In a decision released yesterday, RBC Dominion Securities v. Merrill Lynch, the Supreme Court of Canada has clarified the duties that employees owe to their employers when accepting employment with a new employer.
In 2000, a group of investment advisors and their manager resigned from RBC’s Cranbrook BC office without providing any notice. They immediately commenced employment with RBC’s competitor Merrill Lynch. RBC sued the former employees for lost profits and other damages.
At trial, the BC Supreme Court found each of the defendants liable to their former employer for damages, including $1.7 million in lost profits. While none of the RBC employees contracts of employment contained restrictive covenants limiting their ability to compete against RBC, the Court held that the employees were bound by an implied duty of good faith not to compete unfairly against RBC following their departure.
On appeal, the BC Court of Appeal concluded that the employees were not subject to a duty to compete fairly with RBC. The majority reduced the damages payable for lost profits to $40,000 but upheld the punitive damage awards against the defendants.
The Supreme Court of Canada, in a 6-1 decision, overturned the BC Court of Appeal and clarified the obligations of departing employees.
The Court confirmed that an employee’s contract of employment ends when either the employer or the employee terminates the employment relationship. However, residual duties may remain. For example, an employee who resigns may be liable for failure to give reasonable notice and for breach of specific residual duties (such as the improper use of confidential client records). Subject to these duties, employees are free to compete against their former employer. The majority also held that, absent a restrictive covenant or the existence of fiduciary duties owed by an employee to their employer, an employee who has terminated employment will generally not be prevented from competing with his or her employer during the notice period, and the employer will be confined to damages from the employee for failing to provide reasonable notice.
For employers, the decision confirms that executives and managers owe an implied duty to act in the best interests of their employer. This duty includes not engaging in conduct which would encourage or otherwise lead to the departure of employees.
Conversely, absent fiduciary duties or a restrictive covenant term, employees will be free to compete against their former employer. Absent enforceable contractual terms, a former employee is free to compete against their former employer.
The decision is silent on one issue of importance to the financial industry: who owns the “book of business” or clients serviced by the employee. The law in BC remains that, in the absence of a written contract to the contrary, a client does not belong to an employer and the employee may retain a list of their own clients upon departing.