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Supreme Court enforces former employee’s duty to act in good faith

|Written By Kelly Harris

Former employees who violate confidentiality agreements are being pursued more aggressively, says labour and employment lawyer Erika Ringseis.

The recent Supreme Court of Canada decision in RBC Dominion Securities v. Merrill Lynch Canada Inc., where the court ruled employees must act in good faith even in the absence of confidentiality agreements, will likely serve to further employers resolve, according to the associate with McCarthy Tétrault LLP’s Calgary office.

“What we’ve seen recently, especially in Alberta, is an increase in the number of court actions where the issue is essentially restrictive covenants or the non-competition, non-solicitation clauses in employment agreements,” she says. “Companies are more likely to pursue employees who violate these agreements.”

Ringseis credits the Alberta economy, long one of the best performing in Canada, with fanning the flames of employers’ resolve. She says despite the slowing economy, RBC v. Merrill Lynch may add more fuel to that fire.

“It’s starting to cool down, so we might see the trend shift,” she says. “But I think, especially with this particular case, it provides some additional leverage for employers, some additional recognition of the fact that employees do have a duty even absent of contractual decisions, they do have a duty to act in good faith.”

In November of 2000, the branch manager and virtually all of the investment advisers at the RBC Dominion Securities branch in Cranbrook, B.C. left their jobs and moved to Merrill Lynch Canada. The manager of that branch RBC, Don Delamont, who had left and moved to Merrill Lynch, encouraged the team of advisers to take up with his new employer.

In doing so the investment advisers also encouraged their clients to leave RBC and take their business to Merrill Lynch. The move caused a near-collapse of the Cranbrook RBC branch. Subsequently, RBC sued for damages from everyone involved in the defection.

The employees were not fiduciaries and were not in senior positions at RBC. They did not have restrictive covenants within employment contracts.

Ultimately, the court found the clients’ best interests were paramount, however Ringseis says that at all levels, the courts criticized the employees for taking confidential information.

The Supreme Court rejected RBC’s argument that the investment advisers had a duty not to compete. As noted, none of the advisers had non-competition clauses in their contracts. The SCC ruling states: “Generally, 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.” As such, the advisers did not breach any
non-competition obligations.

“In the absence of any non-competition clause in his contract or a fiduciary relationship with his employer, Delamont was free to leave RBC at any time and to discuss his intentions with his co-workers,” reads the ruling. “They, in turn, were free, individually or as a group, to be influenced by him. There was, as a result, no breach of Delamont’s duty of good faith to RBC, either in the fact of his own departure, or in his facilitating the departure of the other investment [advisers].”

Creating such a fiduciary duty would have a chilling effect on the movement of employees who are looking for other employment opportunities, said the court in its 6-1 decision.

“Introducing an impediment [to employees moving to other companies] by means of the uncertainty of a new category of ‘quasi-fiduciary’ employees will likely create an unwarranted chilling effect on the mobility of those senior non-fiduciary employees who have legitimately been under the impression that absent non-competition clauses, they were free, individually or with their colleagues, to leave, and compete.”

The decision, however, did confirm that employees should give reasonable notice and are bound by confidentiality. All of the damage awards of the trial judge, some of which were not under appeal, remained intact. RBC was awarded damages against Delamont of nearly $1.5 million for loss of profits. That total equals five years of lost business and devastated operations resulting from the encouragement of the former employees to join Merrill Lynch.

The Supreme Court agreed with the B.C. Court of Appeal that additional damages of $225,000 based on unfair competition were not proper, and having made a global loss of profits award against the branch manager, it would be inappropriate to award additional damages against the employees for loss of profits based on improper use of confidential information.

Read the full Supreme Court decision at csc.lexum.umontreal.ca/en/2008/2008scc54/2008scc54.html

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