Canada: Departing Investment Advisors: An Update Since The Supreme Court's Decision In RBC v. Merrill Lynch

Last Updated: June 4 2013
Article by James J. Heelan and Mathieu J. LaFleche

The Departure of an Investment Advisor

The departure of an investment advisor (IA) raises a number of serious and often conflicting considerations. For the IA, a departure could mean uncertainty in terms of earning a livelihood and risks upsetting longstanding relationships with clients. For the brokerage, a departure might mean the loss of confidential information, employees, or clients. Intertwined with these considerations are the obligations owed by both IAs and brokerages to the clients during the period of transition.

How these concerns are addressed will depend on the nature of any duties or obligations that exist between IAs and their brokerages. In 2008, the Supreme Court of Canada (SCC) last considered the scope of these obligations in its decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54.

The RBC Dominion Securities Decision

In November 2000 a mass departure took place at the RBC Dominion Securities (RBCDS) branch in Cranbrook, British Columbia. Without providing advance notice, nearly all of the IAs left to join competitor Merrill Lynch, taking copies of client records with them. This move, coordinated by the branch manager, left only two junior IAs behind, effectively decimating the branch.

Protracted litigation erupted following the departure, ultimately winding its way to the SCC. None of the departing IAs were bound by any formal employment agreement specifically preventing them from competing with Merrill Lynch or soliciting former clients. As a result, the SCC attempted to clarify the existence and scope of an IA's common law employment obligations in and around the time of their departure. Specifically, the SCC concluded that:

  • The individual IAs breached an implied term of their employment agreement by failing to give reasonable notice of their departure. However, once the employment relationship had ended, the IAs did not owe a general duty not to compete with RBCDS, so long as they did not misuse confidential information obtained in the course of their employment.
  • The branch manager breached his duty to act in good faith by systematically orchestrating the departure of the other IAs while employed with RBCDS. Accordingly, he was personally liable for RBCDS' lost profits arising from the mass departure.

Outcome and Further Issues

The SCC's decision delineated several aspects of the relationship between IAs and their brokerages. In particular, the SCC confirmed that IAs have an implied duty to:

1. Perform functions in good faith;

2. Give reasonable notice of their departure; and

3. Avoid misusing confidential information;

Since the SCC's decision, several Canadian appellate Courts have considered and applied the underlying principles in the RBC decision to further refine the scope of these obligations. Two particular issues that have been further explored at an appellate level:

1. In the RBC decision, the departing IAs voluntarily left for a competitor. Are there any reciprocal obligations on a brokerage not to compete with a former IA where that IA's position has been terminated by the brokerage?

2. In the RBC decision, none of the departing IAs had a written employment agreement containing a non-solicitation clause. Have the policy concerns underlying the RBC decision affected the interpretation of a restrictive covenant in the IA context?

Reciprocal Obligations

In some ways, the Alberta Court of Appeal in Soost v. Merrill Lynch, 2010 ABCA 251, examined the reverse question as the one examined by the SCC: does a brokerage which terminates an IA owe a general duty not to compete with that IA for the clients he used to service?

Kurt Soost was recruited by Merrill Lynch's predecessor in 1998. He brought along his personal client database, and a book of business valued between $70 - 80 million. During his time with Merrill Lynch he grew that book of business to $150 million and was repeatedly acknowledged as a top performer. Subsequently, difficulties in the relationship arose, including allegations that Mr. Soost failed to follow internal guidelines with respect to private placements. In May of 2001, he was terminated. Eventually he found work with another brokerage, but only retained a small fraction of his former clients.

Ultimately, the trial judge concluded that the issues raised by Merrill Lynch were not sufficient to justify the termination of Mr. Soost for cause. As a result, the Court awarded $600,000 in damages in lieu of notice. This was not controversial. However, the Court went on to award an additional amount of $1.6 million for damages to Mr. Soost's reputation and book of business. The trial judge found that Merrill Lynch knew at the time it hired Mr. Soost that terminating him without cause and without notice would cause significant damage to his reputation and his book of business.

Merrill Lynch appealed the additional $1.6-million damage award. Mr. Soost raised two potential grounds on which the additional damages could be sustained:

1. Merrill Lynch's unfounded allegation for cause and the stigma associated with his unexplained dismissal; and

2. Merrill Lynch's unfair competition for his clients post-termination.

Because Merrill Lynch had made the allegations of dismissal for cause in good faith, the Court of Appeal concluded that the allegations themselves could not give rise to the additional damages.

