Laura Paglia
The Alberta Court of Appeal recently cleaned up a mess made at one of its trials.
Kurt Soost was a top-performing stockbroker who was fired by Merrill Lynch in good faith in May, 2001, for a number of breaches of the firm's compliance policies. Notwithstanding the breaches, the trial judge found that Merrill Lynch did not have cause and awarded Mr. Soost a total of $2.2-million in damages, $600,000 of which amounted to damages for a one-year notice period the judge felt he was entitled to.
The damages award at trial was a surprisingly bold new high watermark for compensation paid to a fired stockbroker - and $1.6-million of it was wrong.
The only issue on appeal was the $1.6-million award for damage to Mr. Soost's reputation and loss of his clients, or book of business. In a judgment refreshingly written in plain and generally straightforward language, the Court of Appeal clearly stated that a dismissal by an employer or a resignation by an employee could be whimsical or completely inexplicable. All that needs to be reasonable in dismissing an employee is length of notice.
Put another way, the manner in which someone is fired cannot be unduly unfair or insensitive, but that is a separate matter from the firing itself. For most people, the losses they will suffer when out of a job may be felt well beyond any reasonable notice period. But because an employee has no right to keep a job - only a right to reasonable notice - there can only be compensation for the length of that notice, not the loss of that job.
The Court of Appeal ruling aptly described the heavy damages award at trial as a "slacker's charter."
"What if Courts imposed heavy and almost automatic penalties on any defendant who alleged cause in good faith but failed to convince a judge or jury that it was bad enough?" the ruling said. "That would be most unfair to employers. It would deter alleging cause so that employers with cause would instead have to give pay in lieu of notice (to avoid a second set of damages)."
The ruling also suggested this "would significantly increase the expenses of hiring staff and hence increase prices charged to innocent customers."
The decision has serious legal and financial implications for those who hire commissioned salespeople with a book of business, such as investment advisers, and, of course, for those employed that way. In a nutshell, on appeal the court determined that the trial judge had unfairly "double-dipped" by granting Mr. Soost $1.6-million in extra damages. That extra money was meant to compensate him for his lack of future earnings from the same customers that had formed the basis for the $600,000 he had already been given for a one-year notice period.
In catching and fixing the double-dip, the court caused investment advisers to instantly become much less costly to fire. Instead, it is the fired salespersons alone who bear the cost of potentially losing their clients and the income that comes with them.
It's too bad that the issue of whether or not Merrill Lynch actually had cause to fire Mr. Soost in the first place was not appealed by Merrill Lynch. The $600,000 Mr. Soost received for a one-year notice period ignores the reality that many investment advisers are not employees but independent contractors who have written agreements with the firms who sponsor their licences to sell mutual funds, stocks or other investment products. As such, their relationship with their employer does not work, in the everyday sense, in the same way as many employer-employee relationships.
Investment advisers are entrepreneurial business people who are paid on a purely commission basis. The commissions are used to provide not only their own salaries but also the salaries of their own staff and many other expenses, such as marketing, associated with running their businesses.
The clients who invest with them are the pivotal part of the shared business interests of both employee and employer. The courts have made clear that both employee and employer are free to compete for these clients when an adviser's employment ends. When the trial judge awarded Mr. Soost damages for a one-year notice period, he ignored the fact that, due to the competition between advisers and their employers to keep clients, most investment advisers give their employers minimal to no notice of their departure, leaving their clients only for the minimum time necessary to transfer their licence to another sponsor employer.
More important, Mr. Soost was fired by Merrill Lynch for a number of compliance indiscretions. For example, he did not obtain Merrill Lynch's approval or provide disclosure to Merrill Lynch of his private placement activity. He solicited clients to purchase a speculative security that Merrill Lynch had concerns about regarding pricing and market manipulation. And he also managed his own margin account in an unprofessional manner in the face of Merrill Lynch's past warnings not to do so.
The trial judge found that Mr. Soost's breaches were either not "bad enough" or were tolerated in some form from other advisers at Merrill Lynch so that they did not amount to cause.
The trial judge also ignored the fact that the rules Mr. Soost broke were ultimately designed to prevent harm to his clients, the investing public, which the court may better consider the next time it is reviewing the well-intentioned termination of a wayward broker.
Laura Paglia is a partner with Torys LLP in Toronto.