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Do mere employees owe their employers a duty of loyalty?

—Danielle S. McKinley

While acting as an agent or employee of another, one owes the duty of fidelity and loyalty.  There has been debate whether mere employees (non-officers) owe such duties to their employer.  Illinois courts have held that employees can be held liable for breach of fiduciary duties, however they are held to a different standard for fiduciary duties than corporate officers.  Enterprise Recovery Systems, Inc. v. Salmeron, 401 Ill.App.3d 65,80, 340 Ill.Dec. 113,126, 927 N.E.2d 852 (2010).  Generally, an employee owes a duty to their employer not to directly compete with their employer while still employed.  Under Illinois law, the duty of loyalty requires that an employee act solely for the benefit of the employer in all matters related to their employment.  That said, employees are not prohibited from ever competing with their employer. You cannot prohibit competition in a free economy and doing such would contradict the “American Dream.” An employee’s duty of loyalty, however, restricts the extent of their competitive activities prior to their resignation.

In Illinois, the timing of an employee’s arguably competitive behavior is important.  Exhibit Works Inc. v. Inspired Exhibits, Inc., 2005 U.S. Dist. LEXIS 34909 at 7.  Illinois has adopted the “preliminary stage doctrine” which permits an employee to plan, form and outfit a competing corporation while still working for the employer so long as he does not commence competition.  Id.  An employee is held accountable for breaching his fiduciary duty (of loyalty) when they go beyond such preliminary competitive activities and commences business as a rival concern while still employed.  Id. However, absent a restrictive covenant (an agreement in an employment contract not to do certain things, usually an agreement not to compete), an employee does have a right to enter into competition with their former employer immediately upon leaving such employer.  Radiac Abrasives, Inc. v. Diamond Technology, Inc., 177 Ill.App.3d 628,637-638, 126 Ill.Dec. 743,748, 532 N.E.2d 428 (1988).  The key distinction is whether or not the employee begins to take certain actions that directly compete with their employer’s business while still employed.

So what happens when you realize your employee (or former employee) has been forming a competing business or moving to a competing company while still employed by you? If an employee takes active steps to compete with their employer prior to their resignation you may have a claim for a breach of duty of loyalty.  Examples of active steps, or activities that extend beyond preliminary activities, include:

  • Diverting potential clients to a competing business;
  • Taking their employer’s customer lists for their own use (Courts have held that lists of customers compiled in the course of business are valuable assets and protected against improper use by employees who have gained knowledge of them by virtue of their employment);
  • Soliciting fellow employees to join new employer; and
  • Taking employer’s property or information (including trade secrets) for their own benefit or benefit of their new employer.

Keep in mind that employees are permitted to engage in preliminary activities such as:

  • Purchasing equipment, machinery, uniforms and other supplies for their new position or company;
  • Creating letterheads, business cards or business plans for their new position or company (courts have even gone so far as to hold that creating these documents on their former employer’s computers did not rise to the level of a breach of duty);
  • Obtaining trademark registration; and
  • Incorporating their competing business.

If you believe your employee has breached their duty of loyalty you may be entitled to certain remedies. In order to state a claim for breach of fiduciary duty you must allege that: 1) a fiduciary duty exists; 2) the fiduciary duty was breached and 3) such breach proximately caused your damages. If you are successful with your breach of fiduciary duty claim, you may be entitled to the following:

  • Money damages, including lost profits and punitive damages;
  • The right to withhold the employee’s unpaid commissions;
  • Injunctive Relief (a remedy in place of monetary damages, specifically a court order for the employee to stop a specified act or behavior);
  • Disgorgement of wrongful gains (giving up profits gained from the breach)
  • A Constructive trust to collect the profits received by the employee as a result of the breach; and
  • Recovery of bonuses paid during the time period in which the employee breached their duty.

It should be noted that the fiduciary of duty as it pertains to employees varies from state to state.  Although the Illinois courts have made clear certain actions are considered active steps to compete against your employer, this topic is still evolving and you should contact an attorney to discuss whether you believe your employee has taken active steps. Further, Illinois’ employment laws are constantly changing and it is important to have your employment contracts and restrictive covenants reviewed annually by an attorney to ensure they are compliant with these laws.

The information in this article is for informational purposes only and does not constitute formal, legal advice.  Contact Danielle S. McKinley or Patrick J. Keating Roberts McGivney Zagotta LLC if you would like to further discuss the duties owed by employees to their employers and recommendations for protecting your business.