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Fiduciary duty owed by co-owner and employees / breach of that duty
October 15, 2020
Fiduciary duty owed by co-owner and employees / breach of that duty
            While I have recommended that you have a formal Employment Agreement with your employees, not all have heeded the advice.  Without contractual protection what recourse might you have against an employee who runs afoul of your expectations?  The posed question is curious enough to roust suspicion. The issue for today concerns employees who decide to commence competing while still ostensibly working for you.
            I am again reminded of what a client said to me a long time ago, that if his technicians were stealing his material and his time he didn’t want to know about it as long as they continued to do their job satisfactorily.  Not all of you have that philosophy.  
            An insurance agency sued two former employees complaining that they did just that, setting themselves up in business while still working for the agency.  The employer sued and the lower court dismissed the action, but the appellate court reinstated several of the causes of action asserting various theories of law.  
            Breach of fiduciary duty:  A breach of fiduciary duty is defined as taking an action for one’s own improper personal benefit that is not in the best interests of the party to whom a duty is owed.  A member of an LLC or a director or officer of a corporation owes a fiduciary duty to the LLC or corporation.  An employee owes a duty of good faith and loyalty to an employer in the performance of the employee’s duties and an employee may breach his fiduciary duty to the employer by improperly using the employer’s time and resources to form a new business and promote themselves while still working for the employer.            
            In this case the court noted that an insurance agency’s customer list is generally not considered a trade secret, and here there was no restrictive covenant prohibiting the former employees from competing with the agency.  Of course YOU CAN GUARD AGAINST THIS BY USING THE EMPLOYMENT AGREEMENT.  But let’s continue with the case analysis.
            There was sufficient evidence that the employee copied large files of client information from the work computer and before resigning from his employment and from the board of directors [there were two employees] solicited customers.  The appellate court found that the former director breached his fiduciary duty and that the former employee aided and abetted the breach of the fiduciary duty; the court found both liable.
            Unfair competition:  To establish a claim based on unfair competition you must demonstrate that the defendant wrongfully diverted the plaintiff’s business to itself.  IN THE ABSENCE OF A RESTRICTIVE COVENANT an employee may freely compete with a former employer unless trade secrets are involved or fraudulent methods are employed.  Unfair competition encompasses the principle that one may not misappropriate the results of the skill, expenditures and labors of a competitor.
            In this insurance agency case there was sufficient evidence that the employees copied information from the business records including customer contact information and information regarding the customer’s insurance policies and they solicited the customers.  This, the court found, demonstrates they engaged in unfair competition.
            So how does this translate to alarm company members, directors, officers and employees?  It’s likely that the customer list will not be deemed confidential, though the information regarding each customer would be confidential.  [Also, this assumes no written restrictive covenant that includes a customer list].  Believe it or not, your business records contain very valuable information and you would not want a competitor who intended to actively and aggressively use that information to steal your business to have access to that information.  Wrongful competition is messy and aggravating, as well as costly to prosecute.  Do yourself a favor and get all your employees to sign an Employment Agreement; one day you may thank me.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301