i r s t whether there i s a serious issue to be t r i e d , meaning that the p l a i n t i f f ' s case i s not f r i v o l o u s or vexatious. Once t h i s i n i t i a l threshold t e s t i s passed, then the court should look at the balance of convenience that exists between the p a r t i e s . 3 9 The second f a c t o r of balance of convenience was r e l a t e d to an examination of the adequacy of damages as a remedy for both p a r t i e s . The House of Lords emphasized that the granting of an i n t e r l o c u t o r y i n j u n c t i o n 182 i s normally accompanied by the p l a i n t i f f ' s cross-undertaking to pay damages. Such an undertaking w i l l be invoked i f the defendant suffers loss by reason of the improper granting of the i n j u n c t i o n . (The B.C. Supreme Court Rules currently sets forth the same o b l i g a t i o n for an i n j u n c t i o n applicant at Rule 45(6).) The House of Lords d i d not emphasize the p l a i n t i f f ' s damage undertaking simply to protect the defendant. Rather, the emphasis was a clear attempt to l i b e r a l i z e the i n j u n c t i o n remedy and improve a p l a i n t i f f ' s chances of obtaining r e l i e f . As Lord Diplock stated i n the unanimous decision: I f , on the other hand, damages would not provide an adequate remedy f o r the p l a i n t i f f i n the event of h i s succeeding at the t r i a l , the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the t r i a l i n e s t a b l i s h i n g h i s r i g h t to do that which was sought to be enjoined, he would be adequately compensated under the p l a i n t i f f ' s under-taking as to damages f o r the loss he would have sustained by being prevented from doing so between the time of the a p p l i c a t i o n and the time of the t r i a l . I f damages i n the measure recoverable under such an under-taking would be an adequate remedy and the p l a i n t i f f would be i n a f i n a n c i a l p o s i t i o n to pay them, there would be no reason upon t h i s ground to refuse an i n t e r l o c u t o r y i n j u n c t i o n . 4 0 If doubt exists about the adequacy of damages as a remedy for e i t h e r or both of the p a r t i e s , then the concern should be f o r the "balance of convenience" between the parties.40a In t h i s way, the House of Lords dire c t e d future courts to consider any serious p u b l i c or economic f a c t o r which a f f e c t e d e i t h e r of the p a r t i e s . For example, i n the American  Cyanamid decision, the House of Lords considered the r e l a t i o n s h i p between the in j u n c t i o n remedy and the existence of goodwill i n the product market. The case involved a patent dispute and the defendant's proposed 183 introduction of a type of medical suture i n t o B r i t i s h h o s p i t a l s . The court noted that the Ethicon sutures were not yet on the market. Therefore no f a c t o r i e s would be closed and no workers l a i d o f f i f an i n t e r l o c u t o r y i n j u n c t i o n was granted. On the contrary, to allow the sutures to be introduced by the defendant, only to have a permanent in j u n c t i o n granted at the end of the t r i a l would se r i o u s l y harm the p l a i n t i f f ' s goodwill. Resentment would be d i r e c t e d at the successful p l a i n t i f f by those doctors who had become accustomed to using the Ethicon sutures.41 Thus the p l a i n t i f f ' s p o t e n t i a l loss of market reputation was recognized. This second element of balance of convenience i n i t i a l l y appears to answer many of the previously discussed concerns of an employer i n the computer industry. Software misappropriation by an employee or an outsider can be countered by a speedy e f f e c t i v e remedy to preserve market p o s i t i o n . The unfortunate t r u t h i s that the courts i n both the United Kingdom and Canada have not widely accepted the American Cyanamid framework. In the United Kingdom one of the major d i f f i c u l t i e s has been the j u d i c i a l r e a l i z a t i o n that the i n t e r l o c u t o r y injunctions a p p l i c a t i o n i s normally the determinative proceeding where c o n f i d e n t i a l information i s involved. This awareness leads to the courts to consider the case much more c a r e f u l l y and to sidestep the lower burden of proof applied by American Cyanamid. 4 2 What p o s i t i o n have Canadian courts taken i n response to the two-part te s t established by the Ameri can Cyanamid decision? To date the more f l e x i b l e approach has not been widely applied to r e s t r i c t i v e employment covenants. There has not yet been an a u t h o r i t a t i v e Supreme Court of Canada decision or Court of Appeal case that has e i t h e r expressly accepted 184 or disapproved of the American Cyanamid t e s t with reference to employment contracts. The Ontario courts at the t r i a l l e v e l were i n i t i a l l y unsure about adopting the lower threshold, even f o r a franchise case,43 but subsequent decisions have rejected the House of Lord's propositions as inappropriate f o r r e s t r a i n i n g former employees. In Drake International  L t d . v. Wortmann,44 a three member branch of the Ontario High Court of J u s t i c e distinguished two contrary e a r l i e r decisions and then stated: Whatever may be the s i t u a t i o n when patents are i n issue or the protection of undoubted trade or business secrets, we are not prepared to say that i n a case where a r e s t r i c t i v e covenant i n an employment contract i s at issue, the r e l a t i v e l y modest standard adopted i n American Cyanamid i s appropriate. The Court turns i t s face against such a covenant i n an employment contract, and i t i s incumbent upon the p l a i n t i f f to show that there i s at l e a s t a prima f a c i e case that i t w i l l be successful at t r i a l before the Court w i l l grant i t s a i d by i s s u i n g an interim or temporary i n j u n c t i o n . This, i n our view, the p l a i n t i f f has not done with respect to the primary point made before us, that of the existence of a proprietary i n t e r e s t to be damaged. 4 5 The same views were expressed i n Control L t d . v. Bodi Chemicals  Ltd.46 by Goodman J. and thereafter accepted i n Nelson Burns & Co. v.  Gratham Industries Ltd.47 by Eberle J . of the Ontario High Court: If the t r a d i t i o n a l onus placed on an applicant f o r i n t e r l o c u t o r y r e l i e f to e s t a b l i s h a strong prima f a c i e case i s a more stringent requirement than the s a t i s f a c t i o n by such an applicant of the t e s t which has apparently been imposed by the American Cyanamid case, namely, that there i s a substantial issue to be t r i e d , then I am of the opinion that the more stringent standard of proof should be required i n an a p p l i c a t i o n for an i n t e r l o c u t o r y i n j u n c t i o n r e s t r a i n i n g a former employee from committing a breach of a r e s t r i c t i v e covenant contained i n an employment contract. 4® 185 Although the Ontario Court of Appeal has not s p e c i f i c a l l y stated i t s p o s i t i o n , there has been one i n d i c a t i o n of support for the strong prima f a c i e p o s i t i o n . In C h i t e l v. Rothbart,49 the court considered the standard of proof to be applied to an i n t e r l o c u t o r y a p p l i c a t i o n for a Mareva i n j u n c t i o n . Before r e j e c t i n g the lower threshold of proof for Mareva injunctions i n s p e c i a l circumstances,50 the court stated that the i n t e r l o c u t o r y i n j u n c t i o n "remedy must remain f l e x i b l e and that the American Cyanamid te s t may not be a suitable t e s t i n a l l s i t u a t i o n s " . 