Canada: The Supreme Court Of Canada Confirms The Legal Obligations Of Departing Employees

Last Updated: October 13 2008
Article by Carman Overholt and Dana Hooker

The Supreme Court of Canada has released its long anticipated judgment in RBC Dominion Securities Inc. ("RDS") v. Merrill Lynch Canada Inc. ("Merrill Lynch") et al which confirms the legal obligations of departing employees to their employer when they leave to accept employment with a competitor. In RDS v. Merrill Lynch, the Branch Manager orchestrated the departure of employees at the RDS Branch in Cranbrook, BC to the employment of Merrill Lynch, taking information regarding the business of RDS and soliciting the business of the clients of RDS. The Supreme Court of Canada reinstated the damages awarded by the Trial Judge to RDS of approximately $1.5 million that had been set aside by the BC Court of Appeal. The Judgment of the Supreme Court of Canada confirms that a departing employee in a managerial position who may not be a fiduciary, has an implied duty to act in good faith which in this case meant encouraging employees to continue in their employment with RDS as opposed to orchestrating the departure to a competitor in a highly competitive industry.

Introduction

The Supreme Court of Canada has reinstated the key elements of the decision of the Supreme Court of British Columbia in RBC Dominion Securities Inc. ("RDS") v. Merrill Lynch Canada Inc. ("Merrill Lynch") et al. and in doing so, clarified the law with respect to the legal obligations of departing employees in competitive industries.

This case arose after nearly all key staff members left the employment of RDS for employment with Merrill Lynch in Cranbrook, British Columbia. The Branch Manager played a central role in coordinating this mass departure; most of the employees were Investment Advisors ("IAs") and some were assistants. A few weeks before their departure this staff moved RDS's client records to Merrill Lynch's offices. This was in addition to contacting RDS clients regarding the move both before and after the departure. All of this severely impaired the business of RDS in the area.

The Trial Decision

RDS brought an action against both Merrill Lynch and its former employees. RDS claimed that the employees were fiduciaries due to their key role in RDS's business, as well as RDS's vulnerability in the circumstances. Additionally, RDS contended that its former employees had breached their duty of good faith by failing to give adequate notice, making unauthorized use of RDS records, and unfairly competing both during employment and immediately after their employment terminated. RDS also claimed that Merrill Lynch had conspired with its former employees and induced them to breach implied duties under the terms of their employment.

The issues of liability and damages were heard separately. The judgment concerning liability found that the employees were not fiduciaries notwithstanding their key positions. Their mass departure and RDS's increased vulnerability similarly failed to classify them as fiduciaries because the sudden departure of key employees is common within the securities industry. The Branch Manager was also found not to be a fiduciary, although he was found to have breached his employment obligations by failing to warn senior management of the planned move and for his role in orchestrating it. The other employees were found to have competed unfairly with RDS through their unauthorized use of client records and enticement of clients to move their accounts to Merrill Lynch. Merrill Lynch was not found liable for conspiracy because its main intention was to compete with RDS rather than to injure it. However, Merrill Lynch was liable along with the employees for RDS's losses because it was found to have induced the employees' breach of their good faith obligations.

Due to these findings of liability, Merrill Lynch and RDS's former employees were ordered to pay over $2,000,000 as compensatory damages and $265,000 in punitive damages for their breach of good faith obligations and for their acts of misconduct in secretly transmitting the confidential client information to Merrill Lynch prior to leaving their employment with RDS.

The BC Court of Appeal Decision

The departing employees and Merrill Lynch appealed the second judgment on damages, but did not appeal the judgment regarding liability. The BC Court of Appeal nevertheless addressed both the issues of liability and damages, and reversed the trial judgment on the issue of whether the employees were entitled to take the client lists or had a duty to compete fairly with RDS after they left their employment.

The punitive damages were upheld at $250,000.00 against Merrill Lynch; $10,000.00 against the Branch Manager; $10,000.00 against a representative of Merrill Lynch; and $5,000.00 against each of the IAs – an acknowledgement that transferring client information during employment constituted a serious breach of the former employee's obligations to RDS.

The majority of the BC Court of Appeal held that there was no implied duty on an employee to refrain from competing unfairly after leaving the employer's service. The Court also held that subsequent communication with clients did not constitute wrongful solicitation. However, while employees were allowed to take client lists, they were prohibited from making copies of account statements and other documents, and doing so was considered a breach of confidence. Further, the BC Court of Appeal held that because RDS's loss of its clients was not due to the employees' wrongful conduct, RDS was only entitled to damages for the notice period, and not for any future loss of profits. In addition, the majority found that the Branch Manager should be treated the same as the other employees and, accordingly, did not owe any distinct duties to RDS.

