Can I Quit and Start Competing: Dispute Born of Competing Fertility Clinics

Previously printed in The Lawyer’s Daily, a LexisNexis Canada publication. 

Genesis Fertility Inc. v. Yuzpe 2021 BCCA 420 has it all: intrigue, betrayal and even a “shotgun.” In addition, it has some useful takeaways for employers who are navigating employee relations in times of significant organizational change.

Genesis Fertility is all about the facts, so an overview is required for context. Genesis Fertility Centre was operated by a team of physicians practising reproductive medicine in Vancouver: Sonya Kashyap, Abraham Albert Yuzpe, Elizabeth Lynn Taylor and Jason Adolph Hitkari. Their relationship was governed by a shareholders’ agreement, which included a “shotgun clause.” A shotgun clause is a provision whereby any shareholder can give notice to any other shareholder, requiring the other shareholder to elect either to sell their shares or purchase the shares of the person giving notice.

In November 2012, Yuzpe, Taylor and Hitkari (departing physicians) decided that they could no longer practise with Kashyap. They gave Kashyap notice in accordance with the shotgun clause. Kashyap elected to purchase the shares of the departing physicians. The departing physicians opened a new fertility clinic, Olive Fertility Centre in February 2013.

Dr. Gary Samuel Nakhuda was employed by Genesis. In December 2012, Nakhuda tentatively decided to join the departing physicians at Olive. He participated in the planning of Olive and the hiring of several members of Genesis’ staff for Olive, without disclosing his involvement to Kashyap.

Nakhuda joined Olive in June 2013 and subsequently became a shareholder of Olive.

Genesis sued the departing physicians and Nakhuda for breaches of their fiduciary duties, the duty of loyalty and fidelity and the duty of confidence, as well as breaches of Nakhuda’s employment contract. A lengthy trial commenced, following which the trial judge found in favour of Genesis against the departing physicians but dismissed Genesis’ claims against Nakhuda.

Genesis appealed the judgment. A settlement was reached between Genesis and the departing physicians. The appeal proceeded only on the parts of the judgment dismissing the claims against Nakhuda and awarding him costs of the action.

The issues on appeal were whether the trial judge erred by failing to find that Nakhuda breached his contractual duty of loyalty and fidelity owed as an employee of Genesis. Genesis alleged these duties were breached when Nakhuda signed Olive employment contracts with Genesis employees without informing Genesis and by participating in the planning and setup of Olive.

The Court of Appeal, quoting from RBC Dominion Securities Inc. v. Merrill Lynch Canada 2007 BCCA 22, described the duty of good faith as “an all pervasive, residual obligation to further the interests of the employer which is not capable of exhaustive categorization but which can be relied on by the courts to compel ‘faithful’ service in a myriad of work situations.” The Court of Appeal continued, “components of the duty of fidelity are the duty not to make a secret profit, the duty of confidentiality, the duty not to compete and the duty to respect the employer’s business interests.” (para. 29)

The evidence was that in December 2012, within a few days of Kashyap’s election to purchase the shares of the departing physicians, the two senior managers began taking steps to create Olive. The two senior managers prepared letters of employment for themselves and three other Genesis employees who decided to leave Genesis for Olive. These five letters of employment were signed, on behalf of Olive, by the departing physicians and Nakhuda, in some cases before the employees had provided Genesis with notice of resignation. Nakhuda did not advise Kashyap that he had signed the letters on behalf of Olive or that the employees intended to leave Genesis. The Court of Appeal determined that the trial judge erred in failing to decide the issue of whether or not this conduct constituted a breach of the express or implied duties in Nakhuda’s employment contract (paras. 35- 36).

Due to the retirement of the trial judge and the costs of ordering a new trial, the Court of Appeal took it upon themselves to make a determination. The Court of Appeal found that Nakhuda breached his duty of fidelity, requiring him to act in good faith, when he signed the letters on behalf of Olive without informing Genesis. It was clear that Nakhuda acted contrary to the express provisions of his employment contract which included a provision that he would not on his own behalf or on behalf of others “solicit, divert or hire away … any person employed by Genesis.” (para. 42)

The Court of Appeal concluded that Nakhuda breached both the express and implied terms of his employment contract.

There are several takeaways from Genesis Fertility. First, the case reiterates the definition of the duty of good faith, which is implied in all employment contracts. Second, where an employee plays an integral role in co-ordinating the departure of themselves and their co-workers, the employer can commence an action against that employee for breach of contract of both implied and express terms. Third, if this scenario could occur in your workplace, it may be a preventative measure to make an express term of the employment contract that employees cannot “solicit, divert or hire away” other employees of the organization. This would at least put employees on notice that such behaviour is prohibited.

 

Mike Hamata is an employment and labour lawyer and a partner of Roper Greyell LLP in Vancouver. He practises in all areas of employment, labour and workplace human rights law and is a strong advocate for his employer and employee clients. He can be reached at mhamata@ropergreyell.com. Katelin Dueck is a lawyer at Roper Greyell LLP. She works all areas of workplace law, including employment, labour, workplace human rights and privacy law. She advises clients on all issue that arise in the workplace and can be reached at kdueck@ropergreyell.com.