No General Duty Not to Compete With Former Employer

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. – Supreme Court of Canada – October 9, 2008

There is no general duty prohibiting employees from competing with a former employer after their employment ends.

On October 9, 2008 the Supreme Court of Canada rendered a decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. [2008] S.C.J. No. 56 (“RBC”), and in doing so, examined the issue of  employees competing with their former employers.  The Court concluded there is no general duty that an employee cannot compete with their former employer once they have terminated their employment contract.

In RBC, the Branch Manager of the employer’s branch in Cranbrook, British Columbia helped coordinate a move of all the branch’s Investment Advisors from the employer’s branch to a competitor without providing any notice to the employer. The employer sued the Branch Manager, the Investment Advisors and the competitor, claiming, inter alia, compensatory, punitive and exemplary damages.

The trial judge found that the Investment Advisors had breached the implied terms of their employment contract with the employer to provide reasonable notice of their resignation and to not compete unfairly with their employer. The Investment Advisors were ordered to pay a total of $40,000 each in damages to the employer for failure to give reasonable notice of termination of employment and an additional $225,000 for unfair competition against the employer. Furthermore, damages were awarded against the Branch Manager for breach of implied duty of good faith, and against all the Investment Advisors and the competitor for loss of profits during the notice period and future loss of profits due to unfair competition during that period.

The Branch Manager, Investment Advisors and competitor appealed the decision and the Court of Appeal reversed some of these damages, including the $225,000 award against the Investment Advisors for unfair competition. The employer subsequently appealed this decision to the Supreme Court of Canada seeking to have the trial judge’s entire award of damages reinstated.

After reviewing the facts of the case and the lower court decisions, the Supreme Court of Canada decided to allow the appeal in part. The Court concluded that the trial judge’s award of damages against the investment advisors in the amount of $225,000 for unfair competition was wrong in law and that the Court of Appeal was correct in setting aside that award. The Court stated, “The difference between the trial judge and the Court of Appeal on this issue reflects a different view of the obligations of employees leaving their employ [sic] without notice. The trial judge…took the view that the employees continued to be under a general duty not to compete with their former employer during the notice period.” The Court continued, “The majority of the Court of Appeal, by contrast, held that once the investment advisors left [the employer], they were no longer under a duty not to compete with it…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. To this general proposition Rowles J.A. may be read as adding the qualification that a departing employee might be liable for specific wrongs such as improper use of confidential information during the notice period. This appears to be consistent with the current law, which restricts post-employment duties to the duty not to misuse confidential information, as well as duties arising out of a fiduciary duty or restrictive covenant.”

The conclusion reached by the Supreme Court of Canada in RBC is one that all employers and employees should be aware of. It provides important insight as to what duties exist between an employee and their former employer. There is no general duty to not compete with a former employer.  Short of the existence of fiduciary duties, restrictive covenants or misuse of confidential information, the decision reached in RBC permits an employee to seek new employment with any employer, whether or not they are in competition with their pervious employer. Employers should be aware of this decision and perhaps take steps to ensure that all of their employees have signed a non-competition agreement and non-solicitation agreement, known as “restrictive covenants”, to prevent employees from competing or poaching co-workers on behalf of a competitor and ensure that they are also legally binding.  Similarly, employees should not hastily sign such restrictive covenants or accept positions that carry fiduciary duties since doing so would likely restrict their ability to seek future employment.

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