Canada: SCC Restores $1.5 Million Award Against Branch Manager For Leading Mass Exodus To Competitor

Last Updated: October 29 2008
Article by Derek Knoechel

On October 9, 2008, the Supreme Court of Canada released its decision in RBC Dominion Securities v. Merrill Lynch Canada et al, 2008 SCC 54. The Court restored an award of approximately $1.5 million in damages against a branch manager who had coordinated the defection of substantially the whole of his branch's sales group to a competitor. The decision helps to clarify the duties of employees who leave to compete with their former employer as well as the obligations of supervisory employees. A majority of the court, in reasons written by the Chief Justice of Canada, held:

  1. Resigning employees are required to provide reasonable notice of their departure. Employees who provide insufficient notice of resignation may be liable for damages flowing from the failure to give reasonable notice.
  2. Although employees owe a general duty not to compete with their employer during the course of employment, this duty will generally end upon termination of employment, even where the employee terminates the relationship by resigning. An employee will generally not be prevented from competing with the employer during any resignation "notice period" that should have been provided.
  3. A departing employee's ability to compete will be limited by "residual duties" that survive the employment relationship, such as the duty not to misuse confidential information, as well as duties of a fiduciary nature or arising out of an enforceable restrictive covenant. In this case, the advisors were not fiduciaries and there were no restrictive covenants in place.
  4. A manager has an obligation to perform his or her duties, including any duties relating to recruitment and retention of employees under his or her supervision, in good faith. A manager will be in breach of the duty of good faith where he or she organizes a mass exit of employees, and may be liable for lost profits and other damages flowing from such breach

Background Facts

In November 2000, RBC's Cranbrook office was decimated when virtually all of its investment advisors and administrative staff resigned without notice and joined Merrill Lynch. The branch manager, eight of ten investment advisors, and five of seven administrative assistants all defected, leaving a hollowed out RBC office with only two very junior investment advisors, an office administrator, and a receptionist.

RBC's own branch manager had been complicit in the defection, coordinating the mass defection while he was still ostensibly working for RBC. In the weeks preceding the employees' departure, the employees also surreptitiously copied and transferred RBC's client records to Merrill Lynch. In the subsequent battle over client accounts, and despite its best efforts, RBC lost over 85% of the accounts that had been serviced by the departing advisors.

RBC sued the branch manager, the other departing employees and Merrill Lynch, and at trial was awarded approximately $1.7 million in lost profits plus an additional $300,000 in punitive damages. The branch manager was held liable for the majority ($1.5 million) of the lost profits for breach of his duty to perform his duties in good faith. He owed a duty, in his capacity as branch manager, to work to retain employees and to inform his regional manager when he had become aware of the potential for a mass departure. His active organization of the mass defection, along with his deliberate concealment of such efforts, was held to constitute a clear breach of this duty. The "planned, prolonged, secret scheme to arrange a wholesale transfer of information to a competitor" triggered the substantial punitive damage award.

Merrill Lynch and the investment advisors appealed to the B.C. Court of Appeal, with partial success. The Court of Appeal sustained the trial judge's award of punitive damages, but slashed the award of lost profits from $1.7 million to $40,000, which represented only the profits lost during the 2 ½ week notice period that the investment advisors should have given to their former employer.

The Supreme Court of Canada Weighs In

RBC appealed to the Supreme Court of Canada to have the trial judge's awards restored against the branch manager and investment advisors for loss of profits. In restoring the trial judge's award against the branch manager, the Supreme Court adopted the following statements of principle:

  1. The contract of employment ends when either the employer or the employee terminates the employment relationship, although residual duties may remain.
  2. Resigning employees are required to provide reasonable notice of their departure. An employee terminating his or her employment may be liable for failure to give reasonable notice.
  3. 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.
  4. An employee terminating his or her employment may also be liable for breach of specific residual duties, such as the duty not to misuse confidential information, as well as duties arising out of a fiduciary duty or restrictive covenant. Subject to these duties, the employee is free to compete against the former employer upon termination.
  5. A manager may be subject to separate "managerial" duties arising out of the nature of the position, breach of which may give rise to a claim for damages.

