On October 9, 2008, the Supreme Court of Canada (“SCC”) issued an important decision, in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, addressing the duties owed by a producing branch manager and investment advisor(s) when they leave one brokerage house to join another. The case has application to other employees.
In this case, the branch manager and all but two junior investment advisors of RBC Dominion Securities Inc.’s (“RBC”) branch offices in Cranbrook, and Nelson, B.C., left en masse to join the Cranbrook branch of Merrill Lynch Canada Inc. (“Merrill Lynch”). The branch manager was directly involved in the recruitment of the other investment advisors by Merrill Lynch. They left without providing notice and, in the weeks preceding their departure, they orchestrated the copying and transfer of client records to Merrill Lynch. RBC’s office was effectively hollowed out and all but collapsed.
RBC was awarded $40,000 in damages for breach of the implied term in the investment advisors’ (including the branch manager’s) contracts to provide reasonable notice of termination. This portion of the award was not appealed to the SCC.
RBC was awarded $1,483,239 in damages against the branch manager for breach of his contractual duty of good faith in orchestrating the departure of substantially all of the office’s investment advisors.
RBC was awarded punitive damages in the amount of $5,000 payable by each investment advisor, an additional $5,000 payable by the branch manager, $250,000 payable by Merrill Lynch and $10,000 payable by Merrill Lynch’s regional manager, who had done the recruiting. This portion of the award was not appealed to the SCC.
Very shortly after their departure, RBC brought an application for an interim injunction to restrain Merrill Lynch and their former employees for twenty one days from doing business or dealing an any manner with former clients of RBC’s Cranbrook and Nelson offices, from soliciting clients or employees of those same offices, and from using confidential information obtained in employment with RBC. By the time of the hearing of the application, the confidential information of RBC had been returned and the defendants had indicated that they had destroyed any copies that they had made. The application was dismissed on the basis that any damages were quantifiable and employees were entitled to fairly compete. (RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al 2000 BCSC 1750)
The SCC declined to reinstate the Trial Judge’s award of damages against the investment advisors and Merrill Lynch for breach of a duty not to compete unfairly. In so doing, the SCC clarified the law with respect to the obligation of non-fiduciary employees not to compete once their employment contract is terminated. Once terminated, the employee may be liable for failure to give reasonable notice and for breach of specific residual duties, such as the duty not to misuse confidential information or contractual covenants not to compete. Subject to these duties, however, the employee is free to compete against the former employer (SCC at paras. 18-19). This means that non-fiduciary employees upon termination of their employment are free to promptly establish a directly competing business in the immediate locality; to approach and seek and accept business from the clients of their former employer; and to use for their own purposes any information they carried in their heads provided they obtained the information honestly in the ordinary course of their employment.
The Trial Judge concluded that there was no fiduciary relationship between any of the investment advisors, including the branch manager, and RBC. This finding was based, in part, upon the conclusion that there was no implied duty not to compete following termination of employment (which was the nature of the fiduciary duty plead). This finding was not under appeal before the SCC. The Trial Judge, instead, found liability on the basis of breach of contractual terms.
The finding of breach of the implied term in the investment advisors’ (including the branch manger’s) contract to provide reasonable notice of termination was not under appeal to the SCC. The finding of breach of the implied contractual duty of good faith, upon which the Trial Judge found the branch manager liable for $1,483,239, was. This portion of the award, previously set aside by the B.C. Court of Appeal, was reinstated by the SCC.
In partially dissenting reasons, The Honourable Madam Justice Abella, concludes that the award of damages against the branch manager is an expansion of the traditional scope of liability for an implied duty of good faith. However, it appears that the majority of the SCC reached the decision based upon the finding that the branch manager breached an implied contractual term of his employment to recruit and to retain employees that were under his supervision (terms he admitted to at trial) (SCC at para.13). It appears that this case is more appropriately analyzed on its specific facts, as a case in which the court found a breach of these specific contractual terms rather than as a breach of general duty of good faith.
The difficulty with this finding is that RBC did not plead breach of contractual term by the branch manager to recruit and retain employees under his supervision (or even breach of a contractual term of good faith related to the exodus of investment advisors encouraged by the branch manager). The claim against the branch manager for breach of duty was focused on the assertion of a duty not to compete unfairly (which duty was found not to exist at law). While the SCC does not seem too concerned by this fact, it likely had a significant impact on the defendants’ ability to defend a claim that was potentially unarticulated and a moving target.
The Trial Judge awarded damages based upon a loss of profits analysis for a period of five years, applying an increasing discount rate annually. This was upheld by the SCC. Given the finding, reiterated several times by the Trial Judge, that recruiting within the industry was aggressive and moves were sudden and not infrequent, it is difficult to accept that damages based upon whether, had the parties at the time of entering into the contract of employment considered the possibility that the branch manager might orchestrate the departure of substantially all the office’s investment advisors, they would have contemplated a loss of profits giving rise to awarding damages for a five-year period.
In addition, the damages award includes lost profits arising from the branch manager’s own departure. As stated by Abella, J. in partially dissenting reasons: “Since he was entitled to leave, it is difficult to see how [the branch manager] could be punished for lost profits arising from a lawful decision to terminate his employment contract.” (Abella, J., at para.67)
Practical Tips for the Brokerage Industry and other employers
There are several strategies that employers can implement to protect their business.
Employers who wish to preclude employees - including branch managers - from competing after termination of employment must negotiate non-competition and non-solicitation clauses at the time of formation of the employment contract. In the absence of such clauses, nonfiduciary employees will be free to compete once they terminate their employment.
Additionally, absent a restrictive covenant, there is virtually no prospect of obtaining injunctive relief to prevent non-fiduciary employees from soliciting the employer’s clients.
If non-competition and non-solicitation clauses are negotiated at the time of contract formation, they should specifically state that damages would not be an adequate remedy in the event of a breach of the employee’s obligation not to compete in order to assist in obtaining injunctive relief.
Employers should ensure that the job duties of its employees, particularly those in managerial, or quasi-managerial positions, are reduced to writing. This will clarify and define the scope of any obligations arising as a result of an employee’s obligation to carry out the terms of their employment in good faith.
If client records are copied and transferred to the new employer, the employees responsible and the new employer can expect to be liable for punitive damages.
The employer receiving the recruits should refrain from implementing policies that expressly encourage the transferring of confidential information from the originating brokerage firm in order to avoid liability for conversion, inducing breach of contract and punitive damages and if they have such policies should review and revise them.
The employer receiving the recruits should refrain from being involved in a managerial or quasi-managerial employee’s (specifically branch manager’s) active recruitment of other employees to the receiving firm.
Employees who choose to move should ensure that they obtain an indemnity from their new employer for any damages that may be awarded arising there from.