There is more than one way to skin a disloyal cat: The Common Law Duty of Loyalty Claim Saves the Day – Intellectual Property


United States: There is more than one way to skin a disloyal cat: the common law duty of loyalty claim saves the day

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We often answer clients’ questions on 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: restrictive covenants (for example, non-compete, non-disclosure, and non-solicitation agreements); statutes; and common law.

It is 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 the competition. In the event that legal action is required, it is important for businesses to make all possible arguments. In some cases, the former employee may not have signed a restrictive covenant. In other cases, the conduct of the former employee may not be covered by applicable law. In these cases, the common law could still provide the protections the business needs. We have already written about the common law obligation of employees to refrain from using or disclosing confidential information and how an employer can potentially prevent an employee leaving the competition from using that information, even in the absence of a non-compete agreement.

A recent New Jersey case in federal court further illustrates how a company can successfully invoke another common law obligation to prevent an departing employee from unfair competition, this time using the duty of loyalty.

In SFX Installation, Inc. v Pimental, 2021 WL 4704964 (DNJ 8 October 2021), the employer has installed specialized laboratory equipment. The former employee worked there for four years, starting as a helper and being promoted to foreman. As a foreman, the former employee had access to the employer’s VPN, which contained information on the company’s prices, offers and proposals, and 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 clients. He also conducted some business for his new business during his employer’s time, using the employer’s employees and resources. He also posted photos of his work for the employer on his new company’s social media page.

The employee ultimately resigned, citing personal reasons and not mentioning his new business. When the employer learned of the new business from his own clients, he sued for injunction and damages. Since the company did not require the former employee to sign a restrictive covenant, its complaint alleged that the former employee had violated the Defend Trade Secrets Act (“DTSA”) and the New Jersey Trade Secrets Act. (“NJTSA”) and asserted common law allegations of tortious interference with the contract, conversion and breach of the duty of loyalty.

The court dismissed the employer’s claims under the DTSA and NJTSA on the grounds that the employer failed to sufficiently allege that the installation of laboratory equipment was a protectable trade secret, as opposed to general industry knowledge not protectable. In addition, although the former employee had access to the employer’s trade secrets (for example, information on customers, prices and offers), the former employer did not present sufficient evidence that the he former employee actually used them.

However, the rejection 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. On this point, the employer has sufficiently asserted a complaint. The former employee admitted to soliciting and performing work for the employer’s clients, and that work constituted the majority of the business of the new company.

In addition, the employer alleges that the former employee 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 was working and shopping for their new business during the days and times listed on their tally sheet for the employer. He used the company’s cell phone for his new business calls. He used some of the employer’s equipment to perform work for his new business and he advertised his new business by posting photos of the work performed for the employer.

Following the request for a duty of loyalty, the Court granted the employer’s request for a preliminary injunction. This case presents some valuable lessons. First, it shows that it is not necessarily necessary for a restrictive covenant to be in place for an employer to succeed in a case against an unfair former employee. Second, although there is often an overlap between statutory and common law claims, sometimes the conduct of an disloyal former employee can go against the common law without violating a law. It is important that employers are aware of and assert all possible claims when filing a lawsuit. This is especially true where the conduct of the former employee 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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