Supreme Court Decision Impacts Competitive Hires in Brokerage Industry

Reproduced with permission of the publisher from National Banking Law Review, Volume 27, Number 6 , December 2008.  

The Supreme Court of Canada has sent a message to all investment brokerage firms in Canada: proceed with caution when asking a competitor's investment advisor (IA) to cross the street. In its decision released on October 9, 2008, the SCC held a former manager at RBC Dominion Securities' (RBCDS) personally liable for almost $1.5 million in damages for coordinating RBCDS' IAs to join competitor Merrill Lynch. In what should provide targeted brokerage firms with some comfort, the decision reversed most of the Court of Appeal's findings and concluded that the branch manager breached his duty of good faith by coordinating the mass departure.

The Mass Departure

In November 2000 virtually all of the IAs at RBCDS' branch in Cranbrook crossed the street to join direct competitor Merrill Lynch. The move was coordinated by Don Delamont, RBCDS' branch manager. Consistent with a desire to quickly transfer existing clients from RBCDS to Merrill Lynch, none of the departing IAs provided advance notice of their resignations, all of which were effective on the same day. In addition, prior to the coordinated announcement of their resignations, the departing IAs copied RBCDS' client records and transferred these records to Merrill Lynch. These actions crippled RBCDS' Cranbrook branch, as only two very junior IAs remained.

Trial Judge Critical of Conduct

As typical within the industry, none of the departing IAs had contracts requiring them to provide advance notice of termination. There were also no contractual restrictive covenants (i.e., non-competition or non-solicitation clauses). Nonetheless, the trial judge was offended by the conduct and found:

• Delamont (while not a fiduciary) breached his duty of good faith in coordinating the departure and failing to inform RBCDS management and was ordered to personally pay almost $1.5 million in damages, which represented RBCDS' lost profits resulting from his breach;
• the departing IAs breached their implied duty to provide reasonable notice of their resignations;
• the departing IAs breached their duty not to compete unfairly (i.e., working for Merrill Lynch during their notice period caused damages that extended beyond the notice period); and
• punitive damages were warranted in the amount of:
  • $5,000 against each departing IA for taking RBCDS' client records; and
  • $250,000 against Merrill Lynch.
   

The Court of Appeal Emphasizes Lack of Contract

The British Columbia Court of Appeal reversed significant portions of the trial judge's findings, emphasizing the lack of written contracts with any restrictive covenants. The Court of Appeal held that:

• the IAs were not bound by a general postemployment duty not to compete unfairly; and
• Delamont did not breach his common law duty of loyalty in not discouraging the IAs from leaving for a competitor.

Supreme Court Clarifies IA Duties

An IA has a Duty of Good Faith

The Supreme Court restored the majority of the trial judge's findings, including that it was an implied term of Delamont's contract that he would perform his functions in good faith. Those functions included retaining the IAs of the branch under his supervision. In organizing the mass departure from RBCDS, Delamont breached this duty. The award of almost $1.5 million against Delamont personally is a significant deterrent to managerial or senior employees coordinating the departure of IAs to a competitor.

No General Duty to Not Compete Unfairly

However, the Supreme Court agreed with the Court of Appeal that the IAs were not bound by a general duty not to compete unfairly.

Regardless of there being no general duty to not compete unfairly, the Supreme Court decision is good news for all brokerage firms because it confirms that IAs have an implied duty:

1. to perform functions in good faith;
2. to give reasonable notice of termination; and
3. not to misuse confidential information.

What This Means to You

If your IA is leaving to join a competitor:

1. Remind the IA of their duty to provide notice of resignation if it is not provided.
2. Do not terminate the IA's contract effective immediately. Advise the IA that he/she remains a firm IA until the effective date of their resignation and place the IA on “garden leave” in order to provide time to solidify client relationships.
3. Collect all company property and remind the IA of any post-departure duties, including confidentiality.

If you are hiring IAs from a competitor:

1. Tell IAs to provide reasonable notice of termination to the former brokerage firm to reduce the likelihood of a claim for inducing breach of contract.
2. Have new hires sign a written contract, including a provision that confirms the IA is not in breach of any prior obligations. A written contract may also confirm the IA's duty of confidentiality, duty of faithful service, reasonable notice of termination and any applicable restrictive covenants, including noncompetition clauses.