Like most employees, top investment advisors who lose their jobs can expect to receive pay in lieu of notice. And given what some in this field earn, those payouts can be substantial. But what advisors cannot expect is additional compensation for the loss of high-value clients and the blow to their reputations that can come with getting fired.

In a recent decision, the Alberta Court of Appeal reversed the ruling of a lower court that had awarded $1.6 million in special damages to investment advisor Kurt Soost, who was dismissed for cause by Merrill Lynch Inc. (now part of Charlotte, N.C.-based Bank of America) in May 2001. Although the original trial judge had concluded that Soost, who was a “top performer,” was entitled to extra compensation for “damage to his reputation and book of business or goodwill,” the Appeal Court strongly disagreed.

The Appeal Court ruled that Soost could not collect more than the $600,000 — equivalent to a year’s pay — he was awarded at trial, saying: “A dismissed employee gets no damages for any prejudicial effect (even on reputation) of the dismissal itself.”

Although it is sometimes possible to get damages in addition to pay in lieu of notice in situations in which the termination is handled poorly by the employer, leading to actual economic loss, those situations are limited to cases in which the employer is “unduly unfair or insensitive,” the Appeal Court ruled. Those types of damages were established by the Supreme Court of Canada in a 2008 case dealing with the firing of a chronically ill Honda Canada Inc. employee and are now known as “Honda” damages.

Unfortunately for employees, however, it appears that the serious downdraft that often comes with losing a good job won’t be enough to create entitlement to those types of damages. To do otherwise, the Alberta Appeal Court ruled, would be to create a “slacker’s charter.”

Says Wendy-Anne Berkenbosch, a lawyer with Davis LLP in Ed-monton: “The fact that an employee is dismissed does not result in additional damages. There’s often a great deal of sympathy for employees, particularly when they are terminated by large employers who have a lot of resources. There can be a tendency to let that sympathy creep into the legal analysis. Unfortunately, there’s not a place for that [in the legal analysis] unless you can show that the manner of dismissal, as distinct from the dismissal itself, was malicious or done in bad faith.”

So, unless there is a specific contract spelling out who gets what at the end of the relationship, there are no special deals — even for employees who are outstanding producers; even though the terminated employee may have had special status while employed and may believe that he or she has a “right” to deal with certain clients.

“The law applies just the same to advisors as it does to other employees,” says Julie Hopkins, a litigator with Borden Ladner Gervais LLP in Calgary, who, together with partner Frank Foran, represented Merrill. “It doesn’t matter if you are a star or a mail clerk. Reasonable pay in lieu of notice is all you get.”
@page_break@Of course, there’s often a history of acrimony when cases like this end up before a judge. When Soost joined Merrill in August 1998, he brought clients with him representing assets of $70 million-$80 million. When he was fired in May 2001, that amount had grown to about $150 million. Following a dispute dealing with Soost’s personal trading, which escalated over a few months, Merrill dismissed Soost for cause, alleging several violations of both company rules and industry regulations. The trial judgment also concluded that Merrill had refused to let Soost resign, a choice that might have done less damage to his reputation.

Soost received no pay in lieu of notice and, although he found another position within three weeks, it was with a much smaller firm. Most of his former high net-worth clients did not follow him to his new firm and, as a result, “his income dropped drastically,” the Appeal Court decision says. Soost, who was not licensed as a broker, did not pursue those clients until after he had found a new position. By the end of 2001, the 2009 trial decision says, Soost had decided to leave the investment industry because he could not succeed without his former clients.

Berkenbosch notes that in the absence of a contract stating otherwise, employers and former employees are entitled to compete for the same clients: “Nobody owns the client.”

There was also evidence that some former clients were unhappy with Soost, and that they had lost money when he was their advi-sor. (Stock markets had dropped sharply the month before he was dismissed.)

The Appeal Court’s ruling also noted that, like it or not, some industries are more likely than others to leave employees vulnerable when they are terminated, and that careers in those industries are often driven by the employee’s relationship with clients. Although the loss to such employees may be greater than in other types of jobs, it does not entitle these employees to greater compensation.

Whether clients can be persuaded to follow an advisor who is changing employers is a business decision, Berkenbosch says: “Many clients like the certainty of knowing where they are going and who they are meeting. What the Court of Appeal said is that that is a practical business decision, not a legal issue.”

It was also important in this case that the employer genuinely believed it had just cause to fire Soost. Although the original trial judge found that there was not sufficient cause for termination — and that was not disputed on appeal — it was key that the employer genuinely believed that it did have grounds to fire Soost.

David Harris, a Toronto lawyer who acts for employee plaintiffs, says that he found the Soost trial decision “unusual” and that he did not expect such claims to succeed in the future. Instead of a wrongful dismissal case, he says, the claim for additional damages seems closer to a defamation claim. (A claim for defamation was made unsuccessfully at trial.) The Soost decision, Harris adds, should not be confused with cases that deal with advisors who have disputes with their employers about selling their books of business. Those cases fall under a different set of principles and usually arise in situations in which discussions about such a sale are already underway.

In Harris’s view, many large employers let employee-advisors believe that their clients are their own and can be sold or taken with them when they leave. But on termination, the employer may take the opposing position, he says: “It irks me. They fire somebody and then they put a pack of wolves [other advi-sors in the firm] on the book of business, and the poor guy can’t get a job.” IE