Things were looking pretty good for your sandwich shop chain. You had expanded into a new market, set up some catering contracts and hired a good manager for your new shop. You were even thinking about taking a little time off for a trip to the Caribbean to work on that tan. Then … the manager leaves, the store’s marketing files cannot be found and the little start-up sandwich shop next door — not coincidentally run by your old manager — gets the new major catering contract you had been bidding for. The vacation’s canceled and you are in damage control mode. You are furious but do not know what you can do.
On the other hand, what if you are the store manager? You find yourself passed over for raises the last couple of years, you see the profit that your employer has made off of your hard work and you know you can do better on your own! However, using your skills and knowledge will result in competing with your employer. What can you do?
Variations on this scenario play out every day between employers and employees. Courts have to balance the legitimate interests of the business owners against the legitimate interests of the employees. We have previously addressed an employee’s duty of loyalty (Employee’s Duty of Loyalty, September 16, 2005) and covenants not to compete (Non-Compete Agreements and the Competitive Advantage: Where Do You Fit In?, September 26, 2011), which we recommend you review. Without a written covenant not to compete, employers and employees have to turn to common law principles to determine their respective rights and obligations on and leading up to termination and separation from employment. A recent case out of the Missouri Court of Appeals, Western District, discusses these issues with a clarity that is worth noting.
In Western Blue Print Company, LLC v. Roberts, an employee was sued for, among other things, breach of fiduciary duties, breach of the duty of loyalty and tortious interference with a business expectancy. She was hired as a division vice president of a document printing and management company. While still employed with her employer, Western Blue Print Company, she set up a corporation to which she subcontracted work, she solicited Western Blue Print’s employees to quit their jobs and join her new business, deleted and/or took Western Blue Print’s business files and, shortly after formally quitting, used that advantage to outbid her employer for a significant contract.
An Employee’s Duty of Loyalty and Fiduciary Duties
All employees have a duty of loyalty to their employer. That loyalty is balanced against the right to compete with their old employer once the employment relationship has ended. In finding that balance, courts have held that employees may, during the course of employment, plan and prepare to compete with their employer. The employee is limited to planning and preparation: If the employee goes beyond mere planning and begins competing with the employer, including soliciting the employer’s customers, he or she has breached that duty of loyalty.
While employees have a duty of loyalty to their employer, it’s less clear whether they have broader fiduciary duties to their employer. While the duty of loyalty is a part of what’s referred to as fiduciary duties, it is not the sole fiduciary duty. Fiduciary duties are sometimes framed as a special relationship of trust between the principal and its agent. A fiduciary must “fully disclose all material facts to the principal to strictly avoid misrepresentation, and in all respects act with the utmost good faith. In short, the duty of loyalty prevents an employee from competing with the employer while the employment relationship persists; the fiduciary duty requires the agent to be honest and faithful to the principal in all respects.”
The court in Western Blue Print further held that, without more, mere employment does not create a fiduciary relationship between the employer and employee. However, when there is a special or “peculiar trust” between the employer and the employee, and that employer has entrusted confidence and control over a significant portion of the employer’s affairs, a fiduciary relationship may be inferred. Courts have long held that officers and directors have fiduciary duties to their company, but the court in Western Blue Print went further and held that an employee may be held to be a fiduciary if he or she is a de facto officer or director over a significant portion of the employer’s business. In short, whether the employee has broader fiduciary duties to the employer will depend on the particular facts of the case and how essential or “key” that employee was to the business’ operations. If such a fiduciary relationship is established, then a higher standard of conduct will be required of that employee.
Tortious Interference With Business Expectancy
Tortious interference with business expectancy is a related, but separate, claim. A company may bring a tortious interference claim when there is (1) a contract or valid business relationship or expectancy; (2) the defendant has knowledge of the contract or relationship; (3) intentional interference by the defendant causes a breach of that contract or relationship; (4) there is an absence of justification; and (5) there are damages resulting from the defendant’s conduct. The two elements most commonly litigated are whether (1) there is a valid business expectancy (particularly when there is not an active contract), and (2) whether there is justification for the interference.
In the case of a sandwich shop bidding for a catering contract, it can be difficult to prove that there is a reasonable business expectancy — merely hoping to have a catering contract or business relationship is not enough. In the case of Western Blue Print, the employer was able to produce testimony from the third-party bidder that Western Blue Print would have gotten the contract if not for the actions of the employee.
Courts have held that there is no justification when a former employee acts with “improper means.” Means are improper if they involve acts that are independently wrong, such as threats, violence, trespass, defamation, misrepresentation of fact, restraint of trade or any other wrongful act recognized by statute or the common law. In other words, a past employee can, of course, compete with his or her prior employer for contracts in the future, but if the employee does so in connection with wrongful acts, such as breach of the duty of loyalty or breach of fiduciary duties, the loss of such contract could result in a tortious interference claim.
So what about the sandwich shop owner and her manager? As with most legal issues, the answer depends on the factual details. How essential was the manager? What actions did the manager actually take while he was employed? Did the manager have duties with regard to bidding out contracts? How likely was the owner to obtain that contract? On the other hand, if the manager is careful with planning his departure, the manager can minimize his risk of having to defend himself and his start-up business in court. In other words, it just depends upon the facts of the case. Some facts provide a brighter line than others.