Last month, the Supreme Court of Canada rendered its decision in the lawsuit over brokerage recruiting practices in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc. et al∗
I have trekked through the many decisions in this case, starting with the failed attempt by RBC DS to obtain the extraordinary remedy of an interlocutory injunction, through the two trial decisions: the first, finding liability to RBC DS on the part of Merrill Lynch (the recruiting dealer), Michaud (its recruiter), Delamont (the recruited branch manager at RBC DS), and various sales representatives at DS; the second, determining damages; the majority and dissenting reasons in the British Columbia Court of Appeal: and finally, the majority and dissenting reasons in the Supreme Court of Canada.
It is only with great difficulty that one can attempt to determine what it all means for the industry \u2014 recruiting dealers, branch managers, sales representatives, and targeted dealers \u2014 going forward. There are aspects of each decision at each level that remain relevant to recruiting decisions, with many of the original complexities and contradictions unresolved by this case.
What is clear is the following: first, the ability of a targeted dealer to obtain an injunction to freeze the status quo, which is the only effective real time remedy, remains unlikely in situations where there are no written restrictive covenants restraining the sales representative from post departure competition and\/or solicitation of clients.
The lack of irreparable harm to the targeted dealer is seemingly an insurmountable barrier to the grant of such judicial relief: it was so for RBC DS, and, by and large, has been so for the last 15 years throughout Canada in departing sales representative retail brokerage cases.
Second, the Supreme Court of Canada has established that there is no duty on the departing sales representative (absent contractual restrictive obligations) not to compete after departure, whether fairly or unfairly, except that the sales representative cannot retain and use confidential client information after departure. That would seem to condone the sales representative initiating contact with clients post departure with a view to soliciting their accounts.
Third, whole branch departures are likely a thing of the past, for there is too much litigation risk for branch managers, whether he or she initiated or organized the mass departure. The implied duty on the part of the branch manager to retain sales representatives for his employing dealer means that he cannot participate in a mass departure in any circumstances without taking on considerable risk of legal liability.
Fourth, a sales representative must give reasonable notice of termination. How long the notice must be is somewhat of a mystery. Whether the dealer has the right to compel the sales representative to sit out the notice period without contacting clients is unknown. If the court in RBC DS v. Merrill concluded that 2 1\/2 weeks\u2019 notice was the right period for a whole branch departure in an isolated area, what is the correct number of days or weeks for a single sales representative with a small book, or a large producing sales representative with several licensed subordinate sales representatives and assistants, or several sales representative leaving together, or a producing branch manager leaving alone, etc.?
There the certainties, such as they are, end, and we enter into grey areas. Conservative legal advice to sales representatives contemplating departure from their employing dealers (in situations where the sales representative did not clearly own the book of client business) was to \u201cleave naked\u201d; that is, taking no records or copies of records, including customer lists, account records, policy and procedure manuals, commission runs, etc., and to refrain from contacting clients, both pre and post departure. How much of that advice remains relevant is open to question.
Departing sales representatives cannot leave with client records containing confidential client information \u2014 the punitive damages awards against the departing sales representatives, branch manager, and the Merrill Lynch defendants in this case are unequivocal proof of that. The British Columbia Court of Appeal majority decision stated that a sales representative was allowed to leave with his client contact information.
However, what is entirely missing at the Supreme Court of Canada level, both in the majority opinion and in the dissent, is the more contemporary client centered focus that some judges (and the majority in the BCCA in this case) have largely employed in analyzing these issues. That has meant placing the contractual employment or agency legal analysis as a secondary consideration, with the primary concern being the regulatory obligations of both dealer and sales representative to their retail clients. The ownership interest in the book, and the duties, express and implied, of employee or agent to employer or principal, would not govern the analysis of the conduct of the various parties in the recruiting game.
@page_break@It is unfortunate that the Supreme Court of Canada did not take the opportunity to imprint the client centered approach on the retail brokerage industry, and yet not surprising. Ultimately, that job is for the industry itself, with IIROC and the MFDA providing the necessary code of conduct to put the \u201cregulatory\u201d in \u201cSRO\u201d.
Joel Wiesenfeld is a partner with the law firm of Torys LLP in Toronto. The views expressed in this commentary are strictly his.<\/i>
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