Case Comment: Rbc Dominion Securities Inc. V. Merrill Lynch Canada Inc. Et Al., (2007) Bcca 22.
Recently, the British Columbia Court of Appeal released its decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al. This decision, if not successfully appealed to the Supreme Court of Canada, will have a significant impact on the duties and obligations (or the lack thereof) that departing employees will owe to their employers in the financial services sector, particularly investment brokerages. The case may also have an important impact on the duties and obligations of departing employees generally and for that reason, carefully attention must be paid to it by employers and employees alike in the event of a departure or planned departure.
The case arose after a group of employees in Cranbrook, British Columbia (with a satellite office in Nelson) left their employment with RBC to join Merrill Lynch. Some of these employees were investment advisors, one was the Branch Manager and others were assistants. As a group, they constituted the entire branch and planned to leave RBC en masse. In advance of their departure, they took confidential client information to their future employer, Merrill Lynch, to have it copied before they left RBC. Once at Merrill Lynch they resumed their business and continued to service most of the clients they worked for while at RBC. RBC’s business in the Cranbrook/Nelson area was significantly damaged as a result.
RBC sued. The issues of liability and damages were heard separately. The first judgment found liability on the part of the departing employees and Merrill Lynch. The second judgment awarded significant compensatory damages (over $2,000,000) together with punitive damages of $265,000 (for their misconduct in transmitting the confidential client information to Merrill Lynch prior to leaving their employment with RBC).
The departed employees and Merrill Lynch appealed the second judgment on damages. The first judgment, which determined liability, was not appealed. Nonetheless, the Court of Appeal addressed the issue of liability (i.e., whether the employees were entitled to take a client list or had a duty to compete fairly with RBC after they had left). Since the appeal was only taken on damages, the Court’s exploration of the issues of liability raises the concern that the Court did not have jurisdiction to consider these issues.
Madam Justice Southin, writing for the majority (Chief Justice Finch concurring), reduced the compensatory damage award to $40,000 (for loss of profits during the notice period) but maintained the punitive damages award on the basis of the wrongful conduct on the part of the defendants in obtaining the client information while the departing employees were still employed by RBC. The driving force behind maintaining the punitive damages award seems to have been less about the employees’ breach of their duty of fidelity to their employer and more about the interests of the clients. In the course of its judgment, the Court:
(a) remarked that it had been left with the "uneasy impression" that RBC had been more "concerned with its own bottom line than it was with its clients being able, without interruption, to consult with and give instructions to their respective advisors";
(b) found that clients are entitled to know "immediately upon [their] advisor leaving one firm for another where th[e] advisor has gone so that [they] can decide whether to change to the new firm or remain with the old"; and
(c) found that the departing employees could take lists of their clients rather than resort to their memory for their contact information and this was characterized as not putting "the interests of the brokerage house...ahead of the interests of the clients.".
Again, notwithstanding the fact that the trial judge’s findings on liability had not been appealed, the Court expressed concern with the notion that an employee has a legal duty not to compete unfairly with his or her employer after the employment relationship has ended. In the second judgment, the trial judge had concluded that none of the employees owed a fiduciary duty to RBC. This finding was significant for two reasons. First, had one of them been found to be a fiduciary, all of the employees would have been considered fiduciaries at law. Second, this finding arguably limits the application of this decision to cases dealing with "mere employees" as opposed to those who owe a fiduciary duty to their employers. While the Court held that the employees in this case did not owe their employer a duty to compete fairly post-termination, because they were clearly held not to be fiduciaries, the application of this finding to fiduciaries would presumably be a stretch.