5 1 The conclusion reached by the Ontario t r i a l courts seems to be that the American Cyanamid te s t i s not s u i t a b l e for i n t e r l o c u t o r y injunctions i n employment contracts. In e f f e c t , there has been a r e f u s a l to lower the employer's burden i n an injunction a p p l i c a t i o n . The r e s t r i c t i o n appears to come from the t r a d i t i o n a l p o l i c y statements regarding employment r e s t r a i n t s . Thus the t r i a l courts refer to the "imbalance of bargaining power" i n favor of the employer and to the "more stringent t e s t i n the enforcement of r e s t r i c t i v e covenants" i n employment contracts.52 The underlying fear i s that the American Cyanamid t e s t would allow the employer to accomplish at an i n t e r l o c u t o r y stage what he w i l l not be able to achieve at t r i a l . The American Cyanamid t e s t has received a mixed and uncertain r e a c t i o n from the B.C. t r i a l courts i n s o f a r as the lower threshold applies to employment r e s t r a i n t s . Part of the confusion r e s u l t e d from the i n i t i a l reported Chambers decision to have considered American Cyanamid. In Lindsay v. Lindsay,53 C r a i g J . (as he than was) i n i t i a l l y applied Lord Diplock's wording of "a serious question to be t r i e d " rather than a "strong prima f a c i e case".54 However, Cr a i g J. then used the judgement of Lord Cairns i n Doherty v. Allman55 f o r the p r i n c i p l e that " i r r e p a r a b l e 186 harm need not be proved to enforce a negative covenant by way of injunction."56 Lord Cairns had been dealing with d i f f i c u l t i e s of ordering the s p e c i f i c performance of a personal services contract. Although the court could not enforce an order of s p e c i f i c performance/ the court would issue an i n j u n c t i o n against the employee where the e f f e c t was l i m i t e d to enforcing a r e s t r i c t i v e covenant. However, the words of Lord Cairns contemplated a standard of proof f o r the employer that would be even lower than the American Cyanamid t e s t : My Lords, i f there had been a negative covenant, I apprehend, according to w e l l - s e t t l e d p r a c t i c e , a Court of Equity would have had no d i s c r e t i o n to exercise. If p a r t i e s , f o r valuable consideration, with t h e i r eyes open, contract that a p a r t i c u l a r thing s h a l l not be done, a l l that a Court of Equity has to do i s to say, by way of inju n c t i o n , that which the p a r t i e s have already said by way of covenant, that the thing s h a l l not be done; and i n such case the i n j u n c t i o n does nothing more than give the sanction of the process of the Court to that which already i s the contract between the p a r t i e s . I t i s not then a question of the balance of convenience or inconvenience or of the amount of damage or i n j u r y — i t i s the s p e c i f i c performance, by the Court, of that negative bargain which the p a r t i e s have made, with t h e i r eyes open, between themselves.57 Subsequent B.C. cases have t r i e d to d i s t i n g u i s h Lindsay v. Lindsay as a non-employment case,58 or have rejected the statement of Lord Cairns on general p o l i c y grounds.59 The s p e c i f i c objection was made that "To apply the statement i n a l l i t s force would deprive the Court of d i s c r e t i o n , " with the reminder that "[T]he granting of an i n j u n c t i o n must always remain a matter of the Court's discretion,"60 Thus, the Supreme Court i n B.C. eventually rejected part of Craig J.'s e a r l i e r d ecision i n Lindsay v.  Lindsay.61 187 The d i f f i c u l t y i n dealing with the Doherty v. Allman deviation obscured and delayed the acceptance of the American Cyanamid t e s t for employment injunctions. However, the B.C. t r i a l , court decisions do ind i c a t e an acceptance of the lower threshold for an i n t e r l o c u t o r y a p p l i c a t i o n to enforce a r e s t r i c t i v e covenant.62 Two more recent decisions confirm t h i s conclusion. In Andico Manufacturing L t d . et a l .  v. Gary Bombay et al.,63 MacEachern C.J. followed an e a r l i e r judgement of Bouck J,64 and granted an i n t e r l o c u t o r y i n j u n c t i o n based on the American Cyanamid two-part t e s t . The p l a i n t i f f was a former employer who was seeking the i n j u n c t i o n to enforce a non-competition clause granted by an ex-employee. In a subsequent decision that was not r e l a t e d to employment issues, the B r i t i s h Columbia Court of Appeal approved the "useful summary" of the American Cyanamid p r i n c i p l e s given by Bouck J.65 In summary, there have not been any a u t h o r i t a t i v e decisions by the Supreme Court of Canada nor by the appeal courts i n Ontario and B.C.66 m the absence of such guidance, the t r i a l courts i n these two provinces appear to have a r r i v e d at d i f f e r e n t conclusions on the American Cyanamid tes t with respect to employment r e s t r a i n t s . It i s suggested that the Ontario court's r e j e c t i o n of the lower threshold f o r i n j u n c t i v e r e l i e f i s overly cautious. Modern employees have the advantages of higher education, job mobility and c o l l e c t i v e bargaining to adjust f o r the feared imbalance i n negotiating power between themselves and t h e i r employers. At the same time, an employer i n the computer industry cannot adequately be protected by the t r i a l process and the other l e g a l remedies. The lengthy delays p r i o r to t r i a l l i m i t the a l t e r n a t i v e remedy to damages. Moreover, even i f a damage award i s granted- against an i n d i v i d u a l misappropriator, the average employee w i l l not have s u f f i c i e n t 188 assets to s a t i s f y a large damage award. The t r a d i t i o n a l p o s i t i o n on the granting of injunctions also l i m i t s the court's a b i l i t y to consider the the larger economic or p u b l i c issues involved. If the balance of convenience i s used as the second part of the t e s t instead of irreparable damage, the court can focus on the wider s o c i a l and f i n a n c i a l concerns of the p a r t i e s . In t h i s way, goodwill i n the marketplace and the closure or non-closure of manufacturing plants became relevant issues f o r the House of Lords i n the o r i g i n a l d e c i s i o n . 6 6 In conclusion, maintaining the more r e s t r i c t i v e approach to i n t e r l o c u t o r y injunctions presents a serious weakness for the l e g a l p r o t e c t i o n of c o n f i d e n t i a l information i n the computer industry. A recent comment by Hull summarizes the remedial problem that faces an employer who passes on trade secrets to s k i l l e d employees. One area where i n j u n c t i v e r e l i e f has f a i l e d to give e f f e c t i v e p rotection to l i t i g a n t s i s i n the f i e l d of trade secrets, i n p a r t i c u l a r where the relevant information i s p a r t p u b l i c , part secret, or where i t concerns a f i e l d of technology where t e c h n i c a l advance r a p i d l y degrades novelty or c o n f i d e n t i a l i t y and brings the information into the public domain. 6 7 3. Award of Punitive Damages against An Employee f o r Breach of  Employment Obligations: In summary, t h i s section reviews an employer's r i g h t to claim p u n i t i v e damages i n the event that an employee breaches implied contractual o b l i g a t i o n s , f i d u c i a r y o b l i g a t i o n s , or express contractual covenants. I n i t i a l l y , t h i s section w i l l discuss the background to punitive or exemplary damage awards i n Canada, and explain why t h i s type of damage award of p a r t i c u l a r i n t e r e s t to an employer i n the computer industry. Although the award i s generally associated with a t o r t action, punitive damages are not granted to compensate an injured party for 189 t o r t i o u s l o s s . Instead punitive or exemplary damages are an addi t i o n a l award to an injured p l a i n t i f f that goes beyond the compensatory function of t o r t law. In t h i s sense, the award operates as a f i n e that i s l e v i e d upon the defendant and paid to the p l a i n t i f f . The correct p o s i t i o n i s that aggravated damage or damages are compensatory to the p l a i n t i f f and are to be distinguished from exemplary or punitive damage or damages which are awarded where i t i s proper to punish and deter by the example of such punishment (or penalty), like-minded i n d i v i d u a l s . 6 8 3 The importance of such an award to computer industry employer l i e s i n i t s deterrant value and i n i t s extra f i n a n c i a l contribution to o f f s e t the high costs of l i t i g a t i o n . D i f f e r e n t p r i n c i p l e s govern the awarding of p u n i t i v e damages i n the two j u r i s d i c t i o n s of the United Kingdom and Canada. In England and Wales, damages i n addition to compensation ( i . e . , p u n i t i v e or exemplary), are granted i n accordance with the p r i n c i p l e s set out i n Rookes v. Barnard.69 Such damages must be r e l a t e d "either to oppressive, a r b i t r a r y or unconstitutional action by servants of the government or to conduct by the defendant c a l c u l a t e d to give him a p r o f i t l i k e l y to exceed the compensation payable to the p l a i n t i f f " . 