A recent B.C. court of Appeal decision that has overturned most of a $2-million award in damages against Merrill Lynch Canada Inc. and nine former RBC Dominion Securities Inc. advisors is likely to be appealed to the Supreme Court of Canada, securities law experts say. The advisors left their Cranbrook, B.C., branch on short notice to join Merrill.

“In a highly competitive and somewhat predatory industry, the rules that the BCCA have set out may not be rules that either of the parties want to live with,” says Neil Gross, a partner with Toronto-based law firm Carson Gross Christie Knudsen.

At stake are several issues related to advisor recruitment and switching firms, including: the role of the branch manager in the face of an impending departure; the duty to give reasonable notice when switching firms; and what client information can be taken by departing advisors.

In RBC Dominion Securities v. Merrill Lynch Canada et al, released Jan. 12, the BCCA overturned the B.C. Supreme Court’s decision that the advisors had breached an implied contractual duty “not to compete unfairly.” The move overturned a damage award against them equivalent to 11.5% of the branch’s profits for five years, and found that there was “no such contractual obligation.”

As a result, the BCCA decision also overturned the trial judge’s $1.4-million damage award against the former RBC branch manager, which was based on a finding that he had breached his duty to perform his managerial role. He was found by the lower court to have played a lead role in the move of the advisors, including himself, to Merrill, without providing any warning to RBC.

However, the BCCA maintained the lower court’s punitive damages of $265,000. Prior to the move to Merrill, the branch’s client records were copied or removed for copying, before being returned a few days later.

“That’s clearly still a no-no,” says Ellen Bessner, a partner at Gowling Lafleur Henderson LLP in Toronto. The records are the firm’s property, she says, and the information in them is protected by privacy law.

The BCCA decided, however, that an advisor should be able to compile a list of relevant client information to take along to his or her new employer.

“To hold in the 21st century that an advisor, who usually, by considerable personal diligence, has built up a 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,” wrote Justice Mary Southin.

“This is recognition that the client’s rights are important and should dictate what follows,” says Gross. “The prime relationship is between the advisor and client, not the brokerage and client.”

The BCCA did maintain the trial judge’s decision that “reasonable notice” should be given when an investment advisor decides to move to a new employer. In this case, reasonable notice was found to be two and a half weeks. The BCCA awarded damages of $40,000 to RBC.

Bessner says advisors should not interpret the BCCA decision as a “green light to leave and call clients the day after. This decision could be overturned if it goes to the Supreme Court.”

Generally, when notice is given, says Bessner, the advisor-employee is told to go home for the duration of the notice period. Sending them away with a client list provides them with an opportunity to contact the clients. “This defeats the whole purpose of notice,” she adds, which is to give the employer time to get organized before the advisor can compete with the former employer.

This court case began in the spring of 2000, when Merrill’s regional manager started informal recruiting. He spoke to the former RBC branch manager at Cranbrook, Don Delamont, as well as the branch’s top-producing advisor. Delamont arranged for subsequent meetings with RBC advisors, including one in which Merrill contracts were presented for the advisors to sign.

On Nov. 16, 2000, senior management at RBC heard about the impending departures, and Delamont confirmed it. In a Nov. 18 meeting with the branch’s advisors, RBC failed to persuade them to stay. The departures took place Nov. 20.

The lengthy litigation that resulted raises the question of whether the Investment Dealers Association of Canada should develop a protocol for recruitment and switching firms, says industry commentator Glorianne Stromberg.

@page_break@The IDA declines such a role. This case involves common legal employer-employee principles such as reasonable notice and duty of loyalty, says Paul Bourque, IDA senior vice president, member regulation. IE