In dissent, Madam Justice Rowles of the BC Court of Appeal held that unfair competition was an aspect of the implied duty of good faith in an employment relationship. Furthermore, she held that the Branch Manager did owe greater duties to RDS because of his role as a manager. The role of the Branch Manager in organizing the mass departure of the employees and withholding such information from senior management was found by Madam Justice Rowles to be a breach of his employment obligations.

The Supreme Court of Canada Decision

The Supreme Court of Canada held that the Court of Appeal incorrectly applied the test from Hadley v. Baxendale in setting aside the damages awarded against the Branch Manager for breach of his implied duties on the basis of remoteness. The Supreme Court of Canada held the correct question to determine the issue was whether the parties, at the time of entering into the contract of employment, directed their minds to the possibility that the Branch Manager might orchestrate the departure of substantially all of the IAs, resulting in loss of profits giving rise to damages. The Supreme Court of Canada held that the Trial Judge had formulated the question correctly, and on the basis of the evidence, assessed the damages appropriately.

As a result, the Supreme Court of Canada held that the Branch Manager breached his duty of good faith in the discharge of his employment contract when he failed to attempt to retain the IAs. In fact, the Supreme Court of Canada noted that the evidence revealed that the Branch Manager had orchestrated the mass departure of the employees to a competitor. Further, on the basis of the expert evidence presented to the Trial Judge, the Supreme Court of Canada ruled that damages for five years of loss of profits, "discounted for various contingencies" was appropriate in the circumstances. Accordingly, the Supreme Court of Canada reinstated the award of damages against the Branch Manager in the amount of approximately $1,500,000.00. The judgment of the Court also noted that it was common ground that Merrill Lynch had indemnified or would indemnify the individual Defendants for any damages awarded against them. For that reason, the Court did not address the question of vicarious liability of Merrill Lynch for the actions of the RDS Branch Manager.

With respect to the issue of damages arising from the competition of the former employees with RDS during what would have been an appropriate notice period (i.e. 2.5 weeks as determined by the Trial Judge), the Supreme Court of Canada was in agreement with the majority of the Court of Appeal, and summarized the law as follows:

Generally, an employee who has terminated employment is not prevented from competing with his or her employer during the notice period, and the employer is confined to damages for failure to give reasonable notice...To this general proposition...[may be added] the qualification that a departing employee might be liable for specific wrongs such as improper use of confidential information during the notice period. This appears to be consistent with the current law, which restricts post employment duties to the duty not to misuse confidential information as well as duties arising out of a fiduciary or restrictive covenant...

As a result, the Supreme Court of Canada agreed with the Court of Appeal that the Trial Judge ought not to have awarded damages for unfair competition during the notice period. Further, the Supreme Court of Canada noted that in light of the award of damages against the Branch Manager, which took into account the use of confidential information, even if the departing employees had misused confidential information upon or before the departure (which may have occurred on the evidence, but it was not clear whether there was any loss associated with the misuse) "it would be inappropriate to award additional damages against the IAs for loss of profits based on improper use of confidential information."

This decision of the Supreme Court of Canada does not address the question of whether the employees (managerial or otherwise) had any fiduciary or quasi-fiduciary duties to RDS. The Court held that it was not necessary to address this issue in light of findings that the compensatory damages awarded were grounded in a breach of the implied duty "to perform one's employment functions in good faith and to give reasonable notice of termination".

Conclusion

The Supreme Court of Canada reinstated the award against the IAs of $40,000.00 in total for failure to give notice. In addition, the Supreme Court of Canada reinstated the award of $1,483,239.00 against the Branch Manager. The punitive damages of $5,000.00 against each Investment Advisor, an additional $5,000.00 against the Branch Manager and $250,000.00 and $10,000.00 against Merrill Lynch and its representative, respectively, were not in issue, and were accordingly maintained.

Madam Justice Abella dissented in part. In her dissenting judgment, she held that the Branch Manager did not breach an implied duty of good faith in his employment contract. She noted that there was no restrictive non-competition clause in the Branch Manager's employment contract and he was found not be a fiduciary employee by the Trial Judge. Madam Justice Abella held that employees are not indentured as servants and that they are legally free to leave and enter into competition with other employers, either individually or in a group. She specifically held that awarding damages against the Branch Manager for a period of five years was inconsistent with the reasonable expectations of the parties in light of the highly competitive and mobile nature of employment relationships in the financial services industry.

This decision of the Supreme Court of Canada is important for employers in competitive industries and in particular, employers who are vulnerable for various reasons including the specific nature of their business. A managerial employee may not have a fiduciary duty but the implied duty to act in good faith means that the managerial employee likely has an obligation to protect the interests of the employer generally, and specifically when subordinate employees are being solicited to join a competitor. Departing employees must give reasonable notice of the termination of their employment and the failure to give such notice may result in substantial damages including an award of punitive damages depending upon the circumstances.

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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