Employees Owe Duty of Loyalty to Their Employer

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January 12, 2010

Many states in the nation have adopted laws that address an employee’s duty of loyalty to his or her employer. Wisconsin courts have generally taken a restrictive view on such a duty. However, the courts have applied it to officers of a company and employees who hold positions that involve policy making. Recently, the Wisconsin Court of Appeals clarified that Wisconsin’s doctrine applies to “key employees” as well. According to the Court, “key employees” are those employees whose job responsibilities are of such a nature, with respect to an employer’s business, that they could be used to harm the employer.
I. Facts.
In InfoCorp, LLC v. Hunt, 2007AP2887 (12/8/09), an employee, Christopher Hunt, worked as a salesman for InfoCorp (“InfoCor”). InfoCor was an authorized reseller of technologically advanced chalkboards, projectors, and other audiovisual products purchased by schools. Hunt had a strong relationship with a school district organization, Cooperative Educational Service Agency 2 (“CESA”), one of InfoCor’s customers.
Hunt subsequently approached another company, Tierney Brothers, with regard to working for that company. Hunt then arranged a meeting for Tierney Brothers with CESA, which CESA’s manager understood to be an effort to have Tierney Brothers become an authorized reseller to CESA. Tierney Brothers subsequently hired Hunt on September 18, 2006. However, Hunt did not resign from his employment with InfoCor until January of 2007. During this time period, Hunt sought to divert sales from InfoCor to Tierney Brothers. When Hunt resigned from InfoCor, Tierney Brothers became an authorized reseller and CESA terminated its relationship with InfoCor.
InfoCor filed suit against Hunt and Tierney Brothers alleging, among other things, that Hunt had breached his duty of loyalty to InfoCor and that Hunt and Tierney Brothers had conspired and tortuously interfered with its business relationship with CESA. The lower court dismissed all of InfoCor’s claims except its claim that Hunt had tortuously interfered with customer relationships prior to his resignation (i.e., by trying to divert business to Tierney Brothers). The lower court concluded that a cause of action for breach of loyalty to an employer only applied to employees who were officers of a company or policy makers. InfoCor appealed the lower court’s dismissal of its breach of loyalty, conspiracy, and tortious interference with business relationships claims to the Wisconsin Court of Appeals.
II. Court Ruling.
On appeal, the Court of Appeals disagreed with the lower court’s conclusion that only officers or policy making employees owe a duty of loyalty to their employer. The Court noted that prior cases had established that there are “key employees” whose job responsibilities are of such a nature, with respect to an employer’s business, that they may be used to harm the employer and, if such employees do harm their employer during the course of their employment through the exercise of those responsibilities, the employer has a common law remedy for breach of employees duty of loyalty. The Court further stated:

Whether an employee has such responsibilities as an agent of the employer to create a duty of loyalty must of necessity be determined in the context of the employer’s business and the specific role the employee plays in that business. As we have seen, case law demonstrates that for an employee who is not an officer or director, the status of “key employee” is determined by the specific job responsibilities and the harm to the employer resulting from misuse of those responsibilities.

The Court of Appeals concluded that, based upon the record before it, a fact finder, such as a jury, could conclude that Hunt’s duties with InfoCor made him a “key employee” and, therefore, he had created a common law duty of loyalty to his employer in relation to the exercise of his duties. It also found that the evidence could support a finding that Hunt, while still employed by InfoCor, used his authority at InfoCor to divert business from InfoCor by withholding customer orders until he joined Tierney Brothers and that he also actively attempted to shift business (e.g., CESA business) from InfoCor to Tierney Brothers. The Court ruled that, for those reasons, the lower court’s dismissal of InfoCor’s claims was improper, and it remanded the case back to the lower court for further proceedings.
III. Impact on Wisconsin Employers.
The Court’s clarification of the extent of an employee’s duty of loyalty to his or her employer provides protections for an employer when an employee takes action which competes directly with the employer or undermines the employer’s operations. In light of the Court of Appeals ruling, employees who qualify as “key employees” will owe a duty of loyalty to their employer. A “key employee” will include policy makers and company officers. However, they can also include employees who have job responsibilities that are of such a nature that they can be used to harm their employer. The status of a “key employee” falling into this category will be determined by the employee’s specific job responsibilities and the harm caused to the employer resulting from the misuse of those responsibilities. Such employees could include, for example, those employees who have been provided with confidential information and have caused harm by disclosing it.
If you have questions regarding the above, please contact any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.

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