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Can an Employee Quit, Encourage His Co-Workers to Join Him, and then Join a Competitor? RBC Securities v. Merrill Lynch

Go to fullsize image The Supreme Court issued another employment law decision last week:  RBC Dominion Securities v. Merrill Lynch, et al.. It’s an interesting case of how courts mold and manipulate “implied terms” to suit to the outcome they perceive as warranted.  The facts are somewhat convoluted, but the main facts for the SCC case were the following.  Both RBC and Merrill Lynch had investment advising offices (you know, those people who advise you to buy more Northern Telecom and bank stocks!) in tiny Cranbrook, B.C.   The manager of ML met with a senior investment advisor of RBC (Delamont), and made him an offer he couldn’t refuse to quit RBC and cross the street to join ML.  Delamont went back to RBC, told his coworkers he was planning on moving to ML and told them they might want to do the same.  He also arranged a meeting of the advisors with a rep of ML.  Then one day, Delamont and most of the other investment advisors quit RBC and joined ML.  Almost all of the clients of RBC followed the investment advisors to ML.  This was in large part due to the fact that the investment advisors had sent client information to ML before they quit, and had sent letters to the clients directly telling them about the move from RBC to ML.

None of the investment advisors gave RBC notice that they were quitting.  The implied duty to give reasonable notice in employment contracts apply to both employers and employees.  Here is a rare case of an employer alleging it suffered damages because the employees failed to give notice.  The Court ruled that two and half weeks notice should have been given, and assessed the damages suffered by RBC as a result of the failure of the employees to give notice as $40,000 for each employee. That was apparently the lost profits suffered by RBC during that two and half week period.   That order was not appealed, so the SCC did not deal with it.

The SCC did deal with the finding of the trial judge that former employees continue to owe their ex-employer a duty to not compete against it during the entire period of the reasonable notice.  The SCC rejected this conclusion, and ruled that: “an employee who has terminated employment is not prevented from competing with his or her employer during the notice period, and the employer is confined to damages for failure to give reasonable notice.”

The  decision relating to Delamont the senior investment advisor is a little more difficult to figure out. Like the other investment advisors, he was found to have breached the duty to give notice of termination and ordered to pay $40,000 in damages for that breach.  But the trial judge also ruled that Delamont had breached a separate implied duty of good faith to RBC.  For this, he was ordered to pay a whooping damage bill of nearly $1.5. million dollars!  Apparently, that amount was the estimated loss of profits for a period of 5 years (presumably that’s on top of the loss of profit amounts already accounted for for the breach of the notice term by the Delamont and all of the other advisors)–pretty good profits for a small little office in Cranbrook, don’t you think?  The SCC upheld the trial judge’s ruling on this point.

One interesting fact in the case was that RBC testified that it made a conscious strategic decision not to include a term in the employment contract with the investment advisors prohibiting them from competing with RBC if they leave (a non-compete clause), because it felt these clauses dissuade applicants.   So Delamont was free to compete against RBC all he wanted once he joined ML.  However, he was found to have committed a breach of his implied duty of good faith to his employer.

What did he do to breach that term?  Well, he spoke to ML about leaving RBC.  But employees speak to other potential employers all the time–in fact, doing so is encouraged by the free market model of employment, which assumes people will always move to the best job available.  And, of course, people are allowed to change jobs, and even to move to a competitor.  However, the court found that Delamont breach his contract when he actively encouraged the investment advisors to join ML, and when he failed to inform RBC that the mass quit was about to happen.  Since Delamont’s job included recruiting and retaining investment advisors, the court ruled that by encouraging most of the workforce to join a competitor, his breach of the duty of good faith was serious enough to pin on him five years worth of profits, according to the SCC.

So, if your job involves ‘retaining’ staff, be careful if you decide to suggest to them that there may be greener pastures elsewhere.  

The facts of the case may be unusual enough that the case will not prove to be a significant moment in Canadian employment law.  It’s hard not to notice, though, that what Delamont and the advisors did could probably have been achieved without any breach of contract, and relatively easily.   Delamont could have given 2.5 week’s notice that he was leaving RBC and joining ML.  RBC then (probably) would have told him to leave immediately.  He would then have crossed the street to ML, with most of his clients following him, as they are entitled to do.   He then could have advertised that he was hiring investment advisors for ML.  The RBC advisors could all then have quit RBC and moved to ML, probably taking many of their clients with them too.  Delamont’s main problem was recruiting the RBC advisors while he was still their manager at RBC, not leaving RBC and taking its clients with him.  That’s what makes it pretty odd, in my opinion, to saddle him with 5 years’ worth of lost profits.

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