This morning, the Supreme Court of Canada released its ruling with respect to the former employees of RBC Dominion Securities Inc. (RBC): There is no general duty for employees not to compete post-employment, but there is a duty to give reasonable notice prior to resigning from their employment. Employees are, however, bound by the duties of confidentiality and good faith. Damages will flow from high-handed resignations, including, in this case, a mass departure organized by a then-manager.
A manager from RBC and the majority of investment advisors and support staff of RBC’s branches in Cranbook and Nelson, B.C. were approached by a direct competitor, Merrill Lynch Canada Inc. (Merrill Lynch). The manager "brazenly" organized a group departure, such that all of these RBC employees left en masse without giving any notice. Further, at Merrill Lynch’s direction, prior to resigning, the RBC employees copied confidential client records for use with their new employer. RBC’s operations in Cranbrook and Nelson were crippled.
None of the departing employees were fiduciaries. They did not occupy senior positions at RBC, so were not obliged to act in the best interests of RBC and did not have any restrictive covenants within their employment contracts, such as non-competition or non-solicitation clauses.
Lower Court Decisions
Nevertheless, as we reported in July 2007, the trial judge found that the employees had breached their obligation to give reasonable notice, had competed unfairly and were liable for damages. Merrill Lynch was also liable for these damages in addition to punitive damages because of the wrongful copying of confidential records.
The Court of Appeal, however, noted that brokerage houses may not put their interests ahead of the client’s interests. As RBC did not have a property right in any client, the employees could prepare their own client contact lists and remove these lists from the office. 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 investment advisors’ communications with the former clients did not breach their duty to RBC. The Court of Appeal also noted that there is no obligation to compete fairly in the absence of express restrictions in written employment contracts.
The Court of Appeal agreed with the trial Court, however, that the employees had breached their duty to give reasonable notice prior to resigning from their employment. The Court of Appeal held that RBC was entitled to the amounts earned by its former employees during the 2.5 weeks’ notice that the employees should have given to RBC, but not entitled to compensation for loss of profits due to unfair competition. 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.
The Supreme Court of Canada Decision
RBC appealed the BC Court of Appeal’s decision on two grounds: (1) that the Court of Appeal had improperly overturned the award of damages against the former RBC manager and employees and Merrill Lynch for losses caused over a five-year period; and (2) the Court of Appeal had improperly set aside the award against the former manager on the finding of breach of a contractual duty of good faith.
The Supreme Court stated that, for the purposes of this case:
The contract of employment ends when either the employer or the employee terminates the employment relationship, although residual duties may remain. An employee terminating his or her employment may be liable for failure to give reasonable notice and for breach of specific residual duties. Subject to these duties, the employee is free to compete against the former employer. [at para 19]
The Supreme Court found that the trial judge had been wrong in law to award damages based on the employees being bound by a general duty not to compete, and that the Court of Appeal had incorrectly applied the law when assessing damages. Thus, the appeal was allowed in part, reinstating the trial judge’s decision with respect to damages, except those in which the trial judge found payable by the investment advisors for losses due to unfair competition -- based on their actions during the reasonable notice period. The Supreme Court agreed with the Court of Appeal on the competition issue.
Thus, the damages reinstated by the Supreme Court included damages in the amount of $1,483,239 for the loss of profits RBC suffered as a result of the former manager’s failure to perform his duties in good faith, specifically, his orchestration of the departure of virtually all of RBC’s investment advisors. This amount was calculated based on five years of damages assessed by experts for the lost business and devastated operations.
All punitive damages were upheld; every level of Court expressed its displeasure with the actions of the former employees and the new employer.
Lessons for Employers
This case carries some broad implications for any business operating in an environment where competition, especially competition by former employees, is a concern:
- No general legal duty to compete fairly applies to former employees who are not fiduciaries.
- 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.
- Employees do have an obligation to give reasonable notice prior to resigning, although damages may be limited during this notice period. Including notice-of-resignation requirements in written contracts may be appropriate for a business that will suffer if reasonable notice is not given by the employees.
- Employees owe a duty of confidentiality to their employers. The Courts are not impressed with high-handed behaviour such as copying client records inappropriately and will award punitive damages for such activities.
- Further, orchestrating a mass departure that will cripple a former employer is contrary to the common-law obligation to act in good faith. Damages will be awarded by the courts and may include hefty obligations to compensate for lost business.
- The duty of confidentiality does not necessarily extend to preventing departing employees from taking client contact information, particularly where the client’s interests so indicate.
The Supreme Court of Canada has ruled: former employees have no legal duty not to compete unfairly against their former employer. Employees must, however, give reasonable notice of resignation and cannot breach their duties of confidentiality and good faith in the manner of resignation.