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Howard Levitt: The "Takeover" of a Company Branch by an Executive Sends a Warning to all Businesses

posted 2 years ago

Coup d’états are seldom seen outside of countries with political unrest, remaining a remote possibility for private businesses and employers. However, as one Greater Toronto Area law firm recently discovered, it is not impossible.

By the following morning, Sokoloff Lawyers began receiving client file transfer authorizations, resulting in more than 200 clients transferring to the “new” firm.

Before the “takeover,” the Brampton office had been extremely lucrative. It had doubled its revenue to $5.5 million between 2014 to 2020. Chorney’s compensation was based upon 40 per cent, meaning she was paid $2.17 million in 2020.

Naturally the law firm sought remedy for the damages incurred and brought an application, as well, for injunctive relief for upfront payment of the disbursements on the transferred files, and for arrangements as to how Sokoloff Lawyers would be compensated for legal work performed before the files were transferred.

In a decision released on Nov. 26, 2021, the Ontario Superior Court of Justice found that that Chorney had conducted “a planned and deliberate operation” to take over the Brampton office of the law firm. Further, the court found that Chorney had contacted clients about the transfer of files before she resigned from the firm.

Sokoloff Lawyers relied on a similar case from 2009, where three associate lawyers and a paralegal removed 250 client files on Christmas Eve and resigned from a law firm to start their own firm: Grillo v. D’Angela, 2009 CanLII 7 (ON SC).

In that casethe court found the lawyers staging the takeover breached their duties of loyalty and good faith by: (a) contacting clients for their own purposes to induce them to leave the firm while they were still employed; (b) quitting without notice; (c) taking client files without the firm’s knowledge and permission; (d) using the client files after their departure for the purpose of contacting clients of the firm with a view to inducing them to switch to the new firm; and (e) depriving the firm of the opportunity to inform its clients of the defendants’ departure, of the options available to the clients and of the consequences of the various options.

The court ultimately ordered that, within five months, Chorney and the other employees involved had to pay Sokoloff Lawyers the disbursements on all transferred files, along with at least 25 per cent of the final fees upon settlement of the transferred files.

This case serves as a warning to both employers and employees with respect to transition of practices. These circumstances are not unique to the legal world and can apply to dental and accounting practices, or the transfer of, for example, investment advisers or insurance brokers. Or perhaps, even more broadly within the business world.

Accordingly, an employee who has significant contact with an employer’s clients is wise to provide their employer with reasonable notice of their departure before moving, attempting to move a book of business elsewhere or to start their own shop. Injunction motions can be costly for all parties involved and may result in a public airing of dirty laundry — which I am sure Sokoloff Lawyers and its former associates would have wished they had avoided.

But remember, existing employees of all stations have a duty of fidelity to their employers and cannot solicit clients while still employed or do anything else which damages their client’s interests. Failing to abide by those obligations can have calamitous consequences.

BY HOWARD LEVITT AND ANOUSHKA ZACHARIAH
 
Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Anoushka Zachariah is an associate at Levitt Sheikh.
 

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