The Common Law Duty of Loyalty Claim Saves the Day – Employment and HR
United States: Common law duty of loyalty claim saves the day
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We often answer customer questions about how best to protect their business interests, including their trade secrets. We do not take a one-size-fits-all approach and the advice we give depends on the needs and circumstances of our clients. We take this approach because companies have three sometimes overlapping but distinct means of protection: covenants (eg, non-competition, non-disclosure, and non-solicitation agreements); statutes; and common law.
It’s important for companies to keep this in mind in order to maximize the precautions they can take against employees leaving to take up positions with competitors. In the event that a lawsuit is necessary, it is important that companies make all possible arguments. In some cases, the former employee may not have signed a restrictive covenant. In other cases, the former employee’s conduct may not be covered by applicable law. In these cases, the common law may still provide the protections the company needs. We have already written on a common law duty of employees to refrain from using or disclosing confidential information and how an employer can potentially prevent a departing employee from using that information, even in the absence of a non-disclosure agreement. competetion.
A recent case from New Jersey in federal court further illustrates how a company can successfully invoke another common law duty to restrain an employee leaving unfair competition – this time using the duty of loyalty.
In SFX Installation, Inc. vs. Pimental, 2021 WL 4704964 (DNJ 8 Oct. 2021), the employer installed specialized laboratory equipment. The former employee worked there for four years, first as a helper and was promoted to foreman. As a foreman, the former employee had access to the employer’s VPN, which contained information about the company’s prices, offers and proposals, as well as the company’s storage facility.
While still employed by the company, the former employee secretly formed a new company to compete. He solicited business for his new business by contacting the employer’s customers. He also conducted some activities for his new business on his employer’s time, using the employer’s employees and resources. He also posted photos of the work he did for the employer on his new company’s social media page.
The employee eventually quit, citing personal reasons and not mentioning his new company. When the employer heard about the new business from its own customers, it sued for injunctive relief and damages. Because the company did not require the former employee to sign a covenant, its complaint alleged that the former employee violated the Defense of Trade Secrets Act (“DTSA”) and the on New Jersey Trade Secrets (“NJTSA”) and asserted common law allegations of tort of breach of contract, conversion and breach of duty of loyalty.
The court dismissed the employer’s claims under the DTSA and NJTSA on the basis that the employer had failed to sufficiently allege that the installation of laboratory equipment was a protectable trade secret, as opposed to general non-protectable industry knowledge. Further, although the former employee had access to the employer’s trade secrets (e.g. customer information, prices and offers), the former employer did not present sufficient evidence that the former employee was actually using them.
However, the dismissal of the statutory claims did not end the analysis, as the employer also asserted common law claims. The duty of loyalty prohibits employees from acting against the interests of their employer during their employment. As such, the employer has sufficiently asserted a claim. The former employee admitted that he solicited and performed work for the employer’s clients, and that this work constituted the majority of the business of the new company.
In addition, the employer alleged that the former employee had used the employer’s resources for his new business. For example, the employer presented receipts from EZ Pass and Home Depot showing that the former employee performed work and made purchases for his new business during the days and times indicated on his time card that he worked. for the employer. He used the employer’s company cell phone to make calls for his new business. He used some of the employer’s equipment to do work for his new business and he advertised his new business by posting pictures of work done for the employer.
Following the claim for the duty of loyalty, the Court granted the employer’s request for a preliminary injunction. This case offers some valuable lessons. First, it shows that a restrictive covenant need not be in place for an employer to succeed in a case against a disloyal former employee. Second, although there is often an overlap between legal claims and common law claims, sometimes the conduct of a disloyal former employee may violate the common law without violating any statute. It is important that employers are aware of and assert all possible claims when pursuing legal action. This is especially true where the former employee’s conduct is particularly egregious, as was arguably the case here.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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