Friday, August 1, 2008

Employees: Duty of Loyalty

As part of its commitment to client education, Gross & Romanick publishes articles on its website relating to its various practice areas--including Business Law.

Reprinted below is a recent article about duty of loyalty and non-competition clauses.


Your top salesperson has just given you a two-week notice of resignation. When you discuss this problem with another employee, you learn for the first time that your top salesperson has already set up a competing company based upon copies of your files and solicitation of business from your clients. To compound the problem, several of your key personnel quit within days of your top salesperson; you learn that they are joining this new competitor. What can you do? Well, a recent case in the United States District Court for the Western District of Virginia may provide some help.

In National Legal Research Group v. Latham, the court, in an unusual ruling, enjoined a former employee from soliciting or communicating with clients of the firm for two years after resignation. Furthermore, the former employee was charged with actual damages caused to the former employer, as well as punitive damages, even though the offending employee had no written contract. This case could be a significant aid to employers seeking to enforce the so-called "Duty of Loyalty" that binds all employees.

Non-Competition Clauses

Of course, sales people should sign employment agreements containing restrictive covenants, which prevent them from copying confidential materials or competing upon termination of employment. However, such covenants are rarely executed because of the fear that excellent employee candidates may refuse employment on this basis.

To be enforceable, Virginia law generally requires that non-competition clauses be reasonably necessary for the protection of the employer, and not impose undue hardship on the employee. If the clause prevents the employee from competing in a limited geographical area or for a limited period of time, a court will generally uphold the agreement. If the clause has no such limits, courts will often find the restriction to be impermissibly overbroad and unenforceable. Since non-competition clauses are, in general, a restraint on free trade, a court will carefully examine the agreement and construe the clause, where possible, in favor of the employee.

Duty of Loyalty

Despite the failure to include a restrictive covenant in an employment agreement, the law implies an agreement on the part of the employee to faithfully serve an employer. In addition, an employee is a fiduciary with respect to information learned during the course of employment.

Virginia Trade Secrets Act

The Virginia Trade Secrets Act, Virginia Code §59.1-336 may prevent former employees from using information for which the company took reasonable steps to keep secret. This Virginia Code Section was the basis for the court's ruling in the National Legal Research Group v. Latham case.

Protect Yourself

Restrictive covenants in employment agreements are the best method for protecting your trade secrets and preventing competition from former employees. Nevertheless, you may have a case under the Virginia Trade Secrets Act if you take reasonable steps to protect your important trade secret information. Establish written procedures: inform your employees of what materials are considered protected and under what limited circumstances these materials may be utilized.