In addressing the second ground, the Court of Appeal underscored that the principle outlined in RBC, regarding post-termination competition, apply both ways. As soon as the employment relationship ends, both employee and employer are free to compete with each other for clients. Accordingly, Merrill Lynch was free to compete with Mr. Soost and that competition could not create unfairness in terms of the manner of his dismissal. Therefore, it could not be a basis on which Mr. Soost could recover the additional damages.

Interestingly, the Court went further and outlined several specific considerations that further supported the absence of unfairness, including:

  • Mr. Soost's evidence was that he knew he was going to be fired prior to his dismissal;
  • Merrill Lynch did not contact any of the clients directly until after the dismissal;
  • Industry regulations required Merrill Lynch to contact the clients to avoid any gaps in brokerage coverage; and
  • Merrill Lynch contacted the clients in a fair way - advising that Mr. Soost had left, but not preemptively advising clients he had been dismissed or the reasons for the dismissal.

Although the Court found no general duty not to compete, following this same course of conduct may assist in avoiding any potential liability additional claims for damages in similar situations.

Impact on Enforcement of Restrictive Covenants

None of the departing IAs in RBC had signed an employment agreement containing a non-competition or non-solicitation agreement. Accordingly, the SCC's decision was primarily engaged with the common law obligations that would exist generally between employees and employers. In Edward Jones v. Voldeng, 2012 BCCA 295, the BC Court of Appeal considered how the policy concerns underlying the RBC decision, particularly the protection of client interests, might inform the interpretation of a written employment agreement which includes a non-solicitation clause. These policy concerns were raised primarily at the Court of Appeal level by Justice Southin in RBC Dominion Securities Inc. v. Merill Lynch Canada Inc., 2007 BCCA 22.

On March 12, 2012, Randy Voldeng resigned from his position with Edward Jones to take up a new position with competitor RBCDS. The next morning he sent out an urgent and time-sensitive e-mail to a number of his clients announcing his move to RBCDS. Although the letter did not directly solicit his former clients, it did emphasize that he would be able to provide superior service at his new position.

Edward Jones reminded Mr. Voldeng of his employment contract and indicated that it would be unnecessary for Mr. Voldeng to contact any of his clients. However, Mr. Voldeng did call a number of clients and by March 23, 2012, nearly $4 million in accounts had been transferred from Edward Jones to RBCDS. Accordingly, Edward Jones applied for an interim injunction, seeking to prevent Mr. Voldeng's conduct.

Generally, an applicant for an interlocutory injunction is required to demonstrate three elements:

1. A serious question to be tried (or a strong prima facie case where the result of the interlocutory injunction will, in effect, end the matter);

2. The applicant will suffer irreparable harm if the injunction is not granted; and

3. The balance of convenience favours granting the injunction.

The trial judge granted the injunction. On appeal, the Court of Appeal concluded that Edward Jones was unable to show that it had suffered irreparable harm. Because the industry is highly regulated, it would be possible to demonstrate which accounts had been transferred – and therefore which clients had potentially been solicited.

The Court of Appeal was reluctant to establish the IA/client relationship as a special category for which the general rules regarding interlocutory injunctions would not apply. However, both the trial judge and the Court of Appeal commented on the general policy concerns underlying the RBC decision and considered their general application in the context of an interim injunction to enforce a non-solicitation clause.

The interests of the clients were noted as being a legitimate factor to be considered in the injunction analysis, primarily in the first and third elements of the test. These policy concerns were held to impact the type of conduct considered to be a breach of a non-solicitation clause. The Court of Appeal noted that, arguably, any contact with a former client could be a solicitation. However, in the context of an IA/client relationship, both the trial judge and the Court of Appeal agreed that an IA was entitled to advise clients of their departure and new location. Such a communication would not only be proper, but desirable.

Accordingly, in the IA context, conduct which amounts to solicitation will likely be informed by the special nature of an IA's role and the obligations owed to clients. This decision affirms that an IA is entitled to provide new contact particulars to their current clients, even in the face of a non-solicitation agreement. However, a departing IA must be judicious in the language used in that communication. The use of non-neutral, promotional language will take what would otherwise be an acceptable notice into the realm of solicitation.

The Court of Appeal's decision raises potential roadblocks in all three elements of the interim injunction analysis. Indeed, the Court suggests that the interests of the IA and their clients will often tip the balance of convenience in favour of the IA opposing the injunction. Absent the misuse of confidential information, this may make it difficult to successfully enforce a non-solicitation clause at an interim stage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James J. Heelan
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