RBC Dominion Securities: Show Me the Money!

Remember the famous scene from the movie “Jerry McGuire” where sports agent Jerry has just been fired by his agency and is in his office frantically trying to contact all of his clients in a futile attempt to retain their business? Unfortunately for Jerry, his rival agent, Bob Sugar, has already prepared for this and succeeds in keeping these clients with the agency. Jerry is left on the phone screaming “show me the money!” for the amusement of his lone remaining client, undersized wide receiver Rod Tidwell.

Now imagine the reverse scenario: one day, without any notice, practically all employees of a branch of a brokerage firm, including the branch manager, suddenly leave the company and join a competitor. These former employees take with them confidential client records belonging to the firm and use them to contact and convince a large majority of clients to move their business to the competitor. This mass defection is induced by a regional manager of the competitor who enlists the aid of the branch manager and leads to the near collapse of the branch.

Sound like a movie? Well, this story is coming soon to a Supreme Court of Canada near you. The scenario outlined above form the basic facts giving rise to the action in RBC Dominion Securities Inc v Merrill Lynch Canada Inc, 2007 BCCA 22, which is set to be heard by the Supreme Court of Canada (“SCC”) later this month.

While the situation certainly seems unfair to the plaintiff, RBC Dominion Securities, who essentially lost the business of an entire branch of its company, it is difficult to precisely identify on what basis it can recover damages. At trial, the plaintiff attempted a number of different types of claims: in tort (for conspiracy, conversion and breach of confidence), in contract (for failure to provide reasonable notice and breach of an implied term not to compete unfairly), and in equity (breach of fiduciary duty) [RBC Dominion Securities v Merrill Lynch Canada et al, 2003 BCSC 1773]. The trial judge allowed the action, primarily on the basis that the employees had breached an implied term in the employment contract not to compete unfairly after departure. In a separate judgment, the trial judge awarded damages totaling approximately two million dollars, most of which was calculated on the basis of the plaintiff’s loss in profit over five years, minus contingencies [RBC Dominion Securities Inc v Merrill Lynch Canada Inc et al, 2004 BCSC 1464].

In a split decision, the Court of Appeal largely allowed defendant’s appeal, finding there is no implied duty for employees not to “compete unfairly” following their departure. The plaintiff’s claim was upheld only with respect to the action for conversion of the client records and for the employees’ failure to give reasonable notice. The Court of Appeal limited compensatory damages to the plaintiff’s losses during the reasonable notice period and left the trial judge’s award of punitive damages unchanged. Since the damages were awarded on a contractual basis, Southin J.A., on the basis of Hadley v Baxendale, [1854] EWHC Exch J70, could not find that losses beyond this period would be reasonably foreseeable to the parties at the time they entered into the employment contracts.

The real difficulty in this case is the fact that employees, either individually or in coordination, have every right to leave one employer for another. However, in some types of businesses, such as brokerages, law firms or even sports agencies, the true value of a company lies not in its physical assets, but in its client base. And that client base depends in large part on goodwill and personal relationships that attach, not to the company, but to specific employees. In situations where an employee leaves the company, it is unclear whether this book of clients belongs to the company or the employee. Usually, a company may lose some clients with the departure of a top performer but life goes on. The extraordinary aspect of this case is in the magnitude of the departures, decimating an entire office, and in a competitor’s role in making it happen.

Since this appears to be the first case of its type, it will be interesting to see whether and on what basis the SCC provides a remedy to the losing team in this battle for clients. This is definitely one to watch.

[Editor’s note: the SCC has since rendered its judgement on this case in RBC Dominion Securities Inc v Merrill Lynch Canada Inc, [2008] 3 SCR 79.]

You may also like...

Join the conversation

Loading Facebook Comments ...