Competing while still employed breaches duty of loyalty

By Jay M. Presser

Published in the SHRM Court Report, June 2005

Regardless of whether a non-competition agreement is in force, both an employee and a
new employer may be liable for damages to a former employer if the employee actually
engages in direct competition while still employed, the Supreme Court of Missouri has
held.

Many jurisdictions have held that employees have a common law duty of loyalty to their
employers. This duty, which is based on the principal that no one can serve two masters,
forbids employees from engaging in certain activities that can harm their employer while
they remain employees.

Stevie Chan was the general manager of the St. Louis office of a freight forwarding
business, Scanwell Freight Express. He did not have an employment contract, and had
not signed a non-competition agreement. After several years Chan decided that he would
go to work for one of his employer’s direct competitors, Dimerco Express.
While still Scanwell’s employee, Chan supplied Dimerco with confidential information,
including Scanwell’s air freight rates and customer lists. He also provided more detailed
information about certain key customers.

Chan had previously negotiated, on behalf of his employer Scanwell, a facility lease with
a renewal date of Dec. 1, 2000. By the time the lease renewal date was approaching,
Chan had decided to switch jobs and work for Dimerco, which at the time had an office
in St. Louis.

Chan not only failed to remind Scanwell’s corporate office that the lease renewal was
approaching, he negotiated for that very facility to be leased to Dimerco while he was
still on Scanwell’s payroll. Chan signed a new facility lease for Dimerco before giving
Scanwell notice of his resignation. As a result, Scanwell lost its facility, and individuals
who subsequently arrived at the facility expecting to do business with Scanwell were
greeted by Chan and other former Scanwell employees now working for Dimerco.

When Scanwell learned of this conduct, it brought a civil action against both Chan and
Dimerco. A jury found for Scanwell, and awarded $54,000 in damages from Chan and
just over a quarter of a million dollars from Dimerco. The defendants appealed.

A 1966 decision by the Missouri Supreme Court found that all employees owe a duty of
loyalty to their employer. However, in that case, the court also noted that employees were
free to agree among themselves to compete with their employer. That right brought with
it a corollary right to plan and prepare for their new competitive adventure, even while
still employed. In the 1966 case, the court distinguished between conduct that would
constitute “planning and preparing” from conduct that constituted actual direct
competition and, therefore, a breach of the duty of loyalty.

The Missouri Supreme Court had no difficulty deciding that the dissemination of
confidential information and the covert negotiation of a lease that effectively displaced
his current employer were activities that exceeded mere planning and preparing and,
since they were done while still employed by Scanwell, were breaches of Chan’s duty of
loyalty.

Unfortunately for Scanwell, however, the jury instructions left it unclear whether the jury
had relied only on Chan’s conduct or if they also had improperly considered activities
that might fall in the category of planning and preparation. Therefore, a new trial, with
clearer instructions, was ordered.

Scanwell Freight Express STL Inc. v. Chan and Dimerco Express (U.S.A.), Mo., No.
SC 86022, April 26, 2005.

Professional Pointer. Of course employers can attempt to protect themselves by seeking
to have key employees sign non-competition agreements, agreements that prohibit the
disclosure of confidential information and agreements that limit the right to solicit
employees to join a new venture. However, as this case shows, even when no such
agreement exists, there are limits on what an employee can do while still employed. An
employer that loses a key employee to its competitors may want to check the former
employee’s records, computer files and e-mail logs to make sure that while employed the
former employee had not been “serving two masters.” For a detailed discussion of a
hiring employer’s obligation not to interfere with the legal interests of a job applicant’s
current and former employers, see the Legal Trends column in the February 2005 issue
of HR Magazine.

Jay M. Presser is an attorney with the firm of Skoler, Abbott & Presser PC in Springfield
and Worcester, Mass., an affiliate of Worklaw Network.