Magna International Inc And Royal Laser Corporation example essay topic

Society has become very cynical regarding business ethics. With liberalization and globalization becoming increasingly more important in the 21st century, it has become more difficult to evaluate and validate the goals of a business while fulfilling the demands that ethics put on government, business and consumers. Clearly, the purpose of a business can take two opposing views. From a business standpoint, an organization's primary goal is to offer quality to its customers, efficiency from its employees and competitiveness amongst businesses. However, from an ethical standpoint, a business should act "religiously" towards all stakeholders of a company by taking account of the extent of human suffering that their actions might cause in society. Multinational corporations are increasingly being faced with lawsuits, which tend to accentuate the importance that policy planners in government and industry should allocate to ethical issues.

For instance, Microsoft has faced numerous lawsuits for monopolizing the market in an unethical manner. These ordeals have cost the company millions of dollars in the past five years or so. Not only do these lawsuits ruin the image of the company but, from an economic perspective, these lawsuits hurt the company's profits, directly and indirectly. In essence, conflict of interest exists between all members involved when dealing with business ethics. This paper will attempt to examine the ethical issues of non-competing clause, the fiduciary obligation of a manager and senior officer, theft of trademark secrets, and employer-employee obligations to one another. These topics will be discussed through the case of Magna International versus Royal Laser Tech Corporation.

Magna International Inc. versus Royal Laser Tech Corporation involves four parties-Mister Fred Jaekel, Royal's current Chief Executive Officer, Mister Nick Orlando, who had been formerly employed at Cosma International Inc., a Magna Unit, as the Executive Vice-President of Finance, the Magna International Corporation and its competitor Royal Laser Tech Corporation, a metal molding company. There are two lawsuits at hand that need to be discussed. First of all, Fred Jaekel, as of August 2001, filed a lawsuit against his ex-employer Magna International Inc. because of his wrongful dismissal for $70 million dollars. Mister Jaekel claims that Magna owes him bonuses, shares and other payments.

In response to the accusation, as of October 15, 2001, Magna launched a $50 million lawsuit against Mister Fred Jaekel's employer. Also, Magna International states that in its defense that Mister Jaekel left the company for his own personal reasons and hence, was never asked to leave. Under this presumption, Mister Fred Jaekel, by accepting employment at a competitor's company, broke a two-year non-compete clause. Jaekel was directly responsible for developing applications of hydroforming for the production of parts for the automotive industry.

Thus, he is regarded as one of the best operating managers in the industry. Consequently, Magna International Inc., in addition to the sum of $50 million, is demanding for $5 million in punitive damages. However, Royal Laser Tech Corporation's position on this matter is that the company is not a direct competitor of Magna International Corporation. The Toronto company uses laser machines to do custom metal work for manufacturers in the transportation sector including such products as bus and rail-car parts. Royal Laser Tech Corporation's clients include General Motors and John Deere.

Major clients of Magna International Corporation are OEM's, original equipment manufacturers and virtually every vehicle manufacturer around the world. Both companies' main focus is the automotive industry. Moreover, both Royal Laser Tech and Magna International Inc. use hydroforming technology, which uses high-pressure water to mold metal. Thus, both compete with each other on metal forming processes including stamping, roll forming, hydroforming and assembly operations.

On the other hand, although Magna International's business model is similar to Royal Laser Tech's, the companies differ on one important aspect: revenues. Cosma International Inc., a Magna unit, generates sales of $4 billion annually in comparison to $45,000,000 for Royal Laser Tech. Consequently, Royal Laser Tech does not consider itself a competitor of Magna International Inc. seeing that they do not benefit from the same economies of scale. Hence, Magna International Inc. has a better capability of serving the market and should not be compared to Royal Laser Tech.

Magna's main argument in this case is the breach ement of the non-competition clause signed by its former employees Mr. Jaekel and Mr. Orlando. According to the Auto Part Giant, Jaekel - now Royal Laser's chief executive - signed an agreement that prevents him from competing against Magna for a two-year period. Similarly, Orlando - now Royal Laser's chief financial officer - signed a one-year non-competition clause. Magna argues that the employment of its former officers with Royal Laser is contrary to the Code Civil of Quebec Article 2089 that states: "The parties may stipulate in writing and in the express terms that, even after the termination of the contract, the employee may neither compete with his employer nor participate in any capacity whatsoever in an enterprise which would then compete with him.

