Royal Bank's RBC wins broker defection suit on appeal 2008-10-10 12:53 ET - Street Wire Also Street Wire (C-MLC) Merrill Lynch & Co Canada Ltd
by Mike Caswell The Supreme Court of Canada has reinstated a $1.8-million damages award that arose when a group of investment advisers defected from RBC Dominion Securities Inc.'s branch in Cranbrook. The mass defection nearly caused the branch to collapse. The decision is a loss for Don Delamont, the former manager of RBC's Cranbrook branch. He was ordered to pay $1.48-million after the court found he orchestrated the defection of nearly all of RBC's employees in Cranbrook to Merrill Lynch Canada Inc. He was found liable for five years of lost profits. Although the damages award is a victory for RBC, the court did grant one concession to the defectors. It ruled that a departed employee is allowed to compete with his former employer. This means that the 12 investment advisers that defected along with Mr. Delamont are not liable for $225,000 collectively in damages for unfair competition. The Supreme Court ordered them to pay $40,000 for not giving 2.5 weeks notice that they were leaving. The court also ordered Merrill Lynch Canada to pay $250,000 in punitive damages. The original decision The case began when RBC sued Merrill Lynch and the defectors in B.C. Supreme Court on Nov. 27, 2000. RBC said virtually all of the employees at its Cranbrook branch left in an organized defection. They moved to a Merrill Lynch branch run by one of Mr. Delamont's friends. They did not give any notice. RBC said they copied client lists and took most of its clients with them. RBC's office was effectively hollowed out, and the company only retained 11 per cent of its business. As a result of the departure, there were only two junior investment advisers remaining at RBC and two administrative staff members. The case went to trial over 11 days in May and June, 2003. In the end, the judge found for RBC. B.C. Supreme Court Justice Heather Holmes found that the defectors engaged in a concerted effort to move clients to Merrill Lynch before RBC could protect its client relationships. She ordered Mr. Delamont to pay $1.48-million for committing "tortious wrongs" as branch manager. "I am satisfied that his breach caused the mass departure and the near collapse of the DS branch," she wrote. It was Mr. Delamont's job to retain investment advisers, and certainly not to promote their departure, Justice Holmes ruled. She ordered the 12 defectors to pay a combined $325,000. She also ordered Merrill Lynch to pay $475,000 and Merrill Lynch's branch manager, James Michaud, to pay $235,000, for luring RBC's employees to defect. The first appeal Three years later, her decision was partly overturned by the B.C. Court of Appeal. It ruled that RBC's lawsuit did not adequately support damages of $1.48-million against Mr. Delamont. The B.C. Court of Appeal said the judge should not have treated Mr. Delamont differently from the other defectors because he was the manager. It ruled that there was nothing wrong with him entertaining or accepting other job offers, no matter how vital he was to RBC. The court also reduced the damages against the other 12 defectors to a combined $100,000. It said they failed to give 2.5 weeks notice that they were leaving and were only liable for 2.5 weeks of lost income. It found them not liable for any further loss of profits. The Supreme Court of Canada RBC appealed that loss to the country's highest court, filing notice at the Supreme Court of Canada on March 13, 2007. In a 6 to 1 decision, the Supreme Court reinstated the damages award against Mr. Delamont. The Supreme Court agreed with the original judge's findings that Mr. Delamont had breached his managerial duty. It found that an implied term of his contract with RBC was that he retain the company's employees. "In organizing their mass exit, he breached that duty of good faith," the court found. The court ordered him to pay $1.48-million. The Supreme Court left the damages against the other defectors at a combined $100,000. It ruled that once they left RBC, they were free to compete with their former employer. "An employee terminating his or her employment may be liable for failure to give reasonable notice and for breach of specific residual duties. Subject to these duties, the employee is free to compete against the former employer," the court ruled. The Supreme Court did not penalize the defectors for taking client lists from their former employer. It said that because Mr. Delamont had been penalized for RBC's loss of business, there was no need to assess damages for the lists. The court also noted that the lists were returned after a short time. The only dissenting judge was Justice Rosalie Abella. She said that Mr. Delamont did not have a duty to try to keep RBC's employees there. "I see no reason to impose such a duty on an employee in Delamont's position. It represents a significant reformulation and extension of how courts have interpreted and applied a non-fiduciary employee's implied duty of good faith," she wrote. She also said it was not reasonable to award damages for five years of losses "given the highly competitive and mobile nature of employment relationships in this industry." The total damages award of $1.8-million will be paid by Merrill Lynch, which had agreed to indemnify its employees. | 
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