7 0 A t h i r d category noted by Rookes v. Barnard i s an award of punitive damages expressly authorized by statute.71 Only the second category noted above i s relevant to employment and r i g h t s to information. Obviously, the precise language used severely r e s t r i c t s the basis for the award, and w i l l only r e s u l t i n damages being granted i n extreme cases. Canadian courts have rejected the l i m i t a t i o n s imposed upon p u n i t i v e damages by Rookes v. Barnard.72 Rather than being r e s t r i c t e d to precise categories, the awarding of p u n i t i v e damages i s reserved for those "cases where the.conduct of the defendant has been such as to merit condemnation 190 by the court".56 The Ontario Court of Appeal decision i n Denison v. Fawcett73 provides a general overview of the Canadian p o s i t i o n : Exemplary or aggravated damages are not, broadly speaking, awarded i n actions for breach of contract, since damages f o r breach of contract are i n the nature of compensation, and the motives and conduct of the defendant are not considered relevant to the assignment of damages. The action f o r breach of promise of marriage and an action upon a contract against a banker for wrongfully refusing to pay his customers' cheques constitute exceptions to t h i s r u l e . Generally, however, such damages may be awarded i n actions of t o r t such as assault, trespass, negligence, nuisance, l i b e l , slander, seduction, malicious prosecution and f a l s e imprisonment. I f , i n addit i o n to committing the wrongful act, the defendant's conduct i s 'high-handed, malicious, conduct showing a contempt of the p l a i n t i f f ' s r i g h t s , or disregarding every p r i n c i p l e which actuates the conduct of a gentleman', (to quote a few examples taken from the au t h o r i t i e s ) h i s conduct i s an element to be considered as a circumstance to aggravation which may, depending upon i t s extent or degree, j u s t i f y an award to the injured p l a i n t i f f i n addition to the actual pecuniary loss which he has sustained. I do not think that i t can be stated with any p r e c i s i o n what may be classed as aggravating circumstances but malice, wantonness, i n s u l t and pe r s i s t e n t r e p e t i t i o n have always been regarded as elements which might be taken into account.74 How does the concept of pun i t i v e damages apply to s k i l l e d employees i n the computer industry? In the United States, the courts use such damage awards to prevent and punish the misappropriation of trade secrets, and accordingly grant sizeable punitive damage amounts.75 There are many a u t h o r i t i e s that advance the l e g a l p r i n c i p l e that Canadian courts w i l l not award punitive,damages f o r breach of contract.76 However, t h i s l i m i t a t i o n upon a court's d i s c r e t i o n to award punitive damages i s being increasingly questioned at the t r i a l court l e v e l i n Ontario. In Brown v. Waterloo Regional Board of Commissioners of  Police76a Linden J. reviewed a number of recent decisions76b and made the following obiter statement: 191 "Although the general p r i n c i p a l that punitive damages are not awarded for breach of contract survives, there i s no requirement that the general p r i n c i p l e be followed i n v a r i a b l y . Certainly i n the vast majority of s i t u a t i o n s of contract breach, there would be no p o s s i b l e issue of p u n i t i v e damages a r i s i n g . However, j u s t as our courts have recognized the u t i l i t y of awards for damages f o r mental s u f f e r i n g caused by breach of contract i n appropriate circumstances, so too should punitive damages be allowed where the f a c t s demand that they be awarded.^ 6 0 and then continued: Consequently, I conclude that i t i s not beyond the power of t h i s court to award punitive damages i n those rare s i t u a t i o n s where a contract has been breached i n a high-handed, shocking and arrogant fashion so as to demand condemnation by the court as a d e t e r r e n t . 7 6 0 I t should be noted that the B r i t i s h Columbia Supreme Court has recently followed the more r e s t r i c t i v e view of the p u n i t i v e damage award. In Vorvis v. I.C.B.C., MacFarlane J. found the existence of a breach of contract which j u s t i f i e d a punitive award, but ruled that the p l a i n t i f f could only be compensated for his f i n a n c i a l loss.76e In summary, a decision of the Supreme Court of Canada w i l l be required to c l a r i f y the e x i s t i n g confusion.76f U n t i l that time the s k i l l e d employee who only breaches the express obligations of h i s employment agreement t h e o r e t i c a l l y does not have to fear an exemplary damage award. However, such an employee should not f e e l too safe. If the employee's conduct i n v i t e s condemnation, then the courts have been w i l l i n g to administer the punishment. In a number of decisions, the courts have r e l i e d upon a breach of f i d u c i a r y or implied o b l i g a t i o n s as the basis f o r a p u n i t i v e or exemplary damages award. In Schauenburg Industries L t d . v. Borowski,77 p u n i t i v e damages of $25,000 were awarded against an ex-employee/general manager. The award appears to have been based upon a breach of f i d u c i a r y duties. The defendant employee had i n f r i n g e d his former employer's copyright and 192 misused c o n f i d e n t i a l information. The exemplary damages were j u s t i f i e d by the defendant's "flagrant behaviour and a callous disregard for the r i g h t s of. h i s employer i n breaching his f i d u c i a r y and contractual duties and i n i n f r i n g i n g c o p y r i g h t . " 7 8 The Schauenburg case and G.E. Cox Ltd. v. Adams, 7 9 therefore indicate that p u n i t i v e damages can be awarded for breach of an employee's f i d u c i a r y duties. Estey J . , i n Alberts v.  Mountjoy, 8 0 agreed with t h i s l o g i c by emphasizing that f i d u c i a r y duties "transcended the severance of the employer-employee r e l a t i o n s h i p " 8 1 and thereby allowed the court to consider punitive damages. Other recent Canadian decisions have ei t h e r considered or awarded pun i t i v e damages against a non-fiduciary former employee. These cases appear to r e l y upon the implied obligations of an employee to respect an employer's trade secrets and c o n f i d e n t i a l information. In Investors  Syndicate Ltd. v. V e r s a t i l e Investments Ltd. an employee's breach of the "common law duty of t r u s t and confidence" allowed the court to consider punitive damages. 8 2 In Bee Chemical Co. v. P l a s t i c Paint Ltd., each ex-employee breached the duty "not to use s p e c i a l information which he obtains while he i s i n that employ for h i s own purpose and contrary to the i n t e r e s t of his employer". 8 3 In a decision l a t e r affirmed by the Ontario Court of A p p e a l , 8 4 Parker J. awarded $25,000 i n punitive damages to the p l a i n t i f f employer. Thus, i t appears that a punitive damage award can be an e f f e c t i v e remedy for the protection of c o n f i d e n t i a l information i n the employment r e l a t i o n s h i p . This protection w i l l be even stronger i f the Supreme Court of Canada approves of punitive damage awards for breaches of express terms of contract. 193 FOOTNOTES: CHAPTER VI 1. (1854) 156 E.R. at 145. 2. V i c t o r i a Laundry (Windsor) L t d . v. Newman Industries Ltd. [1949] 2 K.B. 528 (C.A.); Parta Industries L t d . v. Canadian P a c i f i c L td. et  a l . (1974) 48 D.L.R. (3d) 460 at 463 (B.C.S.C.). 3. Investors Syndicate L t d . v. V e r s a t i l e Investments L t d . (1982) 126 D.L.R. (3d) 451 at 467-69 (Ont.C.A.) 4. Moore Int. (Canada) Ltd. v. Carter (1984) 56 B.C.L.R. 207 at 214 (B.C.OA.); See also C.C.L. Industries Inc. v. Adams (1984) 56 B.C.L.R. 332 a t 333-34 where the B.OC.A. affirmed an i n t e r l o c u t o r y i n j u n c t i o n issued to r e s t r a i n breach at f i d u c i a r y duties. For a discussion of exemplary damages for breach of f i d u c i a r y duties with respect to trade secrets Schauenberg Industries Ltd. v. Borowski (1979) 101 D.L.R. (3d) 701 (Ont. H.C); Pro Arts Inc. v. Campus  Cr a f t s Holdings L t d . (1980) 110 D.L.R. (3d) 366 at 385-88 (Ont. H.C.) . 