Name of Case: RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc.

Date of Decision: October 9, 2008

Supreme Court Panel: Chief Justice Beverley McLachlin, Justices Ian Binnie, Marie Deschamps, Morris Fish, Louise Charron and Marshall Rothstein (concurring); Rosalie Abella (dissenting in part)

Judgment under Appeal: Judgment of the British Columbia Court of Appeal dated January 12, 2007

Facts: In the summer of 2000, retail securities brokerage firm Merrill Lynch Canada Inc. approached the manager and staff of competitor RBC Dominion Securities Inc.'s branch in Cranbrook, B.C. and began seeking to persuade them to leave their employer en masse and move to Merrill Lynch. The wooing company offered them various financial inducements, as well as an undertaking to fully indemnify them if they were sued by RBC as a result of their defections. The RBC employees did not have post-employment non-competition or non-solicitation clauses in their employment contracts.

This recruiting effort was successful, with the result that on November 20, 2000, the branch manager, all eight experienced investment advisors and five support staff moved without warning from RBC to Merrill Lynch, leaving the RBC office with only two very junior investment advisors and two support staff. The crippling effect on the RBC branch was compounded by the fact that in the two or three weeks preceding the group departure, most of RBC's confidential client records were removed or copied and sent to Merrill Lynch and the branch manager and investment advisors had begun contacting their clients in the weeks preceding the move to solicit their continued business under the new aegis of Merrill Lynch. The client records that had been removed were returned by Merrill Lynch on the Friday following the Monday departures, apparently on the basis of legal advice. As a result of the sudden personnel departure, the RBC branch was powerless to respond quickly and lost most of its business.

RBC sued the former branch manager and investment advisors and Merrill Lynch for damages, basing its action on the employees' failure to give notice, their solicitation of business away from the firm while still in its employ, their unlawful removal of records and their alleged breach of an implied duty to compete fairly following their employment, and on Merrill Lynch's conduct in inducing these events.

Case History: In a November 26, 2003 decision, B.C. Supreme Court Judge Heather Holmes ruled that the branch manager, Don Delamont, had breached his duties as manager by not only failing to warn RBC of the impending exodus but in fact helping to organize it, and she awarded damages against him personally of $1,483,239, representing RBC's lost profits for five years less a contingency discount. Finding that all the advisors including Delamont should have given notice of their resignations, the judge ordered them to pay a combined total of approximately $40,000 for lost profits during this notice period. Moreover, because she determined that the unfair competition during this period, when RBC had no chance to protect itself, resulted in substantial losses going forward as a result of lost customers, Holmes awarded another $225,000 jointly and severally against all the investment advisors, Delamont, the Merrill Lynch regional manager, and Merrill Lynch. Finally, the judge awarded punitive damages of $250,000 against Merrill Lynch.

The British Columbia Court of Appeal, in a January 12, 2007 decision ([2007] B.C.J. No. 48 (QL), reviewed in Lancaster's Wrongful Dismissal E-Bulletin, March 2, 2007, Issue No. 176), overturned both the $225,000 award against Delamont and the other employees, and the $1,483,239 in damages awarded against Delamont alone. Writing for the majority, Justice Mary Southin held that "there is no such thing on the part of a servant, upon leaving his master's employ, as an obligation not to compete 'unfairly'," and that this was all the more true in this case since RBC was a sophisticated employer that "deliberately chose not to obtain non-competition and non-solicitation clauses from its servants." As for the large award against Delamont, she held that "I see no foundation for treating Mr. Delamont differently from the rest of the staff," especially since prohibiting a course of action that would lead to the collapse of the branch could not have been within the contemplation of the parties when his employment contract was negotiated. The Court upheld, however, the $40,000 award of damages against all of the employees for failure to give notice, and the $250,000 in punitive damages against Merrill Lynch.

Issue(s): The issues on appeal to the Supreme Court of Canada were: (i) whether the Court of Appeal erred in overturning the award of damages for lost profits on the basis that these damages were not sufficiently "proximate" as required by contract law; and (ii) whether the Court of Appeal erred in setting aside the trial judge's award of damages for unfair competition against all of the advisors including Delamont on the grounds that they were not subject to such a duty upon leaving RBC.

Supreme Court's Decision (6-1): The appeal was allowed in part.

Reasons: In a 6-1 majority decision written by Chief Justice Beverley McLachlin, the Supreme Court of Canada allowed the appeal in part, reinstating the trial judge's award of nearly $1.5 million in damages against Delamont personally, but finding that the appellate court had correctly overturned damages totaling $225,000 against all of the employees for unfair competition.

In restoring the award of damages against Delamont for RBC's lost profits, McLachlin held that the majority of the Court of Appeal had erred in its application of the test for determining contract damages established by the English Court of Exchequer in Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145: "The correct question to ask is whether, had the parties at the time of entering into the contract of employment directed their minds to the possibility that Delamont might orchestrate the departure of substantially all the office's investment advisors, would they have contemplated a loss of profits giving rise to damages. In my view, the trial judge asked the correct legal question and arrived at an appropriate conclusion on the facts.... An implied term of [Delamont's] contract, as he admitted at trial, was to retain the employees of RBC who were under his supervision. In organizing their mass exit, he breached that duty of good faith. The damages for that breach are the amount of loss it caused to RBC."

On the other hand, in dismissing RBC's appeal with regard to the $225,000 in damages for unfair competition, Chief Justice McLachlin agreed with the view of the Court of Appeal that, generally, an employee who has terminated his or her 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 or for the breach of specific residual duties such as the duty not to misuse confidential information. Subject to these duties, the employee is free to compete against the former employer.

Writing alone in partial dissent, Justice Rosalie Abella agreed with the majority that the Court of Appeal had correctly overturned the unfair competition award against Delamont and the other advisors. She disagreed, however, that Delamont had breached his implied contractual duty of good faith in the manner of his departure.

In the absence of a fiduciary or contractual obligation not to compete, Abella observed, an employee is generally free to leave his or her employment and, on leaving, to compete with his or her former employer. A necessary corollary of this lawful right is the right to plan for future employment opportunities while still employed. In Abella's view, Delamont was free to leave RBC and to discuss his intentions with his co-workers. His co-workers, in turn, were free to be influenced by him. There was, as a result, no breach of Delamont's implied duty of good faith to RBC, either in the fact of his own departure, or in his facilitating the departure of the other investment advisors. In any event, Abella held that, based on the principles of contract, the award of damages against Delamont based on RBC’s lost profits for five years was excessive since it contradicted the reasonable expectations of the parties, especially given the highly competitive and mobile nature of employment relationships in the investment brokerage industry.

Lancaster Reference: For analysis of the B.C. Court of Appeal's decision see Lancaster's Wrongful Dismissal E-Bulletin, March 2, 2007, Issue No. 176.