The Supreme Court of Canada has issued an important decision on
the legal duties owed by employees who choose to move to a
competitor. In RBC Dominion Securities Inc. v. Merrill Lynch
Canada Inc., released October 9, 2008, the Supreme Court held
that departing employees are free to compete against their former
employer immediately after leaving the company, even if they fail
to give reasonable notice. At the same time, the Supreme Court held
that the company manager who had breached his contractual duty of
good faith to his employer by orchestrating the move was liable for
all losses caused by the collective departure.
RBC Dominion Securities Inc. (RBC) and Merrill Lynch Canada Inc.
were competitors in the investment brokerage business, and each had
offices in Cranbrook, British Columbia. In November 2000, virtually
all the investment advisers at RBC left RBC and went to Merrill
Lynch, in a move coordinated by the branch manager. No advance
notice was given to RBC, whose office "was effectively
hollowed out and all but collapsed." In the weeks preceding
the employees' departure, RBC's client records had been
surreptitiously copied and transferred to Merrill Lynch. RBC sued
Merrill Lynch as well as all the departing employees, all of whom
were found liable at trial and ordered to pay compensatory and
Supreme Court's Decision
On appeal, the parties all accepted that all the departing
employees had failed to give reasonable notice to RBC of the
termination of their employment and that reasonable notice in the
circumstances was two weeks. At issue before the Supreme Court was
whether the departing employees remained subject to their
contractual duties to RBC during the notice period, specifically
whether they had a duty not to compete with RBC. The Supreme Court
held that, generally, an employee who has terminated his or her
employment is "free to compete against the former
employer" during the notice period. The employer is limited to
recovering damages for the failure to give reasonable notice, but
cannot claim damages for losses arising from the early competition.
Exceptions are available to this general rule, the Supreme Court
noted, if the employee commits a specific wrong during the notice
period, such as by improperly using confidential information or
breaching a restrictive covenant.
Regarding the branch manager who had organized the mass
departure, the Supreme Court accepted the trial judge's finding
that the manager had a contractual obligation of good faith in
discharging his employment contract, and that it was an implied
term of that contract that the manager should attempt to retain
investment advisers within RBC, rather than promote their mass
exit. The Supreme Court held the former manager liable for all
losses caused to RBC by the departure of the employees, including
lost profits arising from RBC's inability to operate
effectively out of its Cranbrook office for a period of time
– an amount quantified by the trial judge at
approximately $1.5 million.
Implications of the Decision
The Supreme Court's decision has significant ramifications
for the employment relationship, both within the securities
industry and more broadly. The lesson for employers is that they
must address the issue of competition by departed employees within
the employment contract at the time of hiring, because no legal
requirement exists for employees not to compete, even if they
terminate their employment without notice. The lesson for
employees, particularly those in a managerial role, is that
coordinating a move from one employer to another may breach their
obligation to their current employer and thus risk significant
civil liability. Within the investment brokerage industry, the
Supreme Court's decision raises again the question whether the
industry should establish a code of conduct for dealers and sales
representatives on recruitment and departure issues.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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