Home > Resource Centre > Publications > Publication

Publication

title

Millions in Damages Awarded for Unfair Competition and Breach of Employment Duties

DATE

November 1, 2004

EXPERTISE

Employment and Labour

The BC Supreme Court recently awarded damages that may amount to more than $2 million dollars - including $315,000 in punitive damages - to RBC Dominion Securities ("DS") after nine investment advisers ("IAs") suddenly defected to the local competition, Merrill Lynch Canada Inc., causing the virtual collapse of the DS Cranbrook branch office.[1]

THE FACTS

The Court found that James Michaud, Regional Manager of Merrill Lynch, and Don Delamont, Branch Manager of DS Cranbrook, spearheaded the mass defection. After seven months of discussions, DS senior management became aware of the impending departure courtesy of a contact in the industry. By that time, employment contracts had been signed, many clients had been informed, and the details of the departure had been finalized. Moreover, the departing IAs had secretly removed or copied almost all of DS's confidential client records and sent them to Merrill Lynch.

Most of the IAs began at Merrill Lynch four days later and contacted clients as quickly as possible to arrange for them to continue business with their new employer. One staff member was left behind at DS specifically to refer clients to Merrill Lynch. DS attempted damage control, but, left with only two junior IAs and a handful of staff, they could not match the mass client-recruiting effort undertaken by the departed IAs on behalf of Merrill Lynch.

THE DECISION

The Court found that it may be the industry norm for IAs to enjoy free movement and the ability to take their client base with them when they switch employers, but basic standards of fair conduct and employee loyalty must still be upheld. The DS employees were found to have breached a number of legal duties. First, departing employees - including IAs - have a duty to provide reasonable notice of termination. Second, regardless of whether their employment contracts include non-competition clauses, departing employees have a duty to refrain from competing unfairly with their former employers. In the eyes of the Court, the IAs' "frenzied efforts" to secure clients before DS could compete on an equal footing plainly amounted to unfair competition.

In addition to these employee duties, Mr. Delamont was found to have had a duty to perform in good faith the functions inherent in his role as Branch Manager. The Court said that by taking a key role in organizing the departure, allowing the transfer of documents, failing to keep the regional manager informed of the impending departure, and either encouraging or acquiescing to Mr. Michaud's mass recruiting efforts, "it is difficult to conceive of a more fundamental breach of the duty of good faith as branch manager."[2]

Merrill Lynch and Mr. Michaud were found to bear direct liability, in addition to Merrill Lynch's vicarious liability, for the transfer of DS's records and for inducing breach by the DS employees of their duty not to compete unfairly with DS.

WHY WERE THE DAMAGES SO HIGH?

The IAs were not found liable for all of the crisis that followed their departure. Instead, they were held responsible for damages for the loss of profits suffered by DS due to the breach of their duty to provide 2.5 weeks' notice of resignation and to allow a grace period before competing with DS. Their individual liability was calculated proportionally based on the assets under their management. Mr. Delamont's liability, on the other hand, was not restricted to losses associated with the period of notice of resignation that he should have given. In breaching his responsibilities as Branch Manager, the Court said, he caused the mass departure and the near collapse of the DS branch.

In the most remarkable portion of the judgment, the Court awarded $250,000 in punitive damages against Merrill Lynch, $5,000 in punitive damages against each IA, and $10,000 in punitive damages against Mr. Delamont and Mr. Michaud. The $315,000 in punitive damages was designed to be "large enough to firmly condemn the wholesale surreptitious conversion of virtually all DS's client records in violation of the IAs' duties to clients as well as DS and contrary to their regulatory and ethical responsibilities."[3]

Punitive damages can only be awarded for "misconduct that represents a marked departure from ordinary standards of decent behaviour" and "in exceptional cases for malicious, oppressive, and high-handed misconduct that offends the court's sense of decency."[4] In this case, Madam Justice Holmes found that "the copying and removal took place surreptitiously over several weeks, much of it after business hours when the risk of detection was low. This was a planned, prolonged, secret scheme to arrange a wholesale transfer of information to a competitor."[5]

CONCLUSION

This decision sends a clear message about employee mobility within the financial services industry. Madame Justice Holmes commented that:

IAs, especially those with a client base developed through personal contact and service, enjoy a relatively strong bargaining position. A certain turnover in the branch's sales staff and consequent rises and falls in the branch's profits could be expected as normal contingencies of operation. The coordinated mass departure here, however, was of an entirely different nature and scale.[6]

It may be standard practice in the securities industry for IAs to enjoy free mobility and the right to take their client base with them when they move, but the Court made it clear that this is not a privilege to be enjoyed without responsible limits.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

[1]. The case was disposed of in two stages: the finding of liability was dealt with in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al, 2003 BCSC 1773 ("2003 Decision") and the award of damages was dealt with in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al, 2004 BCSC 1464 ("2004 Decision").

[2]. 2003 decision, at para. 128.

[3]. 2004 Decision, at para. 142.

[4]. Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, 2002 SCC 18 at para. 18.

[5]. 2004 Decision, at para. 137.

[6]. 2004 Decision, at para. 24.

Back to Publications