Former employees have no legal duty not to compete, nor do they have a duty not to compete unfairly. That was the ruling in the recent B.C. Court of Appeal Decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al. However, employees must give reasonable notice of resignation and cannot breach their duty of confidentiality.
A manager at RBC Dominion Securities Inc. (RBC) and the majority of investment advisors and support staff of RBC’s branches in Cranbrook and Nelson, B.C. were approached by a competitor, Merrill Lynch Canada Inc. (Merrill Lynch). None of the employees were fiduciaries (i.e., employed in a high position where they were obliged to act in the best interests of the employer) or had any non-competition or non-solicitation clauses within their employment contracts. The RBC employees left en masse without giving notice. At Merrill Lynch’s direction, prior to resigning, the RBC employees copied confidential client records for Merrill Lynch’s use. The end result crippled RBC’s operations in Cranbook and Nelson.
Trial Court Slams Employees and New Employer
The trial judge concluded that the employees had breached their obligation to give reasonable notice, had competed unfairly and were liable for damages along with Merrill Lynch. The court also awarded punitive damages against Merrill Lynch for inducing the employees to breach their employment contracts and for wrongly copying confidential records.
Court of Appeal Overturns Trial Judge
Merrill Lynch and the employees appealed the trial judge’s decision. The Court of Appeal stressed the importance of the clients’ interests and noted that brokerage houses may not put their interests ahead of the clients’ interests. RBC did not have a property right in any client. As such, although the employees were not entitled to take copies of accounts or other RBC client information, the employees could prepare their own client contact lists and remove those lists from the office. The clients’ interests were paramount. Clients had the right to be notified when their brokers moved to a new brokerage, and to make their own determination as to which brokerage would be best suited to their interests. Thus, although the Court of Appeal agreed that a breach of confidence had occurred, the breach was limited to the taking of inappropriate papers belonging to RBC. The brokers’ communications with the clients did not breach their duty to RBC.
The Court of Appeal also addressed the concept of “fair competition” in the absence of provisions in written employment contracts expressly restricting competition. The court held that the former RBC employees had no obligation to compete fairly, including waiting a reasonable amount of time before attempting to persuade clients to change firms.
The Court of Appeal did agree that the employees had breached their duty to give reasonable notice prior to resigning from their employment. Rarely do we see cases in employment law where the employer sues a former employee for damages based upon the employee quitting before the reasonable notice period has expired. In the case of these commissioned employees, the Court of Appeal held that RBC was entitled to amounts earned by its former employees during the 2.5 weeks’ notice the employees should have given RBC. However, the court indicated that damages awarded by the Trial Court for future profits were not appropriate.
In the end result, the Court of Appeal upheld the punitive damages awarded against Merrill Lynch but greatly reduced the compensatory damages levied against Merrill Lynch and the individual former employees.
Lessons for Employers
The court provided some advice to employers operating in an industry where fair competition and non-solicitation of clients is of the utmost importance. Specifically, the court noted that RBC chose not to obtain non-competition and non-solicitation clauses from its employees and, therefore, faced the consequences of being unable to impose such restrictions after the fact.
This case carries some broad implications for any business operating in an environment where competition, especially competition by former employees, is a concern:
1. No general legal duty to compete fairly applies to former employees who are not fiduciaries.
2. Restrictive agreements like non-competition and non-solicitation agreements should be used in appropriate circumstances of high competition. However, employers must take care to ensure that restrictions on an employee’s right to compete are reasonable.
This includes restrictions as to the length of time and the geographic area in which the employee is prohibited from competing.
3. Employees do have an obligation to give reasonable notice prior to resigning. Including notice-of-resignation requirements in written contracts may be appropriate for your business.
4. Employees owe a duty of confidentiality to their employers. The courts are not impressed with sneaky behaviour such as copying client records, and Merrill Lynch was heavily penalized with punitive damages for its involvement. However, it may be acceptable for a departing employee to take client contact information, particularly where the clients’ interests so indicate.
We understand that the Supreme Court of Canada has granted leave to appeal in this case. It will be interesting to see what happens on appeal and whether this decision will be followed in other provinces.