Manager must pay $1.5 million for organizing resignations

Departed employees free to compete but manager had a higher contractual duty: Supreme Court of Canada

The Supreme Court of Canada has affirmed $1.5 million in damages for a British Columbia financial management firm’s lost profits after a branch manager helped a competitor induce most of the firm’s staff to jump over to it.

RBC Dominion Securities and Merrill Lynch Canada both had offices in Cranbrook, B.C., that competed directly with each other. In November 2000, Merrill Lynch’s regional manager, who had spent 20 years at RBC, asked the RBC branch manager to join Merrill Lynch and help persuade the advisors to follow. Despite RBC’s attempts to retain the advisors’ clients, most of them moved with the advisors to Merrill Lynch. The RBC branch essentially collapsed after losing all its investment advisors. RBC sued its former employees for breach of fiduciary duty and implied contractual terms for leaving without notice, competing directly with it and taking confidential client records. It also sued Merrill Lynch for inducing the employees to breach their contractual obligations.

Employees failed to give reasonable notice

The Supreme Court of Canada upheld the 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 former branch manager had 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 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. It felt RBC would have been able to retain some of the clients if it had been given reasonable notice. However, it struck down the trial court’s award of $225,000 for unfair competition, finding there was no non-compete agreement to prevent the employees from competing once they left RBC, even without reasonable notice.

In addition, each of the former employees was ordered to pay $5,000 and Merrill Lynch $250,000 in punitive damages. Merrill Lynch’s regional manager who had initiated the inducement was also hit with $10,000 in punitive damages.

Manager breached contractual duty to retain employees

The Supreme Court of Canada restored the biggest award against the former branch manager, who was ordered to pay RBC 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 wasn’t foreseeable and the former branch manager shouldn’t be responsible for lost profits.

However, the Supreme Court of Canada said an implied term of his contract with RBC was to keep the employees under his supervision and organizing their departure was a serious breach of that term. His breach of duty “led directly to the circumstances in which the employees determined to leave,” and the effects from the breach would be felt by RBC long after the notice period. The branch manager had a contractual obligation to retain the investors even as he left the company, the Supreme Court of Canada said. It was determined RBC’s loss from losing its investment advisors and the resulting collapse of the Cranbrook branch would total nearly $1.5 million.

Employees free to compete once they leave employer, even without notice The Supreme Court of Canada made one exception to reinstating the awards. It agreed with the Court of Appeal the advisors’ duty not to compete didn’t apply after their departure and there should be no damages for their direct competition both during and after the reasonable notice period.

“An employee terminating his employment may be liable for failure to give reasonable notice and for breach of specific duties,” the Supreme Court of Canada said. “Subject to these duties, the employee is free to compete against the former employer.”

Dissenting judge says branch manager shouldn’t be liable for lost profits

One Supreme Court judge, Justice Roselle Abella, disagreed with the $1.5 million award, arguing the manager was not a fiduciary employee since, 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 and compete as soon as he left.

“In holding (the 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.”

For more information see:

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 CarswellBC 2099 (S.C.C.).

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