Case Summary

The much anticipated Supreme Court of Canada decision of RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. was released on October 9, 2008. The case deals with the duties that departed employees owe their employer upon termination. The Supreme Court of Canada allowed RBC’s appeal in part, ruling that all employees owe their employers an implied duty to perform the functions of their employment in good faith, and to provide reasonable notice of resignation. Breach of those duties may result in significant damages.

Facts:

In the small cities of Cranbrook and Nelson, British Columbia, support staff and all but two junior investment advisors resigned their employment in November of 2000 from RBC effective immediately, and took up employment with Merrill Lynch. Prior to leaving RBC, client records were surreptitiously copied and provided to Merrill Lynch which in turn used the client lists to solicit RBC’s clients. It was found as a fact that the RBC branch manager, defendant Don Delamont, orchestrated the mass exodus to Merrill Lynch.

None of the employees were subject to contractual restrictive covenants, and were sued by RBC for breach of their fiduciary obligations and duties of good faith not to compete unfairly during what would otherwise have been a reasonable period of notice of resignation. They were also sued for failure to provide adequate notice of resignation and for breaching their duties of confidentiality in taking client information.

Supreme Court of Canada Decision:

The Supreme Court of Canada restored the $1,483,239 damage award against Delamont, finding that he did indeed owe an implied duty of good faith to RBC in the performance of his employment duties. In failing to make efforts to retain employees under his supervision, orchestrating their mass departure, and either endorsing or participating in the conversion of confidential client information he breached that duty resulting in lost profits to RBC for which he was liable. The damage award was not restricted to any period of reasonable notice. Rather, it covered lost profits suffered by RBC over a five year period.

With respect to the investment advisors, the Supreme Court of Canada found that they did not owe any duty to RBC not to compete during the notice period. The Supreme Court of Canada made clear that once the contract of employment is terminated by either the employer or employee, the employee’s duty not to compete is at an end as of the date of termination of employment, and does not carry forward through any notice period absent any written contractual restrictive covenants or finding that the employee was a fiduciary. The Supreme Court of Canada, therefore, declined to restore the damage award for lost profits over a five year period against the investment advisors.

On a positive note, the Supreme Court of Canada did confirm that an employee owes a positive duty to his/her employer to provide reasonable notice of resignation. Failure to provide reasonable notice of resignation will result in liability for any losses suffered by the employer during that notice period. In this case, the Supreme Court of Canada upheld the notice period of 2.5 weeks found by the trial judge to be reasonable in this case. The investment advisors and Delamont were each ordered to pay $40,000 to RBC for the lost profits it suffered during the notice period (those profits being what the advisors would have generated during that period).

The Supreme Court of Canada, while not providing extensive reasons into the scope of the duty, did confirm that employees owe a duty to not misuse confidential information of their employers even after their employment comes to an end.

What does the SCC Judgment Mean for Employers:

This decision makes clear that a manager owes a duty of good faith to his employer in the performance of his employment duties. Those duties may include the duty to attempt to retain employees and to not participate, promote or organize the departure of subordinates.

It also confirms that all employees owe their employers a duty of good faith in the performance of their employment duties regardless of their status as a fiduciary. All employees will also be bound post-termination by duties of confidentiality.

Most significant is the confirmation that employees must provide reasonable notice of resignation and will be held liable for any losses suffered by the employer for failing to do so.

Damages for breach of these duties will be those suffered by the employer that were reasonably within their contemplation at the time the parties entered into the contract of employment if the type of breach in question were to occur, such as lost profits. The damages may be significant and may extend over a significant period of time.

Absent a contractual restrictive covenant or finding that the employee is a fiduciary, no non-fiduciary employee owes a duty not to compete with his/her employer once the contract of employment has been terminated by either party, including during the notice period.

It is therefore, strongly recommended that all employers seriously consider the need to require all employees to sign contracts of employment with appropriate restrictive covenants in order to protect against the conduct of employees that, while harmful to the employer’s business, will be allowed by the courts. Note, however, that non-competition clauses or clauses which attempt to restrict doing business as opposed to restricting solicitation of clients are presently under attack by the Ontario Court of Appeal, requiring employers to draft these provisions very carefully and narrowly so as to avoid the unenforceability of the contract.

Although the courts recognize a duty to give “reasonable” notice of resignation, employers should also consider inserting provisions requiring employees to give a predetermined period of notice of resignation in order to avoid any question as to what is reasonable.