Such a stipulation shall be limited, however, as to time, place and type of employment, to whatever is necessary for the protection of the legitimate interests of the employer". Secondly, Magna claims that one month prior to the launch of the court suit, both men, Mr. Jaekel and Mr. Orlando, "agreed to assist Royal Laser to solicit Magna's employees and customers", Magna said in its statement of claim, filed with the Ontario Superior Court of Justice. They also state that Royal Laser has already tried to solicit business from a major Magna customer - Daimler Chrysler - using knowledge of Magna's pricing. Magna's suit claims another man, Richard Cocq - until June 30th, a business director at Autotek Industrial de Mexico, another Magna subsidiary - met with Daimler Chrysler of Mexico shortly after Aug. 14. Magna said Cocq - "encouraged" by Jaekel and Orlando - indicated he could offer a lower price to the Daimler Chrysler unit for parts being supplied by Autotek for the automaker's PT Cruiser production. "In doing so Cocq sought to take advantage of the knowledge of pricing by Autotek that he had secured in the course of his employment with it", Magna said in its claim.

This valuable information, customer contacts and pricing policies are trade secrets that belong to Magna, therefore their misuse by former employees to profit their new employer is unethical and contrary to article 2088 of the civil code of Quebec that states: "The employee is bound not only to carry on his work with prudence and diligence, but also to act faithfully and honestly and not to use any confidential information he may obtain in carrying on or in the course of his work". Finally, among other allegations of corporate espionage, Magna claims Orlando took a bag of documents from Magna-owned Cosma International Inc, and had them copied for Jaekel and Wilde boer less than three weeks before his hiring at Royal Laser. Another critical ethical and legal issue that Magna should address is the fiduciary duties of Mister Jaekel and Mister Orlando as former officers such as loyalty, good faith and avoidance of conflict of duty and self interest. These fiduciary obligations are known to persist even after the employment has been terminated and are forever after. The articles of the Civil Code of Quebec that deal with these issues at hand are: Article 321 " A director is considered to be the mandatory of the legal person. He shall, in the performance of these duties, conform to the obligations imposed on him by law, the constituting act or by-laws and he shall act within the limits of the powers conferred on him".

Article 322 " A director shall act with prudence and diligence. He shall also act with honesty and loyalty in the best interest of the legal person". These articles are also supported by articles 121 (1) and (121) (2) of the Canada Business Corporation Act that state: S. 121 (1) (Duty of care of directors and officers). Every director and officer of a corporation in exercising his powers and discussing his duties shall a) Act honestly and in good faith with a view to the best interests of the corporation; and b) Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. S. 121 (2) (Duty to comply). Every director and officer of a corporation shall comply with this act, the regulation, articles by-law and any unanimous shareholder agreement. Many cases can be quoted where judges have held directors and officers responsible for breaching their loyalty obligations with their corporation.

This issue was clearly seen in the case of Bank of Montreal vs. NG where the Supreme Court judge sites: .".. The employee's obligation of good faith increases with the responsibility attached to the position held by the employee". The obligations of directors and senior officers are imposed upon them not because they are true mandatories of their corporation or of the shareholders but because of the nature of the control exercised over the affairs of the corporation. The fiduciary obligation recognized in the circumstances in the common law into good faith and loyalty of the employee to the employer and the avoidance of the conflict of interest including seeking an advantage which is incompatible with the terms of employment". Royal Laser Tech Corporation in turn, believes that the claim made by Magna is without merit and as defendants they have variety of meritorious defenses.

For one, they claim that they are not a competition of Magna, they argue by saying that the nature of the two companies are different. On the first hand, Royal Laser Tech is described as a metal molding company and for the present time, as well as the past, has not focused on trying to serve solely the automotive industry or any transportation industry for that matter. Secondly, profits are nowhere in the same vicinity for both companies. While Magna International Inc. enjoys revenues of $4 billion dollars per year and is an international company, Royal Laser Tech operates only in North America and has revenues of $45,000,000 per year. Consequently, Royal Laser Tech believes that the employment of Mister Jaekel and Mister Nick Orlando is not contrary to Magna's non-competition clause.

