Employees Owe Your Business A Duty Of Loyalty

California employers, did you know your employees owe you a duty of loyalty?  In California, there is not much you can do to prevent your employee from leaving to work for your competitor.  But while they are employed, they owe you a duty of loyalty and once they leave they cannot use your trade secrets to compete against you.

A recent California trade secrets and unfair competition case underscores these points.

Vice President Competes Against Own Employer While Employed

While still employed, high ranking employee responsible for operations wrote a business plan for a direct competitor.  Employee then obtained bank loan for competitor.  Employee disparaged his current employer to the bank in the process.   Employee also wrote favorable terms into customer contracts allowing easy termination of the contracts, which customers switched over to competitor once employer quit and became employed by competitor.  Employee quit.  On the way out, employee “took” 1000s of pages of employer’s documentation, refused to return it, and went to work for competitor.

Sound familiar to any of you?  Anyone think this conduct is ok?  Only the employees who do this kind of stuff probably think it’s just peachy.

Employer sued former employee and former employee’s new employer, the competitor, for misappropriation of trade secrets, unfair competition, interference with business relationships, breach of contract and conversion (legalese for “stealing”) of the employer’s documents.

Trial Court Rules In Favor Of Employee!

The trial court dismissed the employer’s unfair competition, interference with business relationships, breach of contract and conversion claims.  The trial court left only the trade secrets misappropriation claim.  The case went to the jury and the jury found there were no trade secrets.  Therefore employer lost.

Appellate Court Reinstates Violated Employer’s Claims

Employer appealled the trial court’s dismissal of the unfair competition, interference with business relationships, breach of contract, and conversion claims.  Appellate court agreed with employer and ruled the trial court wrongfully dismissed those claims before trial.

Lessons Learned

While we may never know the ultimate outcome of the case, the good news for this employer is it got a second bite at the apple.

Other employers are not so fortunate.  Trade secret and unfair competition claims are very difficult to prosecute against employees who take your “stuff” to compete against you.  California employment law protects the “free mobility” of employees to leave and work for your competitors or start a business to compete against you.

This strong public policy is contained in Business and Professions Code section 16600.  That law says any contract that restrains anyone from engaging in a lawful profession, trade or business is “void,” as in invalid like it never existed.  This has been interpreted very broadly and trade secrets law very narrowly to frustrate businesses, small, medium and large, that have built up value through their ingenuity and hard work.

To have a prayer of protecting your “trade secrets” your business must first must have information that is defined by law to be a “trade secret.” A trade secret is information that has “independent economic value . . . from not being generally known to the public or to other persons who can obtain economic value from its disclosure and use” that is the “subject of efforts that are resonable under the circumstances to maintain its secrecy.”  Customer lists can be a trade secret in certain circumstances and often are the center of a trade secret/unfair competition dispute.

If you feel your small/medium business has trade secrets you must take steps “reasonable under the circumstances” to protect them.  That includes having your employees sign trade secret, non-disclosure, and/or proprietary rights agreements upon hire and possibly reminding  them in writing of their obligations upon departure.

While employees may engage in certain activities while still employed in preparation of leaving, they still owe a duty of loyalty to you until they leave, cannot use your trade secrets against you at any time, and cannot steal your company documents on the way out.