Competing with former employers

A July decision, also from B. C., concerns an advisor who jumped from Edward Jones to RBC Dominion Securities Inc. (DS) and continued to deal with his former clients.

Now, a Quebec decision involving non-competition and non-solicitation agreements in the context of a sale and subsequent employment is headed to the Supreme Court of Canada (SCC).

At issue in all of these cases is the degree of control that employers can exercise over their former employees.

IRREPARABLE HARM

The August decision from the Supreme Court of B. C. held that an insurance company could not impose an injunction on an advisor who dealt with the firm’s clients after his departure. Even though the advisor acted contrary to the terms of a non-solicitation agreement, the decision says that the injunction sought by the company is not the appropriate remedy. Instead, the company must sue the advisor and recover damages from him in the future, should the firm be successful.

The case involves Christopher Redcliffe, an insurance advisor who had worked for Hub International Canada West Co. in the Lower Mainland area of B. C. Hub had purchased an insurance brokerage owned by Redcliffe’s father in March 2011. After the sale, Redcliffe worked for Hub and signed restrictive covenants that sought to prevent him from soliciting Hub clients for 12 months after leaving Hub. He was also not to solicit prospective clients of Hub for 24 months.

Redcliffe, after failed negotiations to buy back his father’s book of business, left Hub this past June. There is no dispute that he then took on some of his father’s firm’s former clients, which had been transferred to Hub.

The issue was whether Hub could use an injunction to prevent Redcliffe from doing business with these clients. Justice Elliott Myers ruled that an injunction was not available because the damages in the main lawsuit could be precisely calculated. Given the heavy restrictions that injunctions place on action, they typically are only granted to prevent what is known as “irreparable harm.” Usually, that means harm that can’t be repaired by the award of damages.

In this case, the court concluded that Hub’s losses, if established at trial, could be fixed with a financial award. Noted Myers: “The fundamental underlying question is whether the revenue derivved from the client’s busines is readily ascertainable. There is no reason to think that is not the case and every reason to think it is, since the revenue is a commission based on insurance premiums and for that, there will be a paper or electronic trail. Further, as in Edward Jones, Hub was able to calculate with specificity the revenue generated by the relevant clients.”

Advisors also won the day in the Edward Jones case (referred to in Redcliffe, above). In that case, the B. C. Court of Appeal overturned a lower court ruling that had granted Edward Jones an injunction against advisor Randy Voldeng, his assistant and DS, preventing them from actively soliciting Voldeng’s former Edward Jones clients. That injunction did not prevent Voldeng from dealing with his former clients if they approached him.

COMMISSIONS

In removing the injunction against soliciting those clients, the court also reasoned that there would be no “irreparable harm” to Edward Jones because the amount of commissions lost due to Voldeng’s move could be precisely calculated _ in that case, the accounts transferred were worth about $20.2 million. Rather, the court found that the advisor _ not his former employer _ would be more likely to sustain irreparable harm, as “it would not be possible to determine which of his clients would have shifted to [DS] if he had been able to inform them of his new contact particulars.”

And while the circumstances do not deal with the financial services industry, the former employee in another case concerning non-solicitation and non-competition agreements has been granted leave to appeal to the SCC.

That case, Guay Inc. c. Yannick Payette et autres, deals with the sale of a crane business. The seller, Payette, consulted for the buyer, Guay Inc., after the sale and then entered into an employment agreement with Guay. Payette also entered into non-competition and non-solicitation agreements with Guay.

Payette was dismissed about six months after the deal closed and, seven months later, began working for a competitor. An injunction against Payette was granted by the Quebec Court of Appeal.

Resolution of the case by the SCC is likely to bring greater certainty to the interpretation of non-solicitation and non-competition agreements in the context of both a sale and an employment contract.

© 2012 Investment Executive. All rights reserved.