The Need to Know Versus the Right to Intrude: A Caution on Fraud Investigation

by Bennett Jones LLP

Inevitably, properly conducted fraud investigations involve reviewing and digesting the information of the alleged fraudster. Bank records, e-mail accounts, correspondence – all of it must be obtained and examined to prove the fraud, trace the misappropriated funds and obtain recovery. While such intrusions on otherwise private information are a feature of any civil litigation, the tight timelines, zeal and covert manner in which fraud investigations are conducted create particular tension between the apparent need of the defrauded, investigating victim to know what happened and the privacy interests of the innocent-until-proven-guilty suspect. Recent jurisprudence has brought this tension squarely into the open.

Earlier this year, the Ontario Court of Appeal made Canada's first definitive statement on the newly evolving common law right of action for breach of privacy. In Jones v. Tsige, the Ontario Court of Appeal recognized, for the first time in Canada, the tort of intrusion on seclusion, already established in most American jurisdictions. While the subject of much commentary in the employment context, the case has significant implications in fraud recovery litigation as well.

The Case

Jones involves a dispute between two bank employees, Sandra Jones and Winnie Tsige. Tsige became involved in a romantic relationship with Jones' ex-husband and, contrary to the bank's policy, repeatedly accessed Jones' personal account information over the course of four years. Jones became suspicious that Tsige was accessing her account and complained to their employer. When confronted by the bank, Tsige admitted that she had looked at Jones' banking information numerous times, apologized for her actions, and accepted the bank's internal disciplinary measures.

Still, Jones commenced a civil action seeking damages for invasion of privacy. On a motion for summary judgment and cross-motion for summary dismissal, the motions judge dismissed Jones' action on the ground that the issue was novel and there was no common law right of action for invasion of privacy.

On appeal, the Ontario Court of Appeal held that the time had come to recognize invasion of privacy as a tort in its own right. According to the Court, there are four elements to this new tort:

  1. An unauthorized intrusion;
  2. The intrusion was the sort that is highly offensive to the reasonable person;
  3. The matter intruded upon was private; and
  4. The intrusion caused anguish and suffering.

While the Court of Appeal was willing to forge a new common law cause of action in breach of privacy, it acted conservatively in establishing an upper cap for non-pecuniary damages at $20,000 (in Jones awarding $10,000).

The Impact

While the low general damages figures may lead some to dismiss the case as unimportant relative to the large damages at issue in most fraud recovery litigation, this new tort ought to be carefully considered in conducting both internal and external fraud investigations for several reasons.

First, while the maximum general damages are (for now) modest, the financial penalties for breaching this tort are not limited to just those damages. In Jones the Court left open the possibility of claiming larger provable pecuniary loss, punitive damages and aggravated damages and greater general damages where warranted. It reasoned that damages may exceed the cap in appropriate circumstances having consideration to: the nature of the intrusion; the effect of the intrusion on the plaintiff's health, welfare, social, business or financial position; any relationship between the parties; any distress, annoyance or embarrassment suffering by the plaintiff; and the conduct of the parties including any apology or offer of amends made by the defendant. Clearly, the more intentional and egregious the intrusion, the greater the resulting damages. As such, the incautious or overly aggressive investigator may find itself facing a substantial counterclaim, possibly even one that exceeds the original fraud claim depending on the circumstances.

Apart from monetary risk, there are potential evidentiary and remedial ones as well. As a new tort, one that presumably arises from the Court's equitable roots, Courts will undoubtedly be faced with arguments that evidence obtained in breach of this tort ought to be excluded in ongoing litigation. While there is yet no recorded case of a court doing so, it is possible to conceive of a Court excluding evidence obtained in breach of a person's right to privacy, particularly if the breach was intentional. Indeed, even prior to the explicit recognition of this tort, the Ontario Courts were arguably already moving in the direction of excluding evidence obtained in breach of a defendant's privacy interests.1

A breach of privacy will also impact a party's ability to seek equitable remedies. A party seeking equitable relief, such as a disclosure order or Mareva injunction must come to the Court with clean hands. If the party has intentionally intruded on a person's right to privacy, it is quite possible that the Court will refuse to grant the equitable relief sought. Such a result may even apply to unintentional but nonetheless ham-fisted investigations that disregard the right to privacy the tort protects.

In short, an improperly performed investigation can result in a defrauded plaintiff being left without evidence, without a remedy and potentially facing a significant counterclaim.

Avoiding the Pitfalls

To avoid such a result, careful consideration of the scope and nature of the new tort is essential so that fraud investigations can be conducted appropriately and in the proper framework environment.

In terms of scope, an investigating party should understand that the tort includes not only physical intrusions but also listening or looking, with or without mechanical aids, into a person's private affairs, opening private or personal correspondence, intercepting communications, or examining a private bank account. The new tort specifically recognizes a person's right to informational privacy (as distinct from personal and territorial privacy) including sensitive health information, sexual orientation, employment information, diary or private correspondence, information indicating where a person lives, what he purchased where he travelled, or any communications by cell phone, e-mail or text message. As a result, the cases and commentary on internal employee fraud investigations in the wake of the new tort of inclusion on seclusion warn that employers may be limited in accessing employee personal information stored on company computers and hardware, even if that information is critical to an investigation into the employee's wrongdoing.2

As such, part of creating a good framework environment necessarily involves delineating the private from the public in the workplace. Organizations should implement clear Internet, e-mail and information services policies establishing that employees have no expectation of privacy when using company computers, blackberries, tablets or other electronics or e-mail and, further, that any personal information stored on company property is subject to routine inspection and deletion without notice. The more the investigating entity can say "this is not private and was known to be not private" the less risk this tort poses.

In terms of conducting the investigation after the fraud has been discovered, obviously precision is to be preferred over brute force. American courts have already given warnings to over-eager plaintiffs who review or even just make copies (without reviewing) of more than they ought to when conducting investigations.3 Investigating parties must carefully consider appropriate limitations of the search before it starts and then further closely monitor the execution of the investigation as it progresses. Parties must remain mindful that there is no requirement that the improperly obtained information be used, published or even viewed. It may be enough that private information was gathered without justification and in breach of a right of seclusion.

Finally, such warnings apply both to internal investigations, but also investigations conducted with external assistance (from accountants, private investigators, legal counsel, etc). The investigating party will of course be held liable for the acts of its agent in breaching another's privacy. As such, and as always, be careful how you proceed.

  1. Autosurvey v. Prevost (2004), 44 CPR (4th) 274. Note, in that case there were breaches of privilege as well, but the Court's language references both breaches of privilege and privacy as justifying its decision to exclude evidence.
  2. See specifically R. v. Cole, 2011 ONCA 218
  3. See Dalley v. Dykema Gossett, Docket No. 289046, February 11, 2010 (Mich. Ct. of Appeal)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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