As mentioned previously, this court suit follows a $70-million wrongful-dismissal suit filed last month by Jaekel, claiming Aurora, Ont. -based Magna (TSE: MG. A MG. B) fired him in March without cause and broke agreements on restructuring the Cosma subsidiary. Mr. Jaekel states: "I do not see how they can try to claim I am not free to earn a living", implying that he feels he has the right to continue with his career seeing that the non-competition clause do no longer hold in his case in reference to Article 2095 which goes as follows: "An employer may not avail himself of a stipulation of non-competition if he has resiliated the contract without a serious reason or if he has himself given the employee such reason for resiliating the contract". Jaekel also claims he's owed several million dollars in bonuses, shares and other payments and must be compensated for the damages that he has had to live with because of his unlawful dismissal stated in the Article 2181 in the Civil Code of Quebec, to defend his position, which goes as follows: Article 2181 " A mandatory who revokes a mandate remains bound to perform his obligations towards the mandatory; he is also liable for an injury caused to the mandatory as a result of revocation made without a serious reason and an inopportune moment. In response to Jaekel's defense, Magna denied these allegations, saying Jaekel had decided to leave and was therefore not entitled to the money.

A first issue that must be addressed is the question as to whether or not Magna International Inc. and Royal Laser Corporation are actually direct competitors. After referring to many sources such as CNN news and CBC Business News, these two companies have been cited as rivals in many articles. Moreover, the founder and chairman of the Royal Laser Corporation, William Iannaci, in an interview having taken place in the year of 1999, actually admitted to this fact by saying: "We " re going into the automotive industry and competing with the big boys. We " ll eventually be competing against the Magna of the world. We " ve got the technology". Furthermore, what seems even more relevant to this case is the fact that Cosma International, a Magna unit, is one of the world's largest metal molding companies using hydroforming technologies which envelopes perfectly the operations executed by Royal Laser Tech Corporation.

Hence, Royal Laser Tech Corporation's argument cannot be supported and seems unfounded even though the scale at which they enter the market is different. Since the spring of 2000, Royal Laser switched its focus from making store fixtures and industrial products to supplying the auto industry. It installed hydroforming presses in its Toronto area factory and last year bought SCS Manufacturing, a metal stampings and seat assembler - areas that compete with Cosma and Magna. It has become more than obvious to me that the two industrial companies have become growing rivals in a rapidly expanding segment of the auto parts business called hydroforming, an area where Magna has invested heavily in new plants and technology and Royal has also focused its efforts. Given the information and the scope of the case, it is difficult to assess the situation fully. However, a second issue that is very important to address is the question of whether or not Jaekel was actually dismissed or not.

If he was wrongfully dismissed what does this imply? If he left because of personal reasons, what does this imply for the case? Given the uncertainty of the question, one must draw a conclusion according to the limited information that we have at hand. Although Article 2095 states that an employer may not use the argument of non-competing clause to his favor if he has wrongfully dismissed his employee or without any valid reason. Even if Mister Jaekel was dismissed, it is important to point out that he was more than just merely an employee. As the former CEO and president of Cosma International, Mister Jaekel has the highest duty of fiduciary and loyalty obligations to its former corporation even after the termination of his employment and forever after.

This good faith obligation of the officer holds even if the following has been dismissed. This statement is supported by Article 328 that cites the following: " The acts of a director or senior officer may not be annulled on the sole ground that he was disqualified or that he was irregular". Having said this, one must address a final issue. Is the non-competing clause legitimate and will it stand in the Court of Law? Unfortunately, the terms and the activities that this non-competition clause prohibits are not available to the reader.

Taking into consideration the former position of Mister Jaekel and Mister Orlando, a two-year time limitation imposed on the former CEO and the one-year limitation for the former CFO seems more than reasonable. Assuming that the geographical limitations is also valid, this restrictive covenant seems sound in nature and should have been respected by the new employees of Royal Tech Corporation. As to whether or not theft of trade secrets and corporate espionage as well as the true reasons for which Mister Jaekel's departure are actually critical issues to this case must be left to the Court of Law seeing that we do not have sufficient information and hence evidence against this claim in order to render the proper decision. In conclusion, in my opinion, an injunction should be imposed on both Mister Jaekel and Mister Orlando to terminate their employment with Royal Laser Tech and they should be held liable for any damage incurred by Magna as a result of their unethical behaviour.