5. The Mareva in j u n c t i o n can be traced to the judgment of Lore Denning i n Nippon Yusen Kaisha v. Karageorgis [1975] 3 A l l E.R. 282 a t pg. 283 which was applied i n Mareva Compania Noviera S.A. v. Int.  Bulk C a r r i e r s J.A.; The Mareva [1980] 1 A l l E.R. 213 (OA.) This type of i n t e r l o c u t o r y i n j u n c t i o n i s granted to p r o h i b i t an owner of s p e c i f i c assets from dealing with the assets i n c e r t a i n ways. A t y p i c a l instance would be to p r o h i b i t an alleged debtor from t r a n s f e r r i n g assets out of the j u r i s d i c t i o n to avoid execution by the c r e d i t o r . See M c A l l i s t e r , D.M. Mareva Injunctions (1983) The Carswell Company Ltd., Toronto, Canada. 194 6. Permanent injunctions are c l e a r l y applicable to r e s t r a i n ex-employers from r e v e a l i n g the trade secrets or c o n f i d e n t i a l information of former employer. Consolidated T e x t i l e s v. Cen t r a l Dynamics L t d . [1974] 2 F.C. 814 (Fed Ct.); Bee Chemical Co. v. P l a s t i c Paint and  F i n i s h L t d . (1979) 47 C.P.R. (2nd) at 133 (Ont.C.A.) leave to appeal to S.C.C. dismissed on November 6th, 1979. 7. A constructive t r u s t , apart from r e s u l t i n g t r u s t s , may be defined as one which i s not expressed i n any instrument, but i s imposed upon a person by a court of Equity upon the ground of p u b l i c policy....so as to prevent him from holding, for h i s own ben e f i t , an advantage which he has gained by reason of some f i d u c i a r y r e l a t i o n s h i p subsisting between him and others, and for whose ben e f i t only i t i s his duty to act Taylor v. Davis (1917) 41 O.L.R. (A.D.). 8. An Anton P i l l e r order i s an in t e r l o c u t o r y remedy that i s sought on an ex parte basis by a p l a i n t i f f who alleges that a defendant may suppress or destroy evidence favourable to the p l a i n t i f f . The order normally enables the p l a i n t i f f ' s agents to make d i r e c t i n v e s t i g a t i o n s and searches at the defendant's premises. Anton P i l l e r v.  Manufacturing Processes [1976] 1 Ch. 55. See Sony v. Makers  Inte r n a t i o n a l [1981] 9 E.I.P.R. D-189; Nintendo v. Coinex Video (1982) 69 C.P.R. (2d) 122; Bardeau v. Crown Food (1982) 36 O.R. (2d) 355, order d i s s o l v e d - 38 O.R. (2d) 411. The order has p a r t i c u l a r l y been used to get d e t a i l s of the i d e n t i t y of otherwise unknown employees who have passed c o n f i d e n t i a l information to t h i r d p a r t i e s . Mechanical C.P.S. L t d . v. Annette C o l l i n s (1979) E.I.P.R. D-95. 9. Account of P r o f i t s i s the remedy which i s designed to restore to the p l a i n t i f f the p r o f i t s made by a defendant as a r e s u l t of the 195 defendant's wrongful conduct. Peter Pan Manufacturing Corporation  v. Corsets Silhouette Ltd. [1963] 3 A l l E.R. 40 2 applies the remedy to a breach of confidence. The p l a i n t i f f must choose between the remedy of damages and an account of p r o f i t s . But see Moore  International (Canada) L t d . v. Carter (1984) 56 B.C.L.R. 207 at 213-14 (B.C.C.A.). The d i f f i c u l t y of proving the defendant's p r o f i t s rather than evidencing the p l a i n t i f f ' s losses means that the account of p r o f i t s remedy i s infrequently used. See Vaver D. Trade Secrets - A Commonwealth Perspective (1979) E.I.P.R. 301 at 308. If a copyright infringement i s the basis for an employer's action, see 20(4) of the Copyright Act allows the p l a i n t i f f to claim both damages and an accounting of p r o f i t s . Pro Ar t s v. Campus C r a f t s (1981) 50 C.P.R. (2d) 230; See also Teledyne v. Lido (1982) 68 C.P.R. (2d) 204. 10. Delivery up i s a type of equitable r e l i e f which may be used by the courts to order the delivery up and destruction of any c o n f i d e n t i a l material i n the defendant's possession or the products manufactured by the wrongful use of the p l a i n t i f f ' s information. See Vaver D. Trade Secrets - A Commonwealth Perspective (1979) E.I.P.R. 301 at 308; I n d u s t r i a l Furnaces L t d . v. Reaves [1970] R.P.C. 605 at 627-28 (Ch. Div.); Needle Manufacturers L t d . v. Taylor [1975] 2 N.Z.L.R. 33; Stuckey J.E., The Equitable Action f o r Breach of Confidence; Is  Information Every Property? [1981] 9 S.L.R. 402 at 426-30. 11. The assumption here i s that the t h i r d party did not i n t e n t i o n a l l y procure or induce the breach of the employment contract. Such i n t e n t i o n a l acts by the t h i r d party would allow the employer to claim damages for the t o r t of inducing breach of contract. Salmond on the 196 Law of Tor t s , 17th Ed (1977) at p. 367; Unident Ltd. v. DeLong et.  a l . (1982) 131 D.L.R. (3d) 225 (N.S.S.C.); N i c h o l l s v. Richmond e t . a l . [1983] 4 W.W.R. 169 (B.C.OA.); Celona v. Kami oops [1974] 2 W.W.R. 144 (B.C.S.C.). 12. See the discussion i n Chapter I I I r e f e r r i n g to Coco v. A.N. Clark  (Engineers) Ltd. [1969] R.P.C. 41; Thomas Marshall (Exports) L t d . v.  Guinle [1978] 3 A l l E.R. at 193 (Ch. Div.). 13. Cornish, W.R. "Protection of Co n f i d e n t i a l Information i n English  Law" (1975) 6 I.I.C. 43 at 54. 14. The Law Commission Breach of Confidence Report (1981) U.K. at 19, para. 4.2. 15. (1849) 1 Mac. & G., at 25. 16. (1851 ) 9 Hare, at 241. 17. Deta Nominees Pty. v. Viscount P l a s t i c Products Pty. Ltd. [1979] V.R. 167 at 191 18. (1978) 83 D.L.R. (3d) 1 at 13 (S.C.C). 19. Id. 20. [1977] 1 W.W.R. 735 at 739 Toy J . states that the e f f e c t i v e date of the English Law Act R.S.B.C. 1960, c. 129 was Nov. 19th, 1858; see also Ansdell v. Crowther (1984) 11 D.L.R. (4th ed) 614 (B.C.C.A.). 20a. Ricketson S. , Co n f i d e n t i a l Information - A New Proprietory Interest [1978] 11 M.U.L.R. 289 at 294-96; Stuckey J.E. , The Equitable Action  For Breach of Confidence; Is Information Ever Property? [1981] 9 S.L.R. 402 at 416-17; Wentworth v. Woollahra Municipal Council (1982) 42 A.L.R. 69 (High Court of Aust). 21. Supra, note 18, at 13. 22. Id. 197 23. [1967] 2 A l l E.R. 414; [1969] R.P.C. 250 f o r the assessment of damages. 24. Id., at 416. 25. Supra, note 23, at 250-51 i n the assessment of damages. 26. Supra, note 14, at 92-3. 27. Report for Discussion No. 1. February 1984. 28. _Id., para 3:53 at p. 44. 29. Id., para 3:54 at p. 45. 30. Id., at p. 110-137. 31. Corn-Share v. Computer Complex 338 F. Supp. 1229 (1971), a f f ' d 458 F. (2d), at 1341 (1972) (6th C i r . ) ; Data General v. D i g i t a l Computer  Controls 357 A. (2d) at 105 (1975) (Del Ch.). 32. David Roberts, The Advocate, April/May 1982, i n the Entre Nous column at 193-4. 33. Larry S t i l l , "Court Caseloads Turn Day i n Court to Years" Vancouver Sun, A p r i l 18, 1983 at 1. 34. R.G. Hammond, Preliminary Injunctions (1980) U n i v e r s i t y of Toronto Law Review 240 at 250. 35. Id. at 249. 36. Hubbard v. Vosper [1972] 1 A l l E.R. (OA.); Coco v. A.N. Clark  (Engineers) L t d . [1969] R.P.C. 41. 37. American Cyanamid Co. v. Ethicon [1975] A.C. 396 at 398; 1 A l l E.R. 504 (H.L.). 38. Id., A l l E.R. at 509. 39. Id., A.C. at 399. 40. Id., A.C. at 341. 198 40a. Lord Diplock further c l a r i f i e d the balance of convenience element i n N.W.L. L t d . v. Woods [1979] 3 A l l E.R. 614 a t 625-5. 41. Id., at 343. 42. Dunford & E l l i o t t L t d . v. Johnson & F i r t h Brown Lt d . (1978) 4 F.S.R. 143 (C.A.) at 150 r e j e c t i n g the a p p l i c a b i l i t y of American Cynamid. 43. Yule Inc. v. A t l a n t i c Pizza Delight Franchise (1968) L t d . (1977) 80 D.L.R. (3d) at 725 (Ont. H.C). The three judges of the D i v i s i o n a l Court noted that the appellants argued that there were three separate t e s t s a v a i l a b l e f o r the granting of interim i n j u n c t i o n s . The Court summarized and i d e n t i f i e d the other two tes t s as the m u l t i - r e q u i s i t e t e s t and the mu l t i - f a c t o r t e s t . While the Court applied the American Cyanamid t e s t , there was no i n d i c a t i o n of disapproval of the other alternate t e s t s . 