RBC v Merrill Lynch: Employee to pay damages for lost profits due to failure to carry out duties

For financial management company Merrill Lynch, it seems the bad news just keeps on coming.

It’s been a tumultuous couple of weeks for Merrill Lynch. Already battered and reeling from a series of large writedowns stemming from the subprime crisis, the current credit crunch proved too much for the company to bear as the Wall Street stalwart ceased to independently exist when it was acquired by Bank of America on Sept. 14, 2008. Amidst the backdrop of the resultant uncertainty for Merrill Lynch’s Canadian operations, the Supreme Court of Canada (“SCC”) rubs salt in the wounds by handing down a judgment against Merrill Lynch in RBC Dominion Securities Inc v Merrill Lynch Canada Inc, [2008] 3 SCR 79. While there are damage awards against the company and the individual defendants, it was agreed upon that Merrill Lynch will indemnify the damages awarded against the individual defendants (para 6).

Facts and Overview

Back in the Spring, Yu-Sung Soh provided a preview of this case, which can be found here. In brief, this case involved an orchestrated mass defection of investment advisors (along with their client lists) from RBC to Merrill Lynch without notice to RBC. This lead to a near-collapse of RBC’s investment operations in Cranbrook, BC. Subsequently, RBC proceeded to sue for damages from everyone involved in the defection. The SCC outlines the causes of actions RBC claims against the various defendants:

— Against its former employees: breach of fiduciary duty, breach of implied contractual term not to compete unfairly upon leaving RBC’s employ, breach of implied contractual term to give reasonable notice of termination, and an action for misuse of confidential information.

— Against Merrill Lynch and its manager James Michaud: breach of duty in tort for inducing RBC staff to terminate their contracts of employment without notice and to breach their contractual obligation not to compete unfairly.

— Against all the respondents: actions in tort for conspiracy and conversion, the latter related to the removal of documents known to be the property of RBC (para 2).

Discussion

Of the most contentious issues in the case was RBC’s appeal to have the trial judge’s damage award of roughly $1.48 million reinstated. They were successful. In a 7-1 majority, the SCC determined that the former manager (Don Delamont) who orchestrated the departure breached his contractual duty of good faith because an implied term of his employment contract was the retention of RBC employees who were under his supervision. Not only that, the SCC noted that the figure arrived at by the trial judge was a reasonable calculation of loss that was caused to RBC (para 13).

On this point, Abella J. voiced her lone dissent: she felt that the duty of good faith had not been breached, but even if it had, that the damage award was completely unjustified. She bases this conclusion on two main reasons: (1) the absence of a non-compete clause in Delamont’s contract, and (2) the trial judge’s finding that Delamont was not a fiduciary employee. With regards to the first point, she writes at para. 44:

I see no reason for courts to impose, retroactively, restrictions on post-employment competition the parties have not bargained. As Robertson J.A. said in Imperial Sheet Metal [Ltd v Landry, 2007 NBCA 51]:

Courts should not be reading restrictive terms into employment contracts that could have been negotiated sometime prior to the dissolution of the employment relationship. In the global world, the titans of finance and industry pay millions in exchange for their executives executing non competition clauses. Why should courts be handing them out for free when it comes to employees of lesser stature [para 6]?

With regards to the duties of a fiduciary employee, she further notes at paras 49-52,

RBC had successfully urged the trial judge to conclude that, even if Delamont were not a fiduciary employee, he was nonetheless in a special position as branch manager. This led the trial judge to conclude that Delamont’s implied duty of good faith included an enforceable obligation to protect RBC’s interests by actively attempting to retain investment advisors within RBC. …

Injecting such an enhanced content into the implied duty of good faith of a non-fiduciary employee has the effect of creating a new legal category of ‘quasi fiduciary’ employee, a subset the law has yet to recognize. Nor, it seems to me, should it do so now.

Expanding the scope of the duty of good faith in this manner represents a novel and potentially enormous liability on employees. This development, in my view, is not only unwelcome in its uncertainty and punitive in its impact, it also risks widening what this Court has long recognized to be the imbalance of power in employment relationships, by further entrenching the inherent vulnerability of employees [citations omitted].

… In the absence of competition during employment or improper use of confidential information, the duty of good faith has never before been applied to hold a non-fiduciary employee liable in damages for his or her failure to exercise the fullest possible diligence in the pursuit of the employer’s interests.

As the business pages of our newspapers routinely report, non-fiduciary employees, even senior ones, regularly leave their employers for what they hope will be improved employment opportunities. Introducing an impediment 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.

Indeed, it would seem that Abella J. is not the only one that feels this way as it has been noted that this decision may impact the mobility of professionals in other industries as well, including that of bankers, accountants, and lawyers.

However, it remains to be seen whether Abella J.’s concerns will bear out. While the decision has seemingly created greater risks for employees to jump ship to greener pastures, it is likely that employees with the bargaining power to procure the absence of a non-compete clause in their contracts may just be able to gain more explicit wording in their contracts limiting liability. Furthermore, it would seem that circumstances giving rise to this case are exceptional in that the coercion of employees to leave for a competing firm took place during Delamont’s employment. If he had waited until he left to recruit his former colleagues, it seems the majority would have been ok with it since Delamont’s duty to RBC would have been over. As such, there appears to be ways to reign in the reach of this case.

Nevertheless, this decision does change the landscape of the expectations of existing employees. As to whether this will be enough to actually deter employees from leaving an employer, or whether employees will just try to get around this case, only time will tell.