Canada: Mass Exodus Of Employees, Implied Duties Owed To Employers And The Supreme Court Of Canada

On October 9, 2008, the Supreme Court of Canada rendered a highly anticipated decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc.1 The Court made two critical rulings. First, that non-fiduciary managers who facilitate the mass exodus of subordinate employees are in breach of their implied duty of good faith to their employer, and may be held personally liable for that employer's damages including lost profits. Second, that non-fiduciary employees who fail to give notice of termination are not subject to an implied duty not to compete against their former employer during the period that is deemed to constitute reasonable notice of their departure.

Background

In November 2000, Don Delamont, the branch manager at an RBC Dominion Securities office in British Columbia, secretly organized the joint departure of almost all of that office's investment advisory group to a nearby Merrill Lynch office. The employment agreements of these departed employees did not contain non-competition or non-solicitation clauses. Delamont and the other departing employees did not provide RBC with any notice of their departure and, before leaving, they took a good deal of RBC's confidential client information to Merrill Lynch to have it copied. Merrill Lynch was aware of Delamont's activities and, in fact, helped to coordinate the mass departure. Delamont and the other departed employees quickly resumed business as usual at Merrill Lynch, taking with them a significant number of RBC's clients. The mass departure all but gutted RBC's office and resulted in significant lost profits.

RBC sued Delamont, its other departed employees and Merrill Lynch on a number of grounds, including breach of fiduciary duty, breach of the duty of good faith and unfair competition.

Supreme Court Of British Columbia

The trial judge found in favour of RBC and awarded significant damages against all of the defendants. Specifically, while the Court found that neither Delamont nor the other departed employees were fiduciaries of RBC, and therefore did not owe it an elevated or post-employment duty of trust and confidence, it held that:

  • Delamont had breached his implied duty of good faith to RBC when he organized the mass departure for Merrill Lynch, making him personally liable for $1,483,239 in damages for RBC's resulting loss of profits;
  • all of the departed employees (including Delamont) had failed to give RBC any notice of their departure, and had therefore breached their implied duty to give RBC reasonable notice of termination, making them liable for a total of $40,000 in damages;
  • all of the departed employees and Merrill Lynch had engaged in unfair competition against RBC when they failed to give notice of termination and then competed against it during the period that constituted reasonable notice of termination, making them jointly and severally liable for $225,000 in damages; and
  • the copying of RBC's confidential client records attracted punitive damages in the amount of $10,000 against Delamont, $5,000 against each of the other departed employees and $250,000 against Merrill Lynch.

British Columbia Court Of Appeal

The trial judge's decision was predominantly overturned on appeal. In particular, the majority of the Court of Appeal:

  • overturned the trial judge's order for $225,000 in damages against the departed employees and Merrill Lynch for unfair competition, holding that non-fiduciary employees who fail to give notice of termination are not subject to an implied duty not to compete against their former employer during the period constituting reasonable notice of termination; and
  • overturned the trial judge's order for $1,483,239 in loss of profit damages against Delamont for breaching his implied duty of good faith to RBC when he organized the mass departure, holding that such a duty did not apply in the circumstances and that, even if it did, RBC's loss of profit damages were not sufficiently proximate to be recoverable.

On the other hand, the Court of Appeal upheld the trial judge's punitive damages awards against the defendants and the order for $40,000 in damages against the departed employees for breach of their implied duty to provide RBC with reasonable notice of termination.

Supreme Court Of Canada

RBC's appeal to the Supreme Court of Canada was partially successful. In particular, the majority of the Supreme Court:

  • restored the trial judge's order for $1,483,239 in loss of profit damages against Delamont for breaching his implied duty of good faith to RBC when he organized the mass departure, holding that

    • managers who organize such a departure breach their duty of good faith because an implied term of their employment is the retention of employees, and
    • such loss of profit damages were within the reasonable contemplation of the parties when they entered into the employment contract, and were therefore sufficiently proximate; and

  • upheld the Court of Appeal's ruling that employees are not subject to an implied duty not to compete against their former employer during the reasonable notice of termination period, holding that after termination, employees are not generally prevented—subject to specific residual duties or contractual obligations—from competing with their former employer, and that this is so even when they fail to give their former employer any notice of termination and then compete against it during the period constituting reasonable notice of their termination.

Like the Court of Appeal, the Supreme Court upheld the trial judge's punitive damages awards against the defendants and the order for $40,000 in damages against the departed employees for breach of their implied duty to provide RBC with reasonable notice of termination.

Justice Abella wrote a particularly strong dissenting opinion on the issue of whether Delamont owed RBC an implied good faith duty not to orchestrate the mass exodus of its employees. She was of the view that the duty of good faith owed by employees was not sufficiently broad to encompass Delamont's conduct, and that an expansion of the duty in this respect would be an unwelcome reformulation of the duties applied to non-fiduciary employees.

Significance And Implications Of The Supreme Court's Decision

The Supreme Court's decision clarifies some of the implied legal obligations owed by employees who are not senior executives or otherwise fiduciaries and whose employment contracts do not contain non-competition or non-solicitation clauses.

In particular, employers can find solace in the fact that the Court expressly held that it was a breach of a manager's implied good faith duty to his employer to organize a mass departure of its employees, upholding a very significant award for lost profit damages in the process. The decision does not make it clear, however, whether the same duty would apply to a junior, non-managerial employee who organized a similar mass departure. The Court's rationale that the duty existed in this case was based on Delamont's implied managerial duty to retain employees, suggesting that the duty would not apply to non-managerial employees. Regardless, further judicial guidance is required to clarify the law in this respect.

On the other hand, following this decision employers remain highly vulnerable to immediate, direct competition by former employees even in an orchestrated mass departure situation, since the Court made it clear that when the employment relationship ends employees are free to compete with their former employer, even when they fail to give any notice of termination to their former employer and then compete against it during the period deemed to constitute reasonable notice of their termination. Employers may want to contractually protect themselves in this respect by including appropriate non-competition and non-solicitation clauses in their employment agreements.

Finally, the Court confirmed that employees have an implied obligation to provide reasonable notice of termination to their employers, and can be held liable for damages if they fail to do so. This is significant because it is commonly assumed that only employers owe a legal duty to provide reasonable notice of termination.

Footnotes

1. 2008 SCC 54 (CanLII).

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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