A few months ago, the Missouri Supreme Court issued its latest opinion concerning the duty of loyalty that an employee owes an employer. The case is Scanwell Freight Express STL, Inc. vs. Chan. Scanwell continues the long progeny of cases which commenced with National Rejectors, Inc. vs. Trieman, the seminal case on an employee’s duty of loyalty.
National Rejectors, Inc. vs. Trieman (1966)
In Treiman, the essence of the Plaintiff’s charges was that the individual Defendants, together with other employees of the Plaintiff, conspired, while in the Plaintiff’s employ to enter the business of designing, manufacturing and selling coin-handling devices in competition with the Plaintiff. The Plaintiff, National, had successfully engaged in the manufacturing and sale of coin-handling devices since 1935 and until shortly before the lawsuit was commenced, National was practically the sole source of supply for coin-handling devices for vending machine businesses. Early in 1956, an employee of National, by the name of Trieman, advanced the idea that he and another employee leave National and start their own company. As the discussions became more intense, two other employees were invited to participate. In October 1957, the four employees selected a property as the location of their first shop. Around the beginning of November 1957, each of the four employees signed a document pledging each of the participants to secrecy. The four employees agreed in January 1958, that each would contribute funds to get the enterprise under way. Working nights and weekends, the four converted a barn to use as a tool and die shop. The four also commenced designing coin-handling devices as close as possible to the comparable National products.
In October 1958, the group organized the Boxer Tool and Engineering Corporation. Dummy incorporators were used and one of the group’s wife used her maiden name as an officer of the corporation. According to testimony, the group sought to avoid National’s knowledge of the identity of the actual incorporators. In addition to working on their own coin-handling device, the group also did some subcontract work for National without National’s knowledge. Two of the participants were in charge of farming out the making of parts for National and arranged with another company to farm the project to the company and in turn subbing the work to Boxer.
In March 1959, one of the employees, Melvin, finally resigned from National. When informing National that he was resigning, however, Melvin stated that he was going to work for an engineering company, Cavic Engineering, and did not mention the Boxer company. During this time Boxer continued to get subcontract work from National, unbeknownst to National. At around the time of Melvin’s resignation, other employees became involved with Boxer operation, by doing part-time work at the shop and the purchasing of stock in Boxer.
In June 1959, Trieman was at the offices of a vending machine company, Vendo, making a sales call on behalf of National. While at the offices, Trieman informed the vice-president of Vendo about the Boxer operations. At this time business was picking up for Boxer and Boxer moved its location to larger quarters in the City of St. Louis. In July 1959, Trieman finally gave his notice of resignation to National and informed National that he and other employees of National were going into business together. When Trieman resigned, he was aware that one of National’s prime patents was due to expire and that Boxer could start marketing its coin-handling devices.
In September 1959, the Boxer shareholders voted to change the name of the company to Coin Acceptors, Inc. Thereafter, several employees of National resigned and accepted employment with Coin Acceptors. Furthermore, Coin Acceptors entered into a contract with Vendo for the production of the coin-handling devices designed by Coin Acceptors. Following several months of dissension between the owners and directors of Coin Acceptors, Melvin contacted National and revealed the whole story behind the inception of Coin Acceptors to National’s officers and attorneys. Shortly thereafter National filed its lawsuit against Trieman and other officers of Coin Acceptors.
While the trial court found for National on all counts, the appellate court reversed most of the lower court’s rulings. The appellate court stated that employees may agree among themselves to compete with their then employer upon termination of their employment. Such employees are not limited merely to so agreeing during their employment with the employer with whom they intend to compete. The employees may plan and prepare for their competing enterprises while still employed. Moreover, if such right is to be in any way meaningful for an employee not under contract for a definite term, it must be exercisable without the necessity of revealing the plans to the employer.
The Court went on to find that setting up a shop and moving the location of the shop was not beyond the scope of legitimate moves by an agent to compete upon termination of his agency. Neither was the incorporating under dummy incorporators and doing business while employed by National a violation. The business the employees were doing at the time of their employment was not in competition with National but was subcontract work for National.