44. (1980) 108 D.L.R. (3d) 133 (Ont. H.C). 45. ^d. at 136. 46. (1979) D.L.R. (3d) 265 (Ont. H.C). 47. (1981) 59 C.P.R. (2d) 113 at 117 (Ont. H.C.) 48. Supra, note 32, at 271. 49. (1983) 141 D.L.R. (3d) 268 (Ont. C.A.). 50. Id. at 278. 51. Id. 52. Supra, note 46, at 270-71. 53. Lindsay v. Lindsay (1975) 64 D.L.R. (3d) 761 (B.C.S.C) applied i n Greenpeace Foundation of B.C. v. Minis t r y of Environment [1981] 4 W.W.R. at 586 (B.C.S.C). 54. Id., at 764. 55. (1878) 3 App. Cas. 709 (H.L.). 199 56. Supra, note 53, at 765. 57. Supra, note 55, a t 719-20. 58. Cascade Imperial M i l l s L t d . v. Kunsman [1978] 4 W.W.R. 677 at 680 (B.C.S.C. i n Chambers) 59. Id., at 679-80. 60. Servicemaster Industries v. Servicemaster of V i c t o r i a (1980) 101 D.L.R. (3d) 376 at 378-79 (B.C.S.C. i n Chambers); applied i n Sask-Workwear Inc. v. O l l i n i k [1983] 1 W.W.R. 631 at 635-36 (Sask. Q.B.) 61. Supra, note 53. 62. Supra, note 58, at 680; note 60, at 379; see also Trus J o i s t  (Western) L t d . V. United Brotherhood C.J.A. [1982] 6 W.W.R. 744 (B.C.S.C). 63. (1983) 49 B.C.L.R 47 at 48-49 (B.C.S.C. i n Chambers). 64. K e l l y Douglas v. P a c i f i c Coast Industries (1981) C8100345 Vancouver Registry (B.C.S.C). 65. Greater Vancouver Sewerage & Drainage D i s t r i c t v. Ambassador Indust.  Lt d . (1982) 41 B.C.L.R. (C.A.). 66. But see S t i t t g e n v. Luetke Brinkhaus unreported B.C.C.A., No. C.A. 000156, June 8th, 1983 [1983] B.C.D. Civ. 1892-15 at 10 where Esson J.A. comments that i n t e r l o c u t o r y injunctions to enforce r e s t r i c t i v e covenants should only be granted i n exceptional circumstances. 67. H u l l J.K., Some Problems of Injunctive R e l i e f [1981] 9 E.I.P.R. 258 at 260. 68. Supra, note 37. 68a. Cherniak E.A., Morse J.R., Aggravated, Pun i t i v e and Exemplary Damages  i n Canada (1983) L.S.U.C. Special Lectures at p. 157. 200 [1964] A.C. 1129 (H.L.). The Law Commission (1981) Breach of Confidence (United Kingdom) at 69, para. 4.83. Supra, note 69, at 1226-7. McElroy v. Cowper-Smith and Woodman (1967) 60 W.W.R. 85 at 86 and 93 (S.C.C.) ; Banner v. Marwest Hotel Co. (1969) 69 W.W.R. 462 (B.C.S.C), upheld on appeal (1976) 75 W.W.R. 729 (B.C.CA.); Cardi n a l Construction Ltd. v. The Queen i n Right of Ontario (1981) 122 D.L.R. (3d) 703 at 705 (Ont. H.C.) 73. R o b i t a i l l e v. Vancouver Hockey Club Ltd. [1981] 3 W.W.R. 481 at 509 (B.C.CA). 74. [1958] O.R. 312 at 319-20 (Ont. C.A.). 75. Telex Corp. v. I.B.M. 510 F (2d) 894 (10th C i r 1975) awarded $1,000,000 i n punitive damages for the misappropriation of I.B.M.'s trade secrets. The trade secrets were dis c l o s e d by ex-I.B.M. employees. 76. G u i l d f o r d v. Anglo-French Steamship Co. (1884) 9 S.C.R. 303 at 309; Toronto Hockey Club v. Arena Gardens of Toronto Ltd. (1924) 55 O.L.R. 509, per Orde, J . , at 518 and 521; Dobson v. Winton & Robbins Lt d . , [1959] S.C.R. 775; Jennett v. Federal Ins. Co. (1976) 72 D.L^R. (3d) 20 at 21 (Ont. S.C) per Southey, J . ; McMinn v. Town of  Oa k v i l l e (1978) 85 D.L.R. (3d) 131 at 134. 76a. (1982) 37 O.R. (2d) 277 (H.C). 76b. PiIon v. Peugeot Canada L t d . (1980) 29 O.R. (2d) 711 (H.C.J.); Nantec v. P a r i s i e n et. a l . (1981) 18 C C L . T . 7 9 (Ont. H.C.J.). 76c. Supra, note 76a at p. 292. 76d. Id. 69. 70. 71. 72. 201 76e. ( 1982) 134 D.L.R. (3d) 727 (B.C.S.C): at 735, affirmed by a divided court at (1984) 53 B.C.L.R. 63 (B.C.C.A.). 76f. On Jan. 11, 1985 the Globe and Mail reported on page B-2 a 6 m i l l i o n d o l l a r p u n i t i v e damage claim f o r breach of contract by Noranda Inc. against Seaboard Surety Co. The punitive damages claim i s p a r t of a wider claim for an all e g e d 50 m i l l i o n d o l l a r s i n d i r e c t contractual damages. The uncertainty of the applicable law and the sheer amount of money involved makes t h i s case worthy of a Supreme Court of Canada decis i o n . 77. (1979) 50 C.P.R. (2d) 69 (Ont. H.C). 78. Id., at 80 . 79. (1979) 24 N.B.R. (2d) 65 at 73 (N.B.S.C). 80. (1978) 79 D.L.R. (3d) 108 (Ont. H.C). 81. Id., at 117 and 121. 82. (1982) 126 D.L.R. (3d) 451 a t 467-69 (Ont. H.C). 83. (1978) 41 C.P.R. (2d) 175 at 180 (Ont. H.C). 84. (1979) 47 C.P.R. (2d) 133 (Ont. C.A.), leave to appeal to the Supreme Court of Canada was dismissed on November 6, 1979. 202 VII CONCLUSION It should be remembered that t h i s thesis focussed on employment i n the computer industry where l e g a l r i g h t s to information are a major concern of the p a r t i e s . The c e n t r a l objective of the research was to assess the adequacy of e x i s t i n g laws i n meeting the needs of employers and employees, and to serve the i n t e r e s t s of the p u b l i c . In general, the conclusion i s that present Canadian law w i l l be increasingly strained to protect adequately a computer industry employer against an employee's unauthorized appropriation of c o n f i d e n t i a l information. In short, the law has not yet recognized the s o c i a l and technological changes that have greatly increased the v u n e r a b i l i t y of the information employer. There have been c e r t a i n s p e c i f i c conclusions that have emerged from the thesis research that support the general conclusion. Once these narrower conclusions have been presented, a number of general observations w i l l be discussed. In Chapter II the thesis explored an area of law where the courts have imaginatively kept pace with s o c i e t a l change. This chapter dealt with the l e g a l p r i n c i p l e s that determine whether an i n d i v i d u a l q u a l i f i e s as an employee. The various t e s t s used by the courts to d i s t i n g u i s h an employee from an independent contractor, agent or partner were reviewed. The e x i s t i n g case law does not compel the courts to apply a r i g i d framework for the determination of the employee status. Instead, the courts are given a wide ranging d i s c r e t i o n i n the choice of l e g a l t e s t s that can be applied. This broad d i s c r e t i o n means that the courts are well 203 equipped to deal with the subtle problems of c l a s s i f y i n g the more independent, mobile and sophisticated information worker. Other s p e c i f i c conclusions were made i n the t h i r d chapter. This chapter surveyed an employer's proprietary rights to information from the perspective of s o c i a l p o l i c y . 1 i n order to protect an employer's proprietary r i g h t s to information, the law has always had to balance the i n t e r e s t s of employers against the competing i n t e r e s t s of employees and the p u b l i c . In summary, the s o c i a l and technological changes created by the information economy have created imbalances i n t h i s d e l i c a t e weighting of the l e g a l p r i n c i p l e s . The scales have s h i f t e d so that an employer i n the computer industry i s now operating at a marked disadvantage to i t s s k i l l e d employees. I f an appropriate balance i s to be regained, the courts and l e g i s l a t u r e s must respond to the p o l i c y concerns created by: 1) an increasing commercial reliance on secrecy and c o n f i d e n t i a l i t y ; 2) the number of legitimate groups who depend upon r i g h t s to information and who s u f f e r from the confusion over the ownership of information; 3) u n j u s t i f i e d p o l i c y biases i n the e x i s t i n g law; 4) the p o l i c y objections to property r i g h t s i n information. 2 Chapter I I I also reviewed the s p e c i f i c l e g a l protection available to employers i n the computer i n d u s t r y . 3 The general conclusion was that patent and copyright laws i n Canada are only marginally e f f e c t i v e i n securing r i g h t s to information such as computer software. As a r e s u l t , software d i s t r i b u t o r s and employers have resorted to non-disclosure 204 systems such as the r e s t r i c t i v e l i c e n s i n g of software. Trade secrets and the equitable obligations of confidence are currently the most e f f e c t i v e and widely used l e g a l protection for information r i g h t s i n the employment r e l a t i o n s h i p . The implied and f i d u c i a r y obligations of s k i l l e d employees were discussed i n Chapter IV. The o v e r a l l conclusion was these obligations only o f f e r minimal l e g a l protection for an employer's c o n f i d e n t i a l information. Even though a s k i l l e d employee has c e r t a i n implied o b l i g a t i o n s of good f a i t h , honesty and l o y a l t y to h i s employer, there i s a danger that such obligations may not be enforceable against computer industry employees who are covered by a c o l l e c t i v e agreement. This possible lack of control over unionized employees comes from precedents of the Supreme Court of Canada. 