Employee loyalty debt can fill a void in a non-compete agreement

Employee loyalty debt can fill a void in a non-compete agreement

New Jersey is one of several states seeking to restrict the use of non-competition agreements or more commonly “non-competes.” What many employers and employees don’t realize is that the common law duty of loyalty can often fill the void.

Common Law Duty of Loyalty in New Jersey

New Jersey employment law has long-recognized the duty of loyalty, which means that an employee must not act contrary to the employer’s interest while he or she is still employed. During that period of employment, an employee also has a duty not to compete with his or her employer. Accordingly, an employee may breach the duty of loyalty by soliciting the employer’s customers or engaging in other acts of secret competition regardless of whether they are an at-will employment or even have an employment contract that does not specifically prevent such acts.

In  Cameco, Inc. v. Gedicke, 157 N.J. 504 (1999), the New Jersey Supreme Court held that an employer may prove a prima facie case of an employee’s breach of the duty of loyalty not only by showing that the employee directly competed with the employer while employed, but also by showing that the employee – while employed – assisted the employer’s competitor. In evaluating an employee’s conduct under the breach of the duty of loyalty standard, the employee’s level of trust and confidence, the existence of an anti-competition contractual provision, and the egregiousness of the conduct are important factors to consider in the analysis. 

Under New Jersey common law, employees are permitted to accept employment with a rival or establish a competing business, once they are no longer employed. In Lamorte Burns & Co. v. Walters, 167 N.J. 285 (2001), the New Jersey Supreme Court clarified where to draw the line between simply preparing to compete and an actionable breach of loyalty. According to the state’s highest court:

Before the end of his employment, [the employee] can properly purchase a rival business and upon termination of employment immediately compete. He is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer’s business.

Recent Pennsylvania Court Decision

A recent court decision highlights how the duty of loyalty can come into play. In AmQuip Crane Rental LLC et al. v. Crane & Rig Services LLC et al., a Pennsylvania appeals court held that a former employee breached the duty of loyalty in the absence of a formal non-compete.

The case involved four employees who resigned from AmQuip Crane Rental LLC (AmQuip) to go work for a rival startup company, A Crane Rental LLC. AmQuip subsequently filed an action against the former employees, alleging breach of contract, tortious interference with business relations, breach of common law duty of loyalty and civil conspiracy.

One of the employees, Thomas Newell, did not sign any non-competition, non-solicitation or confidentiality covenants. While still employed with AmQuip, Newell told AmQuip’s customers that a new crane rental company would be opening, offered to assist them in transferring their business to the new company, and emailed Ansco, AmQuip’s largest customer, about setting up the new company as a vendor. According to court documents, Newell also emailed, from his AmQuip email address to his home email address, a quote template that AmQuip used. ACrane subsequently used the quote form with its own name and logo on the top but with AmQuip locations, including its Trevose headquarters location, on the bottom.

In the absence of a formal non-compete, the Pennsylvania court held that held that Newell breached his common law duty of loyalty to AmQuip by diverting AmQuip’s customers to ACrane while still employed by AmQuip. “Without AmQuip’s knowledge or consent, and before leaving AmQuip, Newell induced AmQuip’s customers to move their business to ACrane, a clear violation of his duty of loyalty,” the court wrote.

The court also found that Newell breached the duty of loyalty by inducing his co-workers to breach the non-competes that they entered into with AmQuip. “Newell breached his duty of loyalty by helping other AmQuip employees—Graham, Bruu and Rainey—breach their own noncompetition covenants by leaving AmQuip and joining ACrane,” the court explained. “The evidence demonstrates that before Bruu and Rainey left AmQuip, they convened with Newell to meet ACrane’s principals to discuss employment at AmQuip. And before leaving AmQuip, Newell forwarded AmQuip’s price template to an intermediary, who in turn forwarded it to Bruu.”

Key Takeaway for NJ Employers and Employees

As highlighted above, the duty of loyalty can have significant implications for employees leaving a business, as well as business owners. It is particularly relevant for employees who did not have a non-compete provision in their employment agreement and are accused of stealing customers and/or revealing confidential information in advance of leaving.  While it is still recommended that employment agreements contain provision to prevent competition and solicitation, the duty of loyalty also provides additional assistance to employers.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Scott Heck, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.