The Supreme Court of Canada has awarded $1.5 million to RBC Dominion Securities to compensate the financial management firm for lost profits after a branch manager helped a competitor recruit most of the staff.
Competitors RBC and Merrill Lynch Canada both had offices in Cranbrook, B.C. In November 2000, Merrill Lynch’s regional manager, who had spent 20 years at RBC, asked the RBC branch manager to join his employer and help persuade all the investment advisors to follow. The plan worked and the RBC branch essentially collapsed after losing the investment advisors.
RBC sued its former employees for breach of fiduciary duty and implied contractual terms for leaving without notice and for competing directly with the company. It also sued Merrill Lynch for inducing the employees to breach their contractual obligations.
Employees failed to give reasonable notice
The Supreme Court upheld a trial court’s finding that the former employees breached the implied terms of their employment contracts by not giving reasonable notice. Merrill Lynch was also liable for the unfair competition and the Supreme Court ruled the former branch manager breached his duty to perform his employment duties faithfully to RBC when he encouraged the advisors to leave and failed to inform RBC of his departure.
The Supreme Court ordered the former employees to pay a total of $40,000 to make up for RBC’s lost profits during the reasonable notice period. However, it struck down the trial court’s award of $225,000 for unfair competition, finding there wasn’t a non-compete agreement to prevent the employees from competing once they left RBC, even without reasonable notice.
But the Supreme Court restored the trial judge’s order that the former branch manager was on the hook for nearly $1.5 million for loss of profits that resulted from his breach of contractual duty and good faith. The B.C. Court of Appeal had overturned this award, saying the collapse of the RBC branch and loss of profits weren’t foreseeable and the former branch manager shouldn’t be responsible for lost profits.
However, the Supreme Court said an implied term of his contract with RBC was to try to retain the employees under his supervision and organizing their departures was a serious breach of that term. The branch manager had a contractual obligation to RBC to retain the investors even as he decided to leave, said the Supreme Court.
Decision not unanimous
But the decision wasn’t unanimous. One Supreme Court judge, Justice Roselle Abella, disagreed with the $1.5-million liability for the branch manager, arguing although he performed “limited managerial functions,” he spent 80 per cent of his time as an investment advisor. He didn’t have a non-competition clause and was free to leave RBC and compete with it as soon as he left.
“In holding (the branch manager) liable in damages for his conduct with the other investment advisors during his employment, the trial judge not only imposed a unique liability, she also punished him for conduct he had every right to engage in,” said Justice Abella. “Courts should not be reading restrictive terms into employment contracts that could have been negotiated sometime prior to the dissolution of the employment relationship.”
However, the ruling is unlikely to open the door to unduly heavy obligations for managerial staff, said Stuart Rudner, a partner with Miller Thomson’s labour and employment group in Toronto. The decision should not significantly impact the mobility of managerial-level employees leaving one employer to go to a competitor, he said.
“While the manager was still employed by RBC, his duty was to promote its interests and not act to its detriment. A manager can’t actively co-ordinate employees leaving,” said Rudner. “It would be a different situation if he went to Merrill Lynch first and then recruited the other employees.”