By: Rob Harris
Common law recognizes that an employee owes a duty of loyalty to his employer, carrying with it an obligation of the employee to act solely for the employer’s benefit with respect to matters within the scope of employment. This legal concept sometimes comes into play when an employee intends to exit his employment and to compete with his employer. While courts recognize that an employee may take certain preparatory steps–e.g., devising a business plan, looking for office space, etc.–there are lines that cannot be crossed.
Recently, a federal court in Tennessee granted an employer a preliminary injunction with respect to three employees who terminated their employment with a refractory contractor and began working for a newly created competitor.
The refractory contractor’s allegations included a claim that the employees had breached their duty of loyalty, including by using the company’s golf club membership to entertain a prospective backer of the new venture. Bad form, no doubt, but was it legally problematic? The court thought so, finding that it breached the duty of loyalty owed by the employees.
As the court explained:
“Here, the Court must decide whether defendants, during the course of their employment, merely prepared to compete with plaintiff or whether they actually began competing with plaintiff. Plaintiff …shows that defendants entertained a prospective financial backer using plaintiff’s golf club membership, reviewed defendants’ employment contracts, recruited plaintiff’s customers to join defendants’ new venture, developed a company logo, compiled business figures and records, applied for insurance using plaintiff’s customer information, and acquired phones and laptops… Some of this activity would likely constitute mere preparation. For example, developing a company logo, discussing financials, and acquiring equipment are necessary activities for preparing a new business. However, entertaining a prospective financial backer using plaintiff’s golf club membership, using plaintiff’s customer data to apply for insurance, and using plaintiff’s sales figures to help develop an internal cost structure go beyond mere preparation.”