Tuesday, March 2, 2010

Do you know? The duty of loyalty: illegal competition vs. legal preparation


There are right ways and wrong ways for an employee to leave your company. Just because an employee is not subject to a noncompetition agreement does not mean that he or she cannot be liable for mistakes made on the way out the door. In fact, each and every employee owes his or employer a duty of loyalty up to the moment he or she ceases employment.

Your employee may prepare to compete against you while still in your employ without violating this duty of loyalty. There are many reasons why an employee may choose to prepare to compete while still employed. Some need the income provided by ongoing employment. Some want a degree of certainty that their new competitive venture will be ready to operate. Some may derive an eventual competitive advantage from continued association with their present employer (such as knowledge of pricing or business plans, or ongoing associations with key employees, customers, and vendors).

There are certain steps that an employee can legally take to prepare to compete without violating this duty of loyalty, even while still employed and even if done stealthily:

  • Incorporating the new firm.

  • Arranging for space and equipment.

  • Securing financing.

  • Making future business plans.

But, those preparation are subject to certain legal limits while still employed. The duty of loyalty prohibits employees from doing any of the following while still your employee:

  • Using your property (computers, for instance) to prepare to compete.

  • Using confidential information or trade secrets to prepare to compete.

  • Starting the competing operation.

  • Soliciting employees or customers for the new enterprise.

  • Holding back business opportunities or diverting them to the new enterprise.

What can you do to prevent employees from engaging in these illegal activities? Consider these 6 ideas.

  1. Require that key employees sign noncompetition agreements.

  2. Consider requiring a wider subset of employees sign non-solicitation agreements.

  3. Have all employees sign confidential information and trade secret policies, or, at a minimum, incorporate these policies into your employee handbook.

  4. Incorporate statements about employee loyalty into the handbook.

  5. Do not accept notice periods upon resignation for any employee who you think is a risk to compete.

  6. Consider forensic examinations of computers and email accounts for any employee you reasonably believe was engaging in unlawful conduct during his or her employment.

These tips will not magically transform a disloyal employee into your lap dog. They will, however, place you in a position to hold the disloyal employee accountable for his or her actions.


Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus. For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or jth@kjk.com.

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