From National Rejectors, it is clear that employees may leave employment and establish a new enterprise in competition with a former employer, absent a valid restrictive covenant or breach of confidential relationship. Further, the employee may in connection therewith utilize their knowledge, memory, skill and experience gained in the former employment. Moreover, Employees may make plans for a new enterprise so long as employee does not use the employer’s time or any trade secrets in doing so. The Court left open, to be decided on the particular facts of the case, what behavior goes beyond the “mere planning” for competition.
Opie Brush Company vs. Bland (1966)
Opie Brush Company was a case decided almost immediately after Trieman. The Opie Brush Company filed an action to enjoin Bland, who was a former first vice-president, sales manager and director, from competing with the company. Bland joined Opie in 1951 as the company’s sales manager and that same year Bland began buying into the business. In November 1956, Bland and Opie incorporated, with sixty percent of the stock going to Opie and forty percent going to Bland. Both Opie and Bland became officers and directors of the corporation. In July 1961 the personal and business relationship between Bland and Opie began to deteriorate. In December 1965 Bland resigned his position as sales manager, but did not resign as a director of the corporation.
Bland took employment with a direct competitor of Opie Brush Company. When Bland left Opie Brush, he took with him confidential knowledge of the company’s affairs and a list of customers, which Bland had serviced during his tenure as sales manager. Written notice was sent out by Bland’s new employer to these customers, advising them of Bland’s new position. Moreover, Bland began calling on those accounts and selling the accounts the same kind of products he had been selling them for Opie Brush. Bland testified that he was actively seeking to get the business of all of those customer accounts and that he knew that he was putting himself personally in a better position at the expense of Opie Brush.
At the time of trial Bland was still an officer and director, however, during the course of the trial Bland tendered his resignation as to these positions. Bland attempted to show that his position as a director had never been of any significance or worth because Opie really ran the business and that Bland had always been an inactive director and without influence. The Court did not reach any decision as to an inactive director’s duty, because there was contradictory evidence as to Bland’s evaluation of his position as a director which the Court relied upon.
The Court held that there was still “such a thing as loyalty owing from an officer and director to a corporation and its shareholders.” The court found that Bland violated the trust relationship as an officer and director, thereby breaching his duty of loyalty. Bland could not renounce his duty by termination of his directorship. Confidential information obtained by a director of a corporation cannot be made public property merely by dissociating oneself from the corporation. The duty always remains intact.
The holding in Opie Brush indicates that an employee, who is also a director of the employer, will be held to a different standard from that of an ordinary employee. Moreover, due to the fiduciary duty of a director, the director cannot use information obtained during his or her tenure to compete.
Metal Lubricants Company vs. Engineered Lubricants Co. (1968)
Metal Lubricants sought an injunction against former employees who had resigned as a group and formed a company to engage in direct competition with Plaintiff. The Court found that apart from restricting the use of protected information, no right to relief, legal or equitable, can be had against former employees.
The Defendants were all the former employees of the St. Louis branch of Metal Lubricants Company. Prior to handing in their resignations Defendants informed the owners of Metal Lubricants of their intentions to set up a competing business selling industrial oils. To pursue this end, while employed, Defendants contacted different suppliers of Metal Lubricants to determine the feasibility of starting the new enterprise, looked into leasing office space and discussing the monetary compensation of each employee of the new company. It was not until the Defendants resigned that they incorporated, obtained offices or engaged in other preparations for competition.
Metal Lubricants’ primary allegation was that Defendants were duplicating Metal Lubricants products by having said products analyzed by an independent laboratory for the products content. The Court held that this duplication was not a trade secret since the information was obtained by proper means.
Metal Lubricants’ other allegations pertained to the fact that the employees took with them valuable information as to the customers of Metal Lubricants. However, this information was not taken in any recorded fashion, but it was knowledge that each employee obtained through personal contact with the customers. Relying on National Rejectors, the Court stated that this type of knowledge was not privileged. Moreover, the fact of an employer-employee relationship is not, by itself, sufficient to cause a confidential relationship to exist as to knowledge which is the natural product of the employment. Distinguishing the Opie Brush case, the Court stated that “it is obvious that a person who is a director of a corporation, and bears an actual relationship to it like that of a partner in a small business, is under far stricter obligations than an ordinary employee when that employee decides to leave and take his part of the trade with him.”
