The Supreme Court of Canada has issued an important decision on the legal duties owed by employees who choose to move to a competitor. In RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., released October 9, 2008, the Supreme Court held that departing employees are free to compete against their former employer immediately after leaving the company, even if they fail to give reasonable notice. At the same time, the Supreme Court held that the company manager who had breached his contractual duty of good faith to his employer by orchestrating the move was liable for all losses caused by the collective departure.

Background

RBC Dominion Securities Inc. (RBC) and Merrill Lynch Canada Inc. were competitors in the investment brokerage business, and each had offices in Cranbrook, British Columbia. In November 2000, virtually all the investment advisers at RBC left RBC and went to Merrill Lynch, in a move coordinated by the branch manager. No advance notice was given to RBC, whose office “was effectively hollowed out and all but collapsed.” In the weeks preceding the employees’ departure, RBC’s client records had been surreptitiously copied and transferred to Merrill Lynch. RBC sued Merrill Lynch as well as all the departing employees, all of whom were found liable at trial and ordered to pay compensatory and punitive damages.

Supreme Court’s Decision

On appeal, the parties all accepted that all the departing employees had failed to give reasonable notice to RBC of the termination of their employment and that reasonable notice in the circumstances was two weeks. At issue before the Supreme Court was whether the departing employees remained subject to their contractual duties to RBC during the notice period, specifically whether they had a duty not to compete with RBC. The Supreme Court held that, generally, an employee who has terminated his or her employment is “free to compete against the former employer” during the notice period. The employer is limited to recovering damages for the failure to give reasonable notice, but cannot claim damages for losses arising from the early competition. Exceptions are available to this general rule, the Supreme Court noted, if the employee commits a specific wrong during the notice period, such as by improperly using confidential information or breaching a restrictive covenant.

Regarding the branch manager who had organized the mass departure, the Supreme Court accepted the trial judge’s finding that the manager had a contractual obligation of good faith in discharging his employment contract, and that it was an implied term of that contract that the manager should attempt to retain investment advisers within RBC, rather than promote their mass exit. The Supreme Court held the former manager liable for all losses caused to RBC by the departure of the employees, including lost profits arising from RBC’s inability to operate effectively out of its Cranbrook office for a period of time – an amount quantified by the trial judge at approximately $1.5 million.

Implications of the Decision

The Supreme Court’s decision has significant ramifications for the employment relationship, both within the securities industry and more broadly. The lesson for employers is that they must address the issue of competition by departed employees within the employment contract at the time of hiring, because no legal requirement exists for employees not to compete, even if they terminate their employment without notice. The lesson for employees, particularly those in a managerial role, is that coordinating a move from one employer to another may breach their obligation to their current employer and thus risk significant civil liability. Within the investment brokerage industry, the Supreme Court’s decision raises again the question whether the industry should establish a code of conduct for dealers and sales representatives on recruitment and departure issues.