Recently, I read about a lawsuit brought against a high-level management employee and officer of a corporation who secretly started a competing business against his employer while still employed by the corporation.
NJ Will Punish an Employee Who Works Against Its Employer
New Jersey courts have found that if a management level employee secretly forms a competing corporation and starts competing against his/her employer while still working for his former employer, then the management employee may be liable for a breach of duty of loyalty to the employer which will also be imputed to the newly formed competing corporation.
In a recent case, a vice president/director and his wife formed two businesses while still employed at a technology company. One of these businesses was in direct competition for the same customers as their technology company. The other business sold equipment to their company for resale to other companies. Their employer had no knowledge that their own executive was competing with the corporation. A suit was brought against the defendants for unfair competition and breach of fiduciary duty. The defendants moved for summary judgment, arguing that there was no fiduciary duty owed to the former employer.
The court discussed New Jersey case law on “fiduciary duty” and stated that “a hallmark of a fiduciary relationship is one party’s placement of “trust and confidence in another.” This relationship is generally one where one party is dependent on the advice and service of another. This is a duty that management and directors customarily owe to their employees. Directors and officers of a corporation also have both a duty of loyalty to the best interests of their company and their employees.
The attorney for the defendants argued that the two new competing businesses had no fiduciary duty since they had no direct relationship with the former employer, only the employees had the connection, and so liability could not attach to the new corporation.
The court agreed that there was no direct fiduciary duty between the companies, but found that New Jersey courts had in similar cases,” imputed the conduct of the offending individuals to the corporation and held it liable for a breach of the fiduciary duty of loyalty.” Since proof of a breach of imputed fiduciary duty of loyalty involves an intensive inquiry into the facts and an inquiry as to whether the individuals utilized the corporate veil to facilitate a breach of duties, the court allowed the case to go to trial. In the end, the former employees and their new company lost.
Contact me personally today to discuss your business law matter. I am easy to talk to, very approachable, and can offer you practical, legal ways to handle your concerns. Please call Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Employment Law Attorney