This "duty not to compete unfairly", the Court noted, appeared to have originated from cases such as the British Columbia Court of Appeal’s often quoted 1999 decision in Barton Insurance Brokers Ltd. v. Irwin. The Court quoted the following passage from Barton:
"It must, of course, be observed that the problem presented in this case is a rather different one from the one referred to in the cases mentioned above, cases concerning the enforceability of covenants. There was no covenant in this case. However, from that field of the law came the development of the area we are here concerned with: namely, the duties of an employee to a former employer. Absent any express contractual terms, the law has developed to provide that a former employee will not be at liberty to act in an unfair way to a former employer. Whether it be called a fiduciary duty, a duty of good faith or a duty of confidence, the theme running through this whole area of the law is that in appropriate circumstances, a former employee may be found to have breached an enforceable duty owed to a former employer and may be successfully sued for injunctive relief or for damages."
Clearly, an employee has duties to a present employer not to divulge trade secrets or to work against the interests of his or her employer but the duty is not just limited to current employment. After leaving employment, an employee may be obligated not to pursue certain activities to the detriment of the former employer. For instance, it has been usually reckoned to be unfair conduct to permit a former employee to take with him or her customer lists to use for solicitation of business or to divulge trade secrets or to seek to appropriate maturing business opportunities of the former employer. On the other hand, I suppose to avoid what might otherwise be a condition of almost involuntary servitude, it has long been held that an employee is free to compete for custom with a former employer. As usual in human affairs, the difficulty is in the details and it is often difficult to know where to draw the line." [Emphasis added]
To avoid the impact of this passage, the Court in RBC:
(a) noted that it was obiter dicta (an opinion entirely unnecessary for the decision of Barton) and was therefore not binding upon it; and
(b) that statements by judges are not to treated as if enacted by statute or be considered "hard and fast rules".
In concluding that there was "no such thing" as an obligation or duty not to compete "unfairly", the Court stated that:
"Such a broad open-ended legal duty, whether treated as an implied term of a contract of service or as some obligation outside the contract but imposed by law, would be dependent for its scope on the length of any particular judge’s foot. To put it another way, the allegation in paragraph 28 of the statement of claim, which is echoed in paragraphs 33 and 34, does not assert an ingredient of any cause of action known to me.
This is not the place to engage in a disquisition on the general principles of implication of terms. But if each of these servants had been asked on entering into the service of DS, "If you leave our employ, do you promise not to compete unfairly?" would he or she have answered, "of course"? I think not. I think, at least if he or she were intelligent, the response would have been, "What does that mean? I have to make a living."
To the extent, therefore, that the judgment below is founded upon an implied obligation not to compete "unfairly", it cannot be sustained. As, in my opinion, that concept loomed large in the learned judge’s approach to the issues, its rejection puts in doubt the validity of all the learned judge’s ultimate conclusions."
It follows then that a mere employee (not a fiduciary), does not have a duty to compete fairly with his or her employer post-employment. This outcome is not surprising because previous decisions that have made reference to this so-called duty to compete fairly have typically arisen in cases where the employee in question was a fiduciary and therefore required to compete with their previous employer fairly (unless competition was otherwise restrained by an agreement between the parties). The determination of whether or not the employee had competed "fairly" often looked at such things as whether the employee had misused confidential information, appropriated business opportunities or solicited clients and employees.
While it could also be argued that a fiduciary also does not have such a duty given the Court’s treatment of the aforementioned passage from Barton, this seems to go too far given that the trial judge (in her first judgment on liability) concluded that none of the employees were fiduciaries.
The fact that RBC did not require the employees to execute non-competition and non-solicitation provisions appeared to be of significance to the Court. One is left with the impression that the Court felt that RBC had "made its bed" by not doing so and could not complain in the absence of ensuring such covenants were in place. This is a slightly ironic outcome given that the courts have historically treated non-competition covenants as unenforceable restraints of trade, saved only by evidence of their reasonableness in terms of geographic scope and duration as well as the reasonable and legitimate business interest such covenants are aimed at protecting. This decision may breath new life into the use of such covenants and employers looking to restrain the activities of employees, especially "mere employees", will likely pay closer attention to the use of contractual restraints to protect their legitimate business interests.
