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Many employees no longer have just one professional identity. Alongside their day job, they may run a freelance business, consulting practice, online store or even a startup taking shape after hours. Most employers tolerate this – unless the side hustle interferes with the employee’s work or begins to resemble the company’s business.
What happens when an employee secretly builds a competing product on their own time – one clearly inspired by their employer’s business? Can an employer claim any right to ownership?
A recent Ontario Court of Appeal decision examining the federal Copyright Act provides a useful answer. The employer may have a claim for damages. But that doesn’t necessarily mean it owns the product or technology.
Vladimir Krougly worked as a software developer for Nexus Solutions Inc., which created software for monitoring emissions. While still employed by Nexus, Mr. Krougly secretly developed his own competing software product aimed at the same market. After resigning from Nexus, Mr. Krougly began marketing his product commercially, including to Nexus customers.
Nexus sued. One of its arguments was that the copyright in Mr. Krougly’s software belonged to Nexus because he created it while employed there. Both the trial judge and the Court of Appeal disagreed.
At issue was whether the software was created “in the course of” Mr. Krougly’s employment.
Under Canadian copyright legislation, ownership of a product does not automatically pass to an employer unless the employee was hired, expected or directed to develop that kind of work.
On the evidence, Mr. Krougly was not hired to create new software products for Nexus at all. His competing product was developed after hours, using his own equipment and resources. Nexus had not directed the work, funded it or authorized it. In fact, Nexus acknowledged that, had it known what Mr. Krougly was doing, it would have fired him. That admission made it difficult to argue that the software was really company work that Mr. Krougly was expected to perform.
For these reasons, the court refused to give Nexus ownership of the copyright in Mr. Krougly’s product, even though the product was inspired by Nexus’s business and created while Mr. Krougly was still employed.
There are important lessons here for both employees and employers.
An employer does not automatically own what an employee creates during the employment relationship, even if there are close similarities to an employer’s business. Ownership will usually depend on the written terms of any employment contract, the employee’s duties, how and where the work was done and whether company resources, ideas or direction were involved.
But even where ownership of a side project does not pass to an employer, workers are not necessarily permitted to engage in outside work without risk. All employees have a duty of fidelity and loyalty owed to their employer. They must act honestly, avoid conflicts of interest and not take steps that harm the employer’s business.
Secretly building a competing product can breach that duty in obvious ways. It may justify dismissal for cause, without severance. It can also expose the employee to damages if the employer can show it suffered losses, misuse of confidential information, improper solicitation of customers or other wrongful conduct.
In other words, ownership is only one issue. An employee may own the product and still face serious consequences based on how and when it was developed or marketed.
The same caution applies to side businesses that do not directly compete with the employer. Outside work can still create problems if it distracts from the employee’s duties, uses company time or resources, creates reputational risk for the employer or conflicts with written terms of employment.
That is where employment contracts matter. Many modern contracts require employees to devote their full time and attention to the employer’s business and prohibit outside work without written consent. Others contain invention assignment clauses, confidentiality provisions, non-solicitation language or specific rules about intellectual property.
Employees who ignore those provisions may find themselves in trouble even where their side project is developed outside office hours and using their own tools and equipment.
Employers should take this judgment just as seriously.
Too many companies assume loyalty and common sense will be enough. They are not. If a business wants ownership of employee-created software, content, systems, inventions or ideas, it needs clear written language that says so. The contract should explain what belongs to the company, what must be disclosed and what employees can or cannot develop while employed.
Policies about outside work should also be practical, specific and brought to the employee’s attention when employment terms are presented, not buried in a handbook provided long after employment begins.
The worst time to discover a gap in the contract is after an employee has built something valuable – and started selling it elsewhere.
Daniel A. Lublin is a founding partner at Whitten & Lublin Employment Lawyers, representing clients in workplace legal disputes. He can be reached at Dan@canadaemploymentlawyer.com.