ONTARIO – Appeal – To prove the tort of conversion in respect of a book of business, which is an intangible asset, written agreements about ownership and the nature of the relationship between the parties are necessary.
Tar Heel Investments Inc. v. H.L. Staebler Company Limited, Lisa Arseneau et al
2022 ONCA 842 (CanLII) (December 5, 2022)
ONCA (Huscroft, Nordheimer and Copeland JAA)
This was an appeal from an award of damages for conversion of a book of business by the sale of the “book” by Lisa Arseneau (“Lisa”) to H.L. Staebler Company Limited (“Staebler”).
Lisa developed a book of business while working at Kimberly (“Kimberly Book”). Lisa brought the Kimberly Book to PDI, (the predecessor of Tar Heel Investments Inc). While at PDI, Lisa developed a further book of business of insurance clients (“Trip Book”). Some clients of PDI and their policies of insurance were added into the Trip Book. PDI was acquired by James Brown Company (“James Brown”). When Lisa left James Brown, she combined the Kimberly Book and the Trip Book and sold the combined book of business to Staebler and began working as an employee of Staebler.
PDI sued Staebler and Lisa for damages for conversion, breach of and inducing breach of contract, breach of confidence, and breach of, inducing breach of, and knowingly assisting breach of fiduciary duty.
The trial judge found that Lisa was a PDI employee rather than an independent contractor because she was paid a salary and benefits, was reimbursed for business expenses, and did not pay business expenses at PDI such as E & O insurance, occupancy costs, or travel costs. (para. 6)
The trial judge also found that there was no written agreement between Lisa and PDI regarding the Kimberly Book, which Lisa brought to PDI. There were negotiations between Lisa and PDI before she commenced employment at PDI, but no price or other terms were agreed upon and therefore, the trial judge held that no sale occurred. (para. 7)
PDI led evidence at trial that it believed there was an agreement it would provide a pension to Lisa upon her retirement. When PDI was purchased by James Brown, Lisa declined PDI’s offer of $150,000 worth of shares in exchange for her pension rights. Shortly afterward, Lisa sold the Kimberly Book and the Trip Book as a combined book of business to Staebler and went to work for Staebler.
The trial judge held that Lisa was entitled to sell the Kimberly Book to Staebler because she had not sold it to PDI but came to the opposite conclusion with respect to the Trip Book. The trial judge held that Lisa did not own the Trip Book and that by selling it, Lisa committed the tort of conversion.( para.9)
No finding was made as to whether clients moved to Staebler out of loyalty to Lisa or because the Trip Book had been sold to Staebler. The trial judge acknowledged that the books, which he treated separately for the purpose of the conversion analysis, were comingled at the Respondent’s firm and it was not easy to separate them for the purpose of calculating damages. The trial judge calculated damages based on the value of the Trip Book at the time of the conversion.
On appeal, Huscroft JA., writing for the Court held that the trial judge erred by assuming that Lisa owned the Kimberly Book. The trial judge’s finding that Lisa was a PDI employee suggested that the Kimberly Book clients had a relationship with PDI, not Lisa. Huscroft JA. distinguished this case from King v. Merrill Lynch Canada Inc., 2005 CanLII 43679 (Ont. S.C.), on the basis that the judge in the King case made findings of fact regarding the nature of the client relationships with the employer and the employee, while here, no findings were made about the nature of the client relationships with PDI versus Lisa. (para.15)
The ONCA found that the tort of conversion was not established becuase the trial judge had not made the necessary findings about ownership and the client relationships. Huscroft JA. held that the tort of conversion “involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession”: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, at p. 746. It is a tort of strict liability and it is no defence that the wrongdoer did not intend to convert the goods: Boma, at p. 746. (para. 18)
Huscroft JA held that it is not settled law whether intangible assets such as the information in a book of business can be the subject of a conversion clam and referred to a series of cases including, Del Giudice v. Thompson, 2021 ONSC 5379, at para. 172; appeal transferred to Ont. C.A., which provide no authoritative guidance on the issue. (para.19)
The information in the Trip Book was copied and provided to Staebler and also remained in the Respondent’s possession. The information was not taken, used or destroyed and the Respondent was not deprived of using the information in the way that a tangible asset could be removed.
The ONCA sent t the issue of a breach of fiduciary duty back to trial to be determined. Similarly, the Court held that the trial judge did not make sufficient findings of fact to determine if there was a breach of confidence. In doing so, the Court reviewed the test for breach of confidence set out in Lac Minerals v. International Corona Resources Ltd., 1989 CanLII 34 (SCC), [1989] 2 S.C.R. 574. (para. 26)
The appeal and cross appeal were allowed and the action was sent back for a new trial.
Editor’s Comment
The law is unclear whether an intangible assets such as a book of business can be the subject matter of a conversion claim. This case demonstrates the limitations of the tort of conversion to support an employer’s claim that its book of business was unlawfully sold and converted to a new employer. The ONCA focussed on ownership and the failure of the trial judge to make any findings about the content of the book of business when the employee started at PDI and left for Staebler.
The case demonstrates that the failure to document agreements about thenature of the relationship between an individual with a book of business and a company about ownership of the book, will likely make it difficult for an employer to succeed in a conversion claim.