3 a These cases arguably rule that there can be no rights or duties a r i s i n g out of the employment r e l a t i o n s h i p except as s p e l l e d out i n the c o l l e c t i v e agreement. Due to t h i s problem and the general weakness of implied o b l i g a t i o n s , an employer must contract for express covenants i n order to be minimally protected. In spite of c e r t a i n j u d i c i a l reservations, i t i s clear that f i d u c i a r y o b l i g a t i o n s are applicable to highly s k i l l e d employees who receive c o n f i d e n t i a l information. As the degree of secrecy, the associated expense and business importance of information increases, so does the p o s s i b i l i t y that the employee w i l l be considered a f i d u c i a r y . However, f i d u c i a r y obligations w i l l only control an employee's conduct i n l i m i t e d circumstances. Moreover, the unsophisticated and immature status of the B.C. software industry also creates c o n f l i c t s with f i d u c i a r y o b l i g a t i o n s . The cooperative strategies that are required for industry success are incompatible with the f i d u c i a r y requirements of secrecy and l o y a l t y . 3 c 205 Chapter V dealt with the doctrine of r e s t r a i n t of trade. An information employer must be p a r t i c u l a r i l y s k i l l e d i n the use of express covenants of r e s t r a i n t . Instead of r e l y i n g upon the mininal protection offered by implied obligations and f i d u c i a r y duties, employers should be aware of the following advantages to s p e c i f i c contractual r e s t r a i n t s : 4 1) Wider i n t e r e s t s can be protected v i a the use of express covenants; 2) Express covenants a s s i s t i n proving the c o n f i d e n t i a l i t y of the employer's information; 3) Express covenants act as a warning and a deterrant for employees; 4) Injunctions can be issued more e a s i l y to prevent breaches of express covenants, than for breaches of implied or f i d u c i a r y o b l i g a t i o n s ; 5) Express covenants do not displace implied or f i d u c i a r y o b l i g a t i o n s ; 6) Express covenants e s t a b l i s h an employer's claim to inventions and to copyrights. In view of the r e l a t i v e l y weaker protection provided by patent, copyright, and implied and f i d u c i a r y o b l i g a t i o n s , employers i n the computer industry must act d e c i s i v e l y at the time of h i r i n g . An employer c l e a r l y achieves a stronger l e g a l p o s i t i o n by taking express covenants of non-disclosure and non-competition from the employee at the time of engagement. The s p e c i a l status given to employment r e s t r a i n t s under the common law was reviewed. H i s t o r i c a l l y an employer has been required to face a higher burden of proof i n the enforcement of employment r e s t r a i n t s than would a purchaser of a business i n an action against a competing former vendor. After reviewing the h i s t o r i c a l arguments, the conclusion was made that the s p e c i a l status accorded employment r e s t r a i n t s was u n j u s t i f i e d and inappropriate for s k i l l e d employees i n the computer industry. 5 206 A number of more neutral conclusions were also made with respect to the elements of the r e s t r a i n t of trade doctrine. F i r s t , the doctrine normally only can be applied to r e s t r a i n t s that l i m i t an employee's l i b e r t y a f t e r the employment engagement. However, several a u t h o r i t a t i v e English decisions have recently used the doctrine to set aside r e s t r a i n t s that were being applied during the employment period. This l i m i t e d exception occurs when the r e s t r a i n t s are so extensive and u n f a i r as to i n v i t e the court to i n t e r f e r e . 6 A second observation r e l a t e s to the p u b l i c p o l i c y element i n the doctrine of r e s t r a i n t of trade. Recent appeal court decisions i n Canada and the United Kingdom have warned that prima f a c i e assumptions are harmful to the p u b l i c p o l i c y basis for the doctrine. In theory, once a court has determined that a r e s t r a i n t of trade e x i s t s , the proper second question i s to ask whether the r e s t r a i n t of trade i s so offensive as to be void by reason of public p o l i c y . However, the courts normally bypass the p u b l i c p o l i c y element when faced with an employment r e s t r a i n t . The judgments s t a r t with the assumption that employment r e s t r a i n t s are prima f a c i e void. This pattern i s l i k e l y to continue i n spite of the warnings of the appeal courts,7 b u t there i s l i t t l e evidence that t h i s assumption a c t u a l l y operates as a severe disadvantage for the employer. The core of the r e s t r a i n t of trade doctrine has always been the reasonableness of the l i m i t a t i o n being placed upon the employee. To determine the v a l i d i t y of the r e s t r a i n t , the courts look f i r s t at the nature of employer's i n t e r e s t being protected, and then at the s p a t i a l l i m i t a t i o n s being imposed. In order to q u a l i f y f or protection, an employer must prove the existence of a proprietary i n t e r e s t : commercial or business advantages are i n s u f f i c i e n t . The three recognized types of 207 proprietary i n t e r e s t s are business connections or customer goodwill, c o n f i d e n t i a l information r e l a t i n g to the business, and any trade secrets revealed to the employee.8 One cautionary conclusion relates to the nature of the information shared by the employer and employee. The content of the information does not determine whether an employer has a proprietary i n t e r e s t . For example attempting to divide an employee's knowledge i n t o know-how or trade secrets i s not a f r u i t f u l way to i d e n t i f y a proprietary i n t e r e s t . Instead, the courts ultimately i d e n t i f y the i n t e r e s t by paying c a r e f u l attention to the p a r t i e ' s r e l a t i o n s h i p , t h e i r conduct and to the industry within which the business operates.9 Chapter V discussed one d e t a i l e d i l l u s t r a t i o n of the inadequacy of proprietary rights to protect an information employer.10 The example selected was a software licensee who attempts to impose a r e s t r i c t i v e covenant of non-disclosure upon i t ' s employees. Such covenants are required by software li c e n s o r s i n order to protect the c o n f i d e n t i a l i t y of the software trade secret. However such a l i c e n s o r i s only extending a r i g h t of use to the licensee. No t r a n s f e r of proprietary rights to the software takes place between the p a r t i e s . Since the licensee/employer does not possess a proprietary i n t e r e s t i n the software, the doctrine of r e s t r a i n t of trade would therefore d i s q u a l i f y the employer from using the protection of a r e s t r i c t i v e covenant. Equitable obligations of confidence can be imposed upon the employee, but the licensee i s arguably unable to protect i t s e l f i n contract. I t i s suggested that the courts should extend the d e f i n i t i o n of proprietary r i g h t s to include commercial or business advantages as a sensible way to enforce t h i s type of r e s t r i c t i v e covenant• 208 Technological and s o c i a l changes have also resulted i n a lack of protection for the public i n t e r e s t element i n the doctrine of r e s t r a i n t of trade. The threat to the public i n t e r e s t arises from an overly l i m i t e d d e f i n i t i o n of what c o n s t i t i t e s the public i n t e r e s t . In theory, a post employment r e s t r a i n t can be attacked by the covenantee on the grounds that the p u b l i c i n t e r e s t w i l l be harmed by i t s enforcement. However, the case law i s quite unsettled on the d e f i n i t i o n of the p u b l i c i n t e r e s t . A major c o n f l i c