Canada’s Supreme Court Awards RBC Dominion $1.5 Million from Branch Manager Who Defected to Merrill Lynch

by Brian Smeenk

On October 9, 2008, the Supreme Court of Canada released its decision in RBC Dominion Securities v. Merrill Lynch Canada. The court restored an award of approximately $1.5 million in damages against a branch manager who had coordinated the defection of almost all his branch’s sales group from RBC to Merrill Lynch.

In November 2000, the branch manager at RBC’s Cranbrook, British Columbia, office coordinated the defection of virtually all of the branch investment advisers and administrative staff. The branch manager, eight of 10 investment advisers, and five of seven administrative assistants all resigned without giving notice to RBC and joined Merrill Lynch. Only two very junior investment advisers, an office administrator, and a receptionist were left at RBC.

In the weeks preceding the departure, the employees had 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 more than 85 percent of the accounts that had been serviced by the departing advisers.

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 responsible for the majority ($1.5 million) of the lost profits for breach of his duty to perform his duties in good faith. The court said that 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 the defection constituted 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 advisers appealed to the British Columbia Court of Appeal with partial success. The court of appeal agreed with 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 advisers should have given to RBC.

RBC appealed to the Supreme Court of Canada. In restoring the trial judge’s award against the branch manager, the Supreme Court said the following:

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 to their employers 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 advisers were not fiduciaries and there were no restrictive covenants in place, so there were no restrictions on their ability to compete.
4. A manager has an obligation to perform his or her duties in good faith. These include any duties relating to recruitment and retention of employees under his or her supervision. 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. Such was the case here.

So how can you protect your company from employees like RBC’s branch manager? As always, you should have your employees sign enforceable nonsolicitation agreements.

Keep in mind that these types of agreements must be drafted narrowly and carefully, as courts will only enforce reasonable restrictions on employees’ postemployment activities. These agreements are particularly important for employees who are not considered “key” or “fiduciary.”

• 

  Brian Smeenk, Fasken
  Brian Smeenk is a Toronto partner in Fasken's Labour, Employment & Human Rights Group. He is also editor-in-chief of Northern Exposure and a member of the Employers Counsel Network. Since 1981, Brian's practice has focused on management-side labour and employment law. He represents both private sector and public sector employers, including many multi-national companies, in all aspects of labour relations and employment law and appears before tribunals and courts at all levels.