In its recent decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., the Supreme Court of Canada considered the duties and obligations of employees who depart and work for a competitor in a situation where no restrictive covenants have been obtained, and the appropriate measure of damages where these obligations have been breached. Significantly, the Supreme Court restored an award of damages of almost $1,500,000 against one of the defendants who had orchestrated a mass departure of employees, making the total award of damages just under $2,000,000.
The case involved a dispute between two competitors in the investment brokerage business. RBC and Merrill Lynch each had offices in Cranbrook, B.C. In November 2000, as a result of the coordination by a branch manager of RBC, all but two junior investment advisors in the Cranbrook branch resigned without notice and joined Merrill Lynch. Prior to the departures, RBC’s client records were secretly removed or copied and sent to Merrill Lynch’s offices in Abbotsford. These records were used to prepare new Merrill Lynch documentation for the clients. As a result of these activities, RBC’s Cranbrook office was effectively "hollowed out and all but collapsed".
Following the collapse, RBC sued the former employees, Merrill Lynch, and a Merrill Lynch manager who had been involved in the recruitment. In the lawsuit, RBC made various claims against the former employees, including breach of fiduciary duty, breach of an implied term not compete unfairly after leaving RBC, breach of the implied term to give reasonable notice of termination, and misuse of confidential information. RBC also claimed that Merrill Lynch and its manager had induced the employees to terminate their contracts with RBC and to breach their obligation not to compete unfairly. Finally, RBC claimed that all of the defendants had conspired to injure its business and had wrongfully converted its documents.
BRITISH COLUMBIA COURT DECISIONS
At trial, Holmes J. characterized the former employees’ conduct as a "determined and frenetic campaign to move the clients to Merrill Lynch" and noted that the employees "were in fact well past the starting line before [RBC] had any inkling that a race was on." Holmes J. held that the former employees failed to provide proper notice of their resignations (determined to be 2.5 weeks), engaged in vigorous efforts to move clients before RBC could respond, and improperly removed client records. Holmes J. further held that the branch manager had breached his duties to RBC by secretly promoting and coordinating the mass departure.
Holmes J. held that none of the employees were fiduciaries, including the branch manager, because he was one of hundreds of managers in the RBC organization and had "some limited managerial functions" but was "primarily" an investment advisor. That finding was not appealed.
In a separate trial on damages, Holmes J. awarded $40,000 for profits that would have been earned by RBC if the former employees had worked during the notice period; $225,000 for loss of profits from clients due to unfair competition; $1,483,239 against RBC’s branch manager for loss of profits from clients for a period of 5 years relating to the breach of duty of good faith concerning the coordination of the mass departures; and punitive damages of $5,000 against the former employees, $10,000 against the Merrill Lynch manager, and $250,000 against Merrill Lynch.
The majority of the British Columbia Court of Appeal approached the case very differently. The Court of Appeal concluded that, absent an enforceable restrictive covenant, there was no general obligation on an employee not to compete unfairly after an employee had departed. The Court was influenced by the fact that RBC was a sophisticated company that had chosen not to obtain non-competition and non-solicitation clauses because insisting upon such covenants was viewed as an impediment to recruitment. The Court of Appeal also concluded that the branch manager had not breached any duties by coordinating the departure. As a result, the Court of Appeal overturned the trial judge’s awards of $1,483,239 and $225,000. The punitive damages awards were not changed.
SUPREME COURT OF CANADA DECISION
The Supreme Court of Canada agreed with the trial judge that the branch manager had breached his duty of good faith. The Supreme Court noted that it was a term of the branch manager’s employment to retain employees of RBC under his supervision, and that in organizing a mass exit, he had clearly breached that term. The Supreme Court noted that the damages are the losses caused to RBC as a result of his conduct. The Supreme Court found that the trial judge’s approach – considering expert evidence and awarding damages based on five years of lost profits – was reasonable. Accordingly, the Supreme Court restored the trial judge’s award of damages of $1,483,239 against the branch manager.
The Supreme Court agreed with the Court of Appeal respecting the duty of a former employee (who is not a fiduciary) not to compete. Significantly, the Supreme Court confirmed that there is no general duty on an employee to refrain from competing with a former employer after termination of the relationship. An employee may, however, be held liable for specific wrongdoing, such as the misuse of confidential information, or for a failure to give reasonable notice. As the Supreme Court stated:
The contract of employment ends when either the employer or 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.
The Supreme Court agreed with the Court of Appeal that the additional $225,000 award based on unfair competition was not proper, and having made a global loss of profits award against the branch manager of RBC, it would be inappropriate to award additional damages against the employees for loss of profits based on improper use of confidential information. All of the other damage awards of the trial judge, some of which were not under appeal, remained intact.
SUMMARY AND RECOMMENDATIONS
The law is now clear that following termination, an employee has a right to compete with a former employer, that there is no general duty to "compete fairly" and, absent specific wrongdoing such as the misuse of confidential information, an employee should not be held liable for competing activities.
In certain circumstances, an employee may be held liable for activities relating to intended competition and competitive activity prior to the termination of employment. The mere fact that an employee is planning to leave to go to a competitor would not attract liability. However, an employee may be held liable where the planned competition is in conflict with their specific duties. In this case, the pivotal fact was that the branch manager was responsible for retaining employees, and accordingly recruiting other employees to leave was completely at odds with those duties.
This case affirms that an employee has an obligation to provide reasonable notice of resignation. This principle is not often considered, because employers rarely pursue employees for failing to provide notice. Indeed, to the contrary, many employers will summarily terminate an employee who has given notice, if they are leaving to join a competitor. Now that it is clear there is no general duty to refrain from completing following termination, employers should reconsider this approach. In some circumstances, it may be advantageous to require the employee to work during a notice period (and therefore be unable to compete), to provide the employer with an opportunity to contact customers, solidify relationships and otherwise prepare for their competitive activities.
The case illustrates the enormous liability that can arise from breaches of duties in a competitive employment situation. Employers seeking to recruit (particularly in cases involving recruitment of multiple employees) must consider the duties owed by employees, and take care to ensure they are not breached. One important step is to require employees to give reasonable notice. Another is to ensure that the employee represents that he or she has not removed and will not use any confidential information belonging to their former employer. The wrongful misuse of the confidential information in this case was a decisive factor in the outcome, and the basis for the significant award of punitive damages, which are rarely awarded in employment cases.
As always, the best means to protect a company’s business from employee departures, including from a mass exodus, is through the use of restrictive covenants. As the Court of Appeal noted, had covenants been obtained in this case, it is entirely possible the situation might never have occurred. These covenants need to be carefully drafted and tailored to the specific circumstances, to ensure they are reasonable and necessary for the protection of an employer’s business interests, and therefore enforceable.