Walter E. Zemitzsch, Inc. vs. Harrison vs. Walter, et. al. (1986)
Zemitzsch, Inc. was a closely-held, family-owned corporation employing about twenty-five employees, engaged in the manufacturing of store fixtures. Defendants were officers and managers within the corporation who had lengthy careers with the corporation prior to their leaving. In September 1983, while still employed by Zemitzsch, the Defendants organized their own corporation, Harrison-Williams Fixtures, Inc. and contacted Zemitzsch’s biggest customer concerning the possibility of doing business with the new enterprise. On February 1, 1984, the Defendants informed the president of Zemitzsch of their resignations. Thereafter, Defendants began to solicit clients, including those of Zemitzsch. Zemitzsch filed suit based upon unfair competition. The trial court held that Harrison, who was an officer of Zemitzsch, breached his fiduciary duty as a corporate officer and his confidential relationship with Zemitzsch.
On appeal, the appellate court set aside the trial court’s rulings. In doing so, the Court recognized that the issue involved a balancing of two strong public policies, the protection of the established business and the encouragement of free competition. Ordinarily this balance heavily favors the start up business, but it can be upset by evidence of misconduct on the part of the individuals involved. The Court went on to state that customer contracts are protectable, but not under the theory of confidential relationship or trade secrets, and that the proper means of protection is a non-competition agreement.
As to the issue of a breach of fiduciary duty as a corporate officer, the key to this issue was the determination of where the fiduciary obligation ends and where the personal right of independent action begins. The Court found that although Harrison was a corporate officer his authority was limited and that unlike Opie Brush, Harrison was not a director or shareholder, nor did he possess any confidential information. Moreover, there was evidence that Harrison deferred corporate opportunities to Zemitzsch while still employed by Zemitzsch. Therefore, there was no breach of duty.
The holding of Zemitzsch indicates that, absent the use of confidential information, there is no unfair competition by former employees. Furthermore, customer contacts are not confidential information or trade secrets and the only way to protect a corporation’s interest in these contacts is to enter into a non-competition agreement with the employees.
Scanwell Freight Express STL., Inc. vs. Chan, et. al. (2005)
Scanwell Freight Express brought suit against a former employee for the breach of the duty of loyalty based upon actions taken by the former employee while still employed by Scanwell. The Defendant was the general manager of Scanwell’s St. Louis office. While still employed by Scanwell, Defendant made arrangements with one of Scanwell’s direct competitors to open an office in the St. Louis area. To this end, Defendant created a business proposal, arranged for the competitor to take over the premises of Scanwell’s St. Louis office upon the expiration of Scanwell’s lease, and failed to inform Scanwell of the lease’s imminent expiration date. Defendant resigned from Scanwell and one (1) month later opened the offices of the competitor, as the general manager. The competitor operated in the same premises that Scanwell previously occupied, employed most of the same employees as Scanwell, for a while even used the same telephone number, and acquired a number of Scanwell’s customers.
The Court in its opinion reiterated the basic premise that every employee owes his or her employer a duty of loyalty and must not act contrary to the employer’s interest. However, employees are allowed to compete with their then employer upon termination of the employment and may plan and prepare for their competing enterprise while still employed. There is a balance of the duty not to compete with the interest of promoting free competition, but a breach can be found where an employee goes beyond the mere planning and preparation and actually engages in direct competition.
The Court found that Defendant breached the duty of loyalty because while still employed by Scanwell, and at a time that Scanwell could have renewed its lease with the St. Louis landlord, Defendant negotiated and signed a lease for the Scanwell premises on behalf of Scanwell’s competitor. The Court stated that even slight assistance to a direct competitor can constitute a breach of the employee’s duty of loyalty.
As the above cases show, absent misappropriation of a trade secret or confidential information, or the existence of a restrictive covenant regarding post-employment conduct, an employee will not be enjoined from competition with his or her former employer. Further, an employee will be allowed to plan and prepare for such competition as long as the employee does not engage in direct competition until after the employment relationship is terminated. However, an employee who is also an officer and director of a corporation will be held to a higher standard than an ordinary employee.