The Supreme Court of Canada released an important decision on the implied obligations of departing employees in the financial industry in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. This case has implications for every workplace.

Free to Compete

The Court ruled that in the absence of contractual restrictive covenants or common law fiduciary duties, departing employees were free to compete with their employer immediately upon resigning, even in the absence of providing their employer with reasonable notice of resignation. This is not a novel concept. However, the Court also held that a manager who assisted in orchestrating the departure of most of the staff at his office to its main local competitor was in breach of an implied duty of good faith that he owed to his former employer to maintain the employment of those employees under his supervision, even though he was not considered to be in a fiduciary relationship (i.e., a position of trust). This breach of implied duty cost the Manager $1.5 million in damages for loss of profit based on a five-year period. In this respect, the Court broke some new ground.

Important - Place Express Restrictive Covenants

This decision is significant because it demonstrates the importance of placing express restrictive covenants that can address post-employment restrictions in employment contracts when such contracts are negotiated. In the absence of restrictive covenants, or fiduciary duties, the Supreme Court of Canada has held that employees are at liberty to compete with their former employers. This case is also important because it emphasized that managerial level employees would be in breach of the implied duty of good faith (that is, a duty of good faith that is not expressly stated in their employment contract) if they attempt to persuade existing employees to breach their employment contracts to defect to the competition. The case therefore stands for the proposition that the duty of good faith for managerial employees need not be expressly written into their employment agreement in order to be found to exist. The doctrine of good faith outlined in this case will no doubt expand as it is interpreted by the courts in subsequent decisions.

Background Facts

In this case two financial investment firms operated out of the small B.C. town of Cranbrook: RBC and Merrill Lynch. When the former President of RBC moved over to Merrill Lynch, he called upon an existing Manager at RBC to orchestrate a mass defection of all RBC financial advisors and staff to Merrill Lynch. The Manager orchestrated the exodus of 17 financial advisors and staff from RBC to Merrill Lynch without notice to RBC. Before the financial advisor left, they surreptitiously copied confidential information from RBC. Merrill Lynch had made it a condition of employment that it would indemnify any RBC employees for any legal costs associated with leaving RBC.

Trial Decision

At trial, RBC successfully sued its former Manager, financial advisors and Merrill Lynch for damages. Even though the Manager was not held to be a fiduciary of RBC and he was not bound by a restrictive covenant not to compete with or solicit business from RBC, he was found liable for $1.5 million for breaching his implied duty of good faith for orchestrating the mass departure of RBC’s employees and loss of profits for a time-period of 5 years. In addition, the Manager and all of the financial advisors were found to have breached an implied obligation to provide reasonable notice of resignation and to not compete unfairly with RBC during the notice period. The trial judge also held that punitive damages were owed for the misuse of confidential RBC client information.

B.C. Court of Appeal

The Court of Appeal overruled the finding of $1.5 million against the Manager on the basis that it was not a proximate or foreseeable result of the breach of contract. Rather, the Court of Appeal held that RBC’s loss should be restricted to what it would have earned as profit during the reasonable notice period that the employees owed to it before their resignation. The notice period was held to be 2.5 weeks.

Supreme Court of Canada

The Supreme Court held that the Manager was in breach of his implied obligation of good faith by orchestrating the mass departure of RBC’s financial advisors and staff to Merrill Lynch. As a result, the Supreme Court re-instated the trial judge’s $1.5 million damage award as damages for the loss of profit suffered by RBC for a five- year period.

However, the Supreme Court held that the financial advisors were entitled to compete against RBC immediately upon resignation because they were not fiduciaries and they were not bound by any restrictive covenants (the latter something which RBC could have negotiated with the employees in their respective employment contracts at the commencement of employment).

Ultimately, employers should have their employees enter into agreements which address post-employment obligations. These agreements must be carefully drafted, given other recent cases which have addressed the interpretation and enforceability of these clauses.

Simon R. Heath
Human Resources Workplace
Law/Labour Relations Group
Tel: 905.276.0402
E-mail: sheath@kmblaw.com

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