Investment advisors owe their former employers a duty not to compete unfairly, even if they have not signed a non-competition agreement, according to the Supreme Court of Canada.

The SCC’s long-awaited decision concludes that RBC Dominion Securities Inc. is entitled to $2 million in damages after a clutch of its brokers walked across the Street en masse to Merrill Lynch Canada Inc. in 2000, following months of secret preparations.

In overturning a 2003 judgment by the B.C. Court of Appeal, the SCC came down on the side of employers, while still allowing certain freedoms for employees.

“The decision is important,” says Ken Dekker, commercial litigator with Affleck Green McMurtry LLP in Toronto, “because it affirms that employees must give reasonable advance notice of their departure before leaving their employer, and may be liable for damages caused by not giving the employer a chance to adjust to their impending departure.”

Last year, the B.C. Court of Appeal disallowed damages; the SCC decision reinstates them.

In reinstating DS’s damage award, the SCC decision says that the wealth-management advisors involved in the defection from the Cranbrook, B.C., office of DS to Merrill Lynch clearly breached “their implied duty not to compete unfairly.”

The advisors’ defections occurred after Don Delamont, manager of DS’s Cranbrook branch, was asked by a former colleague who had joined Merrill Lynch to recruit DS advisors for Merrill Lynch.

At the time, DS advisors were worried about changes to their pay structure. As a result, nine brokers and five assistants switched from DS to Merrill Lynch after months of secret preparations, including copying DS records. The brokers’ sudden exit almost gutted DS’s Cranbrook office, and the local DS wealth-management business suffered a severe financial rupture.

In the SCC’s decision, it says that in organizing the mass exit, Delamont “breached his contractual duty of good faith, for an implied term of his employment contract was the retention of DS employees who were under his supervision. The damages for that breach were the amount of loss it caused to DS.”

An employee who has terminated employment is not prevented from competing with his employer during the notice period, the court ruled, but “a departing employee might be liable for specific wrongs, however, such as improper use of confidential information during the notice period.”

The court award against the brokers totalled $75,000 for failing to give adequate notice. Another $1,483,239 was awarded against Delamont and $250,000 was awarded in punitive damages against Merrill Lynch. With interest, the total now has reached slightly more than $2 million.

In a dissent from the majority decision, SCC Justice Rosalie Abella said the decision could impose new duties on employees in professional sectors beyond the financial services industry.

“Employees are not indentured servants,” Abella wrote. “In the absence of a fiduciary relationship or non-competition clause, they are legally free to leave and enter into competition with former employers, either individually or in a group. A necessary corollary of an employee’s lawful right to compete following employment is the right to plan for future employment opportunities while still employed.”

The decision imposes “a fiduciary-like, elevated duty of good faith,” Abella warns in her dissent. “This has the effect of creating a new legal category of ‘quasi-fiduciary’ employee, causing inevitable uncertainty for employees who, until now, had the legal right to change employment without fear of financial liability.”

But not all legal observers agree that the SCC’s ruling changes the landscape for employees, such as financial advisors, who work with information that is proprietary to the employers.

“This establishes there is no common-law obligation on employees not to compete with their former employer,” says Dekker. “Most significant, however, is the SCC’s decision to uphold a large damages award against DS’s former branch manager on the basis that he was orchestrating the departure of DS’s employees and their clients while he was still working for DS.

“This restates what the law has always been,” says Dekker, “that an employee will owe a duty of loyalty to the employer until he or she resigns.”

When the case was first tried in the B.C. Supreme Court, Justice Heather Holmes found that the DS advisors had no fiduciary relationship with DS. Holmes determined, however, that the advisors had breached the duty “to provide reasonable notice of termination, which, in turn, contributed to their larger breach of the duty not to compete unfairly.” The defendants, she wrote, “acknowledged the conversion and improper use of DS’s confidential records.”

@page_break@Holmes also noted that a departing employee has “an obligation to refrain from soliciting the former employer’s clients until the former employer has had a reasonable opportunity to contact the clients to reassure them that it is keen and able to continue to service their needs with qualified and capable staff.”

On appeal, Justice Mary Southin of the B.C. Court of Appeal determined that a departing broker is entitled “without fear of litigation, to prepare a list of his own book of business from the records of the brokerage house. To hold in the 21st century that an advisor, who usually, by considerable personal diligence, has built his book of business, must rely on his memory for the full names, addresses, telephone numbers and e-mail addresses of his clients, is not, in my opinion, in the interests of the clients and, therefore, is not in the public interest.”

Southin overturned the bulk of the damages awarded by Holmes in a decision that described DS as a “sophisticated” employer that “deliberately chose not to obtain non-competition and non-solicitation clauses.” Nor did DS “put a term as to length of notice” or a term compelling departing employees not to compete unfairly in its contracts.

Had DS “taken proper care of itself by obtaining such provisions,” Southin wrote, “advisors might well not have entertained the thought of leaving, either because they felt they should observe express terms of a contract, or out of fear of the consequences.”

In overturning Southin’s ruling, the SCC notes that most departing employees run no risk of liability, unless they fail to give reasonable notice to their employer or misuse confidential information that is the property of the employer. IE