t exists i n the case law on the appropriate evidence that can be admitted to define the public interest.11 It appears that the Supreme Court of Canada must be c a l l e d upon to resolve the dispute. A c r i t i c a l argument has arisen i n the t r i a l and appellate courts over the economic and s o c i a l evidence which a court can properly consider i n defining the public i n t e r e s t . If a more l i b e r a l approach towards the allowable evidence i s adopted by the Supreme Court, the doctrine of r e s t r a i n t of trade w i l l u ltimately require a court to assess an employment r e s t r a i n t i n l i g h t of the e f f e c t on economic and s o c i a l conditions a f f e c t i n g the p u b l i c . Such an approach would allow the j u d i c i a r y the scope to recognize the unique features of the computer industry. This thesis concludes that the doctrine of r e s t r a i n t of trade w i l l not be able to f u l f i l l i t s true role as an instrument of s o c i a l p o l i c y without an expanded scope for the public i n t e r e s t element. An employer i n the computer industry i s not disadvantaged by the e x i s t i n g p r i n c i p l e s on the onus of proof with respect to employment restraints.12 Each party has a separate onus of proof i n ascertaining the reasonableness of covenants. The onus to e s t a b l i s h that i t i s reasonable i n the i n t e r e s t s of the p a r t i e s i s on the employer who i s 209 seeking to enforce the contract. The onus for e s t a b l i s h i n g that the r e s t r a i n t i s not i n the i n t e r e s t s of the public i s on the employee who opposes enforcement. More s p e c i f i c a l l y , the employer/covenantee cannot r e l y upon what has sometimes been described as "the p o s s i b i l i t y of misuse doctrine."13 Instead the employer/covenantee has an a f f i r m a t i v e burden to demonstrate a context i n which the court can conclude that the employer's proprietary i n t e r e s t w i l l be harmed by the employee's actions a f t e r termination. However, these p r i n c i p l e s on onus of proof do not impose an unreasonable burden on the employer. Remedies for breach of an employee's obligations were analyzed i n three s p e c i f i c areas.14 The f i r s t conclusion was that there i s a generally adequate basis for a damage award against a t h i r d party who p a r t i c i p a t e s i n or benefits from an employee's breach of confidence. 1^ Although there are uncertainties i n the e x i s t i n g remedy, Canadian courts do have the power to award equitable damages. The Supreme Court of Canada has s p e c i f i e d f l e x i b l e guidelines for the c a l c u l a t i o n of the damages i n equity. 1 6 The second remedial t o p i c was the assessment of the granting of i n t e r l o c u t o r y injunctions against s k i l l e d employees who misappropriate c o n f i d e n t i a l information. This remedy ranks as the most c r i t i c a l l e g a l weapon to protect c o n f i d e n t i a l information against employees or outsiders. Although the House of Lords i n the American Cyanamid case attempted to lower the burden placed upon an applicant, the Ontario t r i a l courts have so f a r refused to lower the employer's burden i n an i n t e r l o c u t o r y i n j u n c t i o n action.17 The r e f u s a l i s motivated by the t r a d i t i o n a l p o l i c y statements regarding employment r e s t r a i n t s such as the 210 "imbalance of power" i n favour of the employer. Although the B r i t i s h Columbia t r i a l courts appear to adopting a less r e s t r i c t i v e approach, the f a i l u r e to adopt the American Cyanamid guidelines presents a serious weakness for the protection of information i n employment r e l a t i o n s h i p i n the computer industry. The t h i r d remedial topic was to determine whether a court could grant p u n i t i v e or exemplary damages against an employee for a breach of employment o b l i g a t i o n s . Canadian courts are currently using punitive damage awards as a very e f f e c t i v e remedy for the protection of employment information. ° Concluding Observations: As with any area of law reform, there are two p r i n c i p a l methods to improve the l e g a l protection a v a i l a b l e to an information employer. The j u d i c i a r y can take an active r o l e i n expanding the e x i s t i n g boundaries of the law, or the l e g i s l a t u r e s can undertake statutory reform. There are i n d i c a t i o n s that both of these routes might be followed i n Canada i n the next f i v e years. F i r s t , a p r o v i n c i a l law reform body has made the i n i t i a l c a l l for a statutory t o r t of misappropriation of a trade s e c r e t . 1 9 The I n s t i t u t e of Law Research and Reform i n Alberta recently d i s t r i b u t e d a discussion report which set out t h i s recommendation. The I n s t i t u t e ' s tentative suggestion of a new statutory t o r t was prompted, i n part, by the desire to protect e x i s t i n g and prospective information employers, 2 0 and to extend the remedial powers of the c o u r t s . 2 1 . There have also been two other r e l a t e d statutory proposals elsewhere i n Canada. The B.C. Law Reform Commission has c a l l e d for l e g i s l a t i o n to 21 1 permit p a r t i a l enforcement of r e s t r i c t i v e covenants under the doctrine of r e s t r a i n t of trade. Such a reform would deal with the harsh impact which an unenforceable r e s t r i c t i v e covenant has upon an employer/covenantee.21a The f i n a l statutory i n i t i a t i v e comes from the Federal government. A white paper has been released which recommends amendments to the Copyright Act to c l e a r l y extend copyright protection to computer software. 2 1 ^ Second, i n the past two years there has been a l i m i t e d , but s i g n i f i c a n t s h i f t , i n the p o s i t i o n of the t r i a l and appellate courts i n Ontario. Even though the decisions do not d i r e c t l y deal with information i n the employment r e l a t i o n s h i p , the decisions show a c l e a r j u d i c i a l w illingness to respond to technological change. In a t r i o of c r i m i n a l law decisions, Regina v. Kirkwood22, Regina v. Stewart23, and Regina v. Turner24, the Ontario courts imaginatively used the criminal law to convict accused p a r t i e s who had e i t h e r arranged for the misappropriation of c o n f i d e n t i a l information, s o l d c o u n t e r f e i t videotapes, or i n t e r f e r e d with computer tapes without authorization. Even . more s i g n i f i c a n t l y , the f i r s t i n t e r l o c u t o r y decisions on copyright and the protection of software object code have now emerged. In an unreported 17 page i n t e r l o c u t o r y decision i n I.B.M. v. Spirales25, the Federal Court r u l e d that both source code and object code were protected by copyright. The judgment establishes the copyright protection of software much more f i r m l y than the previous cases noted i n the t h e s i s . 2 6 These developments i n the case law and the proposal f o r statutory reform hold out the hope of improved protection for employers i n the computer industry. However, law reform proceeds at a s n a i l ' s pace i n comparison with the speed of technological change. Thus, i n conclusion, i t i s doubtful i f the law can keep abreast of the a c c e l e r a t i n g waves of change. 212 FOOTNOTES: CHAPTER VII 1. Supra, Chapter I II at 35-47. 2. Id. 3. Supra, Chapter I I I at 48-66. 3a. Chapter IV at 92-93. 3b. Chapter IV at 97-98. 3c. Chapter IV at 99-103. 4. Supra, Chapter V at 110-117. 5. Supra, Chapter V at 118-123. 6. Supra, Chapter V at 127. 7. Supra, Chapter V at 129-130. 8. Supra, Chapter V at 130. 9. Supra, Chapter V at 137-140. 10. Supra, Chapter V at 141-144. 11. Supra, Chapter V at 149-150. 12. Supra, Chapter V at 156. 13. Supra, Chapter V at 159. 14. Supra, Chapter VI at 172-173. 15. Supra, Chapter VI at 177. 16. Id. 17. Supra, Chapter VI at 178-180. 18. Supra, Chapter VI at 188-192. 19. I n s t i t u t e of Law Research and Reform (Edmonton, A l b e r t a ) , Protection  of Trade Secrets, Report for Discussion No.1 February, 1984. 20. Id. at 59. 21. Id. at 88-91. 213 21a. Report on Covenants i n Restraint of Trade (1984) at p.5. 21b. From Gutenberg to Telidon; A White Paper on Copyright (1984) at p. 79-80. 