Additional findings of interest include:
1. The clear finding that RBC did not have any right of property in any client.
2. The finding that the departing employees did not have a legal obligation to give RBC a reasonable opportunity to persuade clients to stay with RBC.
3. The finding that the departing employees did not have a legal obligation to "behave in a fair and reasonable manner" after they left the service of RBC.
4. The finding that the departing employees owed a duty to provide RBC with reasonable notice of their resignations.
5. The finding that the departing employees were entitled to take a list of their "book of business" and did not need to rely on memory for their contact information. The Court emphasized that this entitlement did not extend to clients of other advisors or to account statements and other documents concerning the client including the "Know Your Client" form. On this issue the Court stated as follows:
"Because of that important interest of the client, an advisor should be able, without fear of litigation, to prepare a list of his own book of business from the records of the brokerage house. To hold in the 21st century that an adviser, who usually, by considerable personal diligence, has built up a book of business, must rely on his memory for the full names, addresses, telephone numbers and e-mail address of his clients, is not, in my opinion, in the interests of the clients and, therefore, is not in the public interest. I emphasize "his own book of business". He is not entitled to take a list of other advisors’ clients. To put it another way, the interests of the brokerage house should not be put ahead of the interests of the clients ... I do not say that an advisor is entitled to take copies of account statements and other papers concerning the client, such as the Know Your Client form. If the client wants to change to the new firm, he or she can give instructions to the old firm to hand over copies of all relevant documents, or give the advisor a copy of his or her own statements, and so forth. For the advisor to take other documents would be quite wrong because the client may consider that parts of those documents are confidential and he or she would not wish them to be in the possession of the new firm. I have in mind, for instance, that a client is obliged to give to an investment firm where he has an account, his social insurance number."
6. The finding that there is no breach of the duty of loyalty to one’s employer to entertain an offer of employment or accept it while he or she is an employee and that a breach will only occur if the employee leaves before the contract has expired or when proper notice is not provided.
7. The finding that an employee need not give his or her employer notice of the terms offered by the new employer and an opportunity to retain his services by matching such terms.
8. The finding that the departing branch manager was not a fiduciary or otherwise owed a "special duty" to RBC.
9. That while the departing employees breached their employer’s confidence by removing the client records, such breach was limited in scope because there was no evidence as to why a particular client chose to move to Merrill Lynch and therefore a causal connection could not be made between the breach of confidence and the loss of business and that it was probable that the client would want to stay with their advisor in any event.
Finally, it is of interest that the Court did not disturb the punitive damages award when such award arose out of the conduct of the departing employees and Merrill Lynch in taking the client records to Merrill Lynch for copying while they were still employees of RBC. Apart from the concern raised by the Court that there was no evidence to connect the taking of these records with the loss of business, this conduct was clearly in breach of the employee’s duty of fidelity to RBC as well as their duty not to compete with RBC during the period of their employment. This inability to connect the taking of these records with the loss of business clearly ended up being fatal to RBC’s claim for compensatory damages. But, obviously, the misconduct was considered to be serious enough to warrant the award of punitive damages although it seems that the Court was more upset with the impact that this conduct could have on the clients than on RBC. Again, the client’s interest (or public interest) played an important role.
Leave to appeal to the Supreme Court of Canada has been sought. In the meantime, employers looking to protect their legitimate business interests will be well served by paying close attention to this decision. The careful use of contractual provisions including: appropriate non-solicitation covenants and restrictions on post-termination conduct; termination provisions that set out how much termination notice the employee must provide the employer; confidentiality and non-disclosure covenants; and codes of conduct which specify what an employee can and cannot do while employed, all may assist the employer in protecting its interests in a departing employee scenario.
Care should also be paid to the client and/or public interest in circumscribing employee conduct.
If you would like more information about this decision, how it might impact your business and assistance with strategies to minimize such impact, please do not hesitate to contact us.
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