Greenbaum, Rowe, Smith & Davis LLP
In This Issue:
- Dispute Resolution Symposium Focuses on Improving Business Performance By Managing Disputes »
- Implementing Work Life Policies While Avoiding Legal Pitfalls »
- The Legislature Expands Employer Liability Under CEPA »
- Supreme Court Expands Warranty Protection to Lessees »
- Raymond M. Brown Joins GRS&D as Chair, White Collar Defense & Corporate Compliance Practice Group »
- David A. Roth Joins GRS&D as Chair, Environmental Practice Group »
- Court of Appeals for the Third Circuit Holds that Computer Fraud and Abuse Act Provides for Civil Remedies »
- BUSINESS FOR BREAKFAST SEMINAR - A Continuing Seminar Series »
- Digging Deeper: What You Need to Know About the Recently Expanded Grantee Fee (Mansion Tax) and the New Transferee Tax »
- The Employee’s Common Law Duty of Loyalty — Combatting the Faithless Employee »
- 30 GRS&D Attorneys Honored by Legal Directories »
- Highlights »
The Employee’s Common Law Duty of Loyalty — Combatting the Faithless Employee
By Richard L. Hertzberg, Esq.
You just heard some unsettling news. After working for you for 20 years, your top salesman took a job with the competition. Since his loyalty was unquestioned, you never asked him to sign a restrictive covenant.1 No doubt, he will be calling on your long-time customers, trading on the relationships developed while working for you. Without a restrictive covenant in place, is there any legal recourse to combat the pirating of your customers?
While it certainly would be preferable to have a restrictive covenant in place, all is not lost. Although the unencumbered employee is free to take a job with a competitor, he must do so in a manner consistent with his duty of loyalty to you, his employer. If it can be demonstrated that before resigning his position, the employee was acting for the benefit of his soon-to-be employer, he may very well have violated that duty of loyalty. In addition, while the ex-employee is entitled to compete with his prior employer, he may not do so utilizing confidential material obtained in the course of prior employment.
Assuming an employee is not subject to a restrictive covenant, he is free to pursue employment elsewhere, even employment with a competitor. Subcarrier Communications, Inc. v. Day, 299 N.J. Super, 634 (App. Div. 1997). Thus, the employee is entitled to take reasonable steps to transition to a new job. Id. However, until he resigns his current position, the employee may not seek to direct business to his future employer. LaMorte Burns & Co., Inc. v. Walters, 167 N.J. 285 (2001). Nor may he gather confidential client information to use at his new position. Id.
What constitutes “confidential” material depends on various factors, including the nature of the industry and the efforts taken to preserve the secrecy of the information at issue. For example, in the wholesale setting, customer lists may not be confidential, since a salesman obviously will know and remember the identity and location of customers with whom he has dealt. Moreover, in this scenario, the identity of customers is easily ascertained and addresses can be located in the telephone book, on the internet, etc. However, in other types of business, such as specialty businesses, and/or consulting services, a customer list may be confidential, since the identity of potential customers may not generally be known. Id.
A similar analysis should apply to information which competitors can obtain about each other regarding prices, etc., sim simply by asking the customer or reviewing a competitor’s catalog. Such discoverable information is unlikely to be deemed confidential. However, in a business where prices are not advertised, and/or customers are not easily identified, information about prices, discounts received, and the like, may be confidential.
Knowledge gained by the employee over the course of his employment can be utilized by the employee in his new position. See, Subcarrier. An employee is not expected to erase his memory. However, such information must be known to the employee personally. For example, in LaMorte, the soon-to-be departing employees were found to have breached their duty of loyalty by photocopying customer files for use in the new business. While the LaMorte defendants were entitled to utilize their own knowledge and experience, they were not entitled to benefit from information belonging to the plaintiff that was not personally known to them.
Returning to the hypothetical, the company should investigate whether the departing employee sought to divert customers before he resigned, and whether he copied or retained materials proprietary to the company. If the employee uses proprietary information to compete against his former employer, there may be a basis for obtaining a Court Order enjoining such unfair competition. The ex-employee may also be liable for damages proximately caused by misuse of confidential information.
Clearly, success or failure of a suit against an ex-employee will turn on the specific facts relevant to the case. However, the employee’s duty of loyalty can play an important role in countering an ex-employee’s unfair competition.