22. (1983) 5 C.C.C. (3d) 393, 42 O.R. (2d) 65 (Ont C.A.) 23. (1982) 38 O.R. (2d) 84 (Ont. H.C), rev'd by (1983) 42 O.R. (2d) 255 (Ont C.A.) 24. Unreported decision Ont. H.C, June 18, 1984 noted i n (1984) 1 Canadian Computer Law Reporter 222, September 1984. 25. I.B.M. v. Sp i r a l e s Computers Inc. (1984) 12 D.L.R. (4th) 351 (Fed. Ct. T r i a l Div.) 26. Supra, Chapter III at 51-60. 214 BIBLIOGRAPHY Atkinson, P.Y.; Spence, R.A. Fiduc i a r y Duties Owed By Departing Employees - The Emerging "Unfairness" P r i n c i p l e (1983/84) 8 Canadian Business Law  Journal 501 Bendel, Michael. "The Dependent Contractor: An Unnecessary and Flawed Development i n Canadian Labour Law" (1982) 32 Un i v e r s i t y of Toronto Law  Journal 374. Berwind, Michael W.,and Martin, Edwin M.Jr. "Research and Development Limited Partnerships", P r a c t i s i n g Law I n s t i t u t e , Computer Law 1982 Acquiring Computer Goods and Services. Blake, H.M. "Employee Agreements Not to Compete" (1960) 73 Harvard Law  Review 625. Br a i t , Richard A. "The Use of R e s t r i c t i v e Covenants i n the Employment Contract" (1981) 6 Queens Law Journal 414. Bre t t , H. and L. Perry. "The Legal Protection of Computer Software." ESC Publishing Limited, Oxford (1981). Brooks, Daniel T. "Perfecting Rights i n Employee Innovations" P r a c t i s i n g  Law I n s t i t u t e , Computer Law 1980 Acquiring Computer Goods and Services. Brooks, Daniel T. "Agreements with Consultants and Employees and Registering Copyrights i n Computer Software", P r a c t i s i n g Law I n s t i t u t e , Computer Law 1982 Acquiring Computer Goods and Services. Brooks, Daniel T. "Perfecting Rights i n Employee Innovations" P r a c t i s i n g  Law I n s t i t u t e , Computer Law 1980 Acquiring Computer Goods and Services. Campbell, Colin (ed.). Data Processing and the Law, London: Sweet & Maxwell, 1984. Clo s i u s , P., Schaffer, H.M. "Involuntary Servitude: The Current J u d i c i a l Enforcement of Employee Covenants not to Compete - A Proposal f o r Reform (1984) 57 So. C a l . Law Review 531. Cornish, W.R. Employee's Inventions - the New United Kingdom Law (1978) E.I.P.R. 4 Cornish, W.R. "Protection of C o n f i d e n t i a l Information i n English Law," (1975) 6 I . I . e . 43. Davidson, Duncan M. Protecting Computer Software: A Comprehensive Analysis [1983] 4 Arizona State Law Journal 611. Dessemontet, Francois. The Legal Protection of Know-How i n the United  States of America, 2nd ed., H.W. Clarke trans., New Jersey: Fred B. Rothman & Co., 1976. Drucker,Peter F. "Schumpeter and Keynes" Forbes May 23, 1983 at page 124. 215 Duncan, "Canadian Business and Economic Implications of Protecting Computer Programs" (unpublished Ph.D. th e s i s , University of Texas at Austin), 1975. Finlayson, George D. " R e s t r i c t i v e Covenants, Trade Secrets, and Wrongful Dismissal" Law Society of Upper Canada Sp e c i a l Lectures 1976 Employment Law at page 251 Fridman, G.H.L. "Some Polemical Thoughts on the Subject of Restraint of Trade" The Canadian Business Law Journal V o l 2 (1977/78) at page 303 Fridman, G.H.L. James G. McLeod, R e s t i t u t i o n , The Carswell Company Ltd., Toronto, 1982. Gasaway, L.N., Maureen Murphy. Legal Protection For Computer Programs Gilburne, Miles R. and Ronald L. Johnston. "Trade Secret Protection for Software Generally and i n the Mass Market", (1982) Computer Law  Journal, 211 Glancy, Dorothy. "The U.S. Crime of Trade Secret Theft" (1979) E.I.P.R. 1979. Glancy, Dorothy. "Disclosure of Trade Secrets under the U.S. Freedom of Information Act" F.O.I.A. [1981] 2 E.I.P.R. 38 Gunderson, R.N. Restraint of Trade i n the F i e l d code (1963) 79 L.W. Rev. 410. Gurry, Francis "Breach of Confidence" Unpublished Material dated 15/8/1984 (to be included i n text to be published by Oxford U n i v e r s i t y Press 1985). Hammond, R. Grant "Developments i n the Equitable Doctrine of Breach of Confidence." [1976] N.Z.L.J. 278. Hammond, R. Grant. "Is Breach of Confidence Properly Analysed i n Fiduciary Terms?" (1979) 25 Mc G i l l Law Journal, 244 Hammond, R. Grant. "Quantum Physics, Econometric Models and Property Rights to Information" (1981) 27 M c G i l l Law Journal, 47 Hammond, R. Grant. Law and the Misappropriation of Valuable Commercial Information i n a Computer Age. Unpublished Materials 247 delivered at Uni v e r s i t y of Toronto Law Conference, October 1974. Hammond, Grant R. The Origins of the Equitable Duty of Confidence (1979) 8 Anglo-American Law Review 71. Hammond, Grant R. Theft of Information [1984] 100 Law Quarterly Review 252. 216 Handman, Suzanne. "The J u r i d i c i a l Status of an Individual Work Contract i n Relation to a C o l l e c t i v e Agreement and Resources of an Employee" (1979) 39 Review du Barreau, 995 Heydon, J.D. The Restraint of Trade Doctrine, London, Butterworths 1971 (KN266.2 H495 1971 ). Heydon, J. D. "Recent Developments i n Restraint of Trade" (1975) 21 M c G i l l Law Journal, 325 (K 1 M32 L38 ) H u l l , J.K. "Some Problems of Injunctive R e l i e f " [1981] 9 E.I.P.R. Hunter, George and G i l b e r t S. Sharpe. "Patent Rights In An Employee's Invention: A Comparative Analysis and a Model For Reform" (1975) 23 Chitty's Law Journal, 253 I n s t i t u t e of Law Research and Reform (Edmonton, Al b e r t a ) , Protection of  Trade Secrets, Report f or Discussion No.l February 1984 Jager, Melvin F. 1983 Trade Secrets Law Handbook, Clark Boardman Co., Ltd.: New York,New York 1983 Jones, Gareth "R e s t i t u t i o n of Benefits Obtained i n Breach of Another's Confidence." (1970) 86 L.Q.R. 463. Kitch, E.W. The Law and Economics of Rights i n Valuable Information (1980) 9 Journal of Legal Studies 683. L a n g i l l e , B r i a n . "Labour Law Is a Subset of Employment Law" (1981) 31 Univ e r s i t y of Toronto Law Journal, 200 Lautsch, John C. "Computer, Communications and the Wealth of Nations: Some The o r e t i c a l and P o l i c y Considerations about an Information Economy", (1983) IV, 1 Computer/Law Journal, 101 Law Commission (United Kingdom), Breach of Confidence Report, October, 1981 Law Reform Commission (Australia) "Privacy" Report No.22. Volumes I and II (1983). Law Reform Commission of B.C. Report on Covenants i n Restraint of Trade (1984). Lawlor, Reed C "A Proposal for Strong Pr o t e c t i o n of Computer Programs Under the Copyright Law" (1979) 20 J u r i m e t r i c s Journal ( F a l l ) 18 Levary, Reuven R., Karen K. Duke. "Some Aspects of P o t e n t i a l Disclosure of C o n f i d e n t i a l Computerized Legal Materials", [1983] 4 Computer/Law  Journal, 159 L i b l i n g , D.F. The Concept of Property: Property i n Intangibles (1978) 94 Law Review Quarterly 103. 217 Maclntyre, Wayne. "Individual Rights and the C o l l e c t i v e Bargaining Process" (1974/75) 40 Saskatchewan Law Review, 269 Mihm, Mickey T. "Software Piracy and Personal Computer: Is the 1980 Software Copyright Act E f f e c t i v e ? " , [1983] 4 Computer/Law Journal 171. North, P.M. "Breach of Confidence: Is There a New Tort? (1972) 12 J.S.P.T.L. 149 Oxman, John Craig. " I n t e l l e c t u a l Property Protection and Integrated C i r c u i t Masks" (1980) 20 Jurimetrics Journal (summer) 405 P h i l i p s , Jeremy and Michael Hoolahan. "Employees' Inventions i n the United Kingdom Law P r a c t i c e . " Oxford, 1982. Ricketson, Sam. "Developments i n the Law Relating to Breach of Confidence." (1980) E.I.P.R. Ricketson, Sam. "Confidential Information - A New Proprietary Interest? Part I (19778/78) Melbourne U n i v e r s i t y Law Review. 223; Part II at 289. Robins^ Sydney L. " H i s t o r i c a l Treatment of the Employer-Employee Relation ship", (1976) Law Society of Upper Canada: S p e c i a l Lectures on  Employment Law 1 Shadowen, S.D., Voytek, K. Economic and C r i t i c a l Analyses of the Law of Covenants not to Compete (1984) 72 Georgetown Law Journal 1425. Sprowl, James A. Proprietary Rights i n Programmed Computers: Looking Beyond the Hardware/Software D i s t i n c t i o n for More Meaningful Ways of Characterizing Proprietary Interests i n D i g i t a l Logic Systems [1983] 4 Arizona State Law Journal 785. Vaver, D. "Trade Secrets - A Commonwealth Perspective (1979) E.I.P.R. 301. Vaver, David. " C i v i l L i a b i l i t y f o r Taking or Using Trade Secrets i n Canada" (1981) 5 C.B.L.J. 253. 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0077662/manifest

Comment

Related Items