How the Principles Were Applied

The Supreme Court of Canada restored the $1.5 million in damages awarded against the branch manager, but declined to reinstate the $225,000 awarded against the investment advisors for

losses due to their competition against their former employer during the 2 ½ week notice period.

The Supreme Court held that the departing investment advisors were, absent any enforceable contractual or fiduciary restrictions, entitled to compete with RBC immediately upon termination of their employment, even though they had failed to give reasonable notice of resignation. RBC's remedy against such employees was limited to damages (including lost rofits) directly accrued as a result of the failure to give reasonable notice of resignation.

The Supreme Court confirmed that the branch manager's orchestration of the mass resignation was inconsistent with and in clear breach of his obligation to perform his branch manager duties in good faith. The Supreme Court held that the parties would have contemplated a loss of

profits giving rise to damages if, at the time the contract was entered into, they had turned their mind to the possibility of the branch manager orchestrating the departure of substantially all the office's investment advisors.

Recognition of Additional "Managerial" Duties A Positive Step For Employers

The recognition of additional or heightened obligations for employees who don't meet the traditional definition of a "fiduciary" or "key" employee is a welcome development for employers. The traditional approach, in which the courts assign departing employees to one of two categories ("mere employees" versus "fiduciary employee"), while attractive in its simplicity, has proved unsatisfactory in its application. Such an approach fails to adequately recognize the broad spectrum of employment types or the range of duties that might attach to them. It is hoped that this decision signals the movement toward a more contextual approach to the assessment of duties and obligations applicable to employees.

Such a contextual approach is applied under the Quebec Civil Code, which states that employees have a duty of loyalty and a duty not to use any confidential information obtained in the course of employment. The Code further states that the obligations continue to apply for a reasonable time after the termination of employment. For instance, it has been generally recognized that a departing employee can compete against a former employer after the termination of employment, subject to the duty of loyalty. Furthermore, such obligations apply to all employees, irrespective of whether they have managerial duties or not. However, unlike the traditional common law approach, Quebec courts take into consideration factors such as the nature of the employment, the length of employment and the nature of the employee's contact with clients in order to determine the scope of these obligations in a particular case. Although the Supreme Court's decision deals with common law concepts, its conclusions with respect to an employee's duty to act in good faith and an employee's ability to compete against a former employer in a manner consistent with residual obligations will be of interest to Quebec employers, as these conclusions confirm previous decisions to the same effect drawn by Quebec courts.

Limits of New "Managerial" Duties

It should be noted that the common law obligations recognized in this particular case may only apply to those employees with true managerial duties. Non-managerial employees will not be held liable for damages merely as a result of discussing future employment options with their colleagues should the colleagues also choose to leave. Further, it is highly unlikely that the managerial obligations recognized in this case will apply following the termination of the employment relationship in the same manner that common law fiduciary obligations traditionally do. Indeed, Madam Justice Abella, writing in dissent, issued a caution regarding the creation of a "quasi-fiduciary" category of employees, noting that it would likely create an unwarranted chilling effect on the mobility of those senior non-fiduciary employees. Lower courts, alive to such concerns, can be expected to interpret and apply these new obligations in a cautious manner.

Employers wishing to seek protection against departing employees soliciting colleagues to join them either prior to or after their departure may wish to consider extracting enforceable non-solicitation covenants from their employees. Such provisions should be drafted narrowly and carefully, as courts will only enforce reasonable restrictions on employees' post-employment activities. Employers are cautioned that the unilateral implementation of any such provisions may potentially give rise to claims of constructive dismissal from existing employees on the grounds that such policies or provisions alter fundamental terms of an employee's contract of employment.

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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