Employee Agreements, Protecting Trade Secrets: It's Not Personal, It's Just Good Business

Increasingly we see protections and benefits being provided to employees under the mandate of statutes or regulations.  The Affordable Care Act, Employee Retirement and Income Security Act, and Family Medical Leave Act are a few that have been added to older protections such as the Worker's Compensation Act gives the injured employee automatic medical and monetary relief but prohibits the worker from suing the employer for injuries.  Other benefits amount to a "safety net" for the laid-off employee but frees up the employer to reduce the labor force "at will" when the economy contracts.  Finally, some benefits are simply imposed because policy makers determine that this is what a just-and-civilized society should require.

With so much focus on these employee benefits, we sometimes forget that there are obligations that flow in the other direction.  Specifically, the employee is considered, in the legal sense, to be an agent of the employer.  The employee's duty will be limited to the defined scope of his or her work, but within that scope the employee is a fiduciary.  Essentially, that means that the employee owes to the employer a duty of care and a duty of loyalty.

So, How Stringent or Restrictive Is This Duty Of Loyalty?

Certainly, an employee cannot lawfully act to intentionally harm or sabotage the employer's business or transactions.  Likewise, a nearly universal rule is that an employee, especially an Officer of a corporate employer, cannot take for himself a business deal or opportunity that his or her employer would want.  But there is an interesting niche of case law involving employee responsibilities and a fact pattern that occurs with some frequency.  These are cases where an employee or a group of employees leave their jobs to start a business and compete with the former employer.  Invariably, the employees plan their departure and new business while still receiving paychecks from the original employer.  Can the original employer do anything to protect against this?

Spring Steels, Inc. v. Molloy, 400 Pa. 354 (1960) is an often-cited case that deals with the issue and is instructive.  Mr. Molloy was a vice president of Spring Steels, Inc., a manufacturing business in Philadelphia.  Without apparent warning, he resigned and set up a competing business four city blocks away, taking with him four key employees of Spring Steels, Inc.  Clearly, Molloy had conspired with these departing employees while they were all still employed by Spring Steels, Inc.  Steel Springs, Inc. sued, claiming that Molloy should be prevented from competing.

Justice Musmanno, writing for the Pennsylvania Supreme Court, questioned the morality of Molloy's tactics, but ultimately agreed that Spring Steels, Inc.'s case should be dismissed.  The reasons were simple:  There were no agreements in place restricting competition by these former employees from competing; there were no agreements restricting Molloy from soliciting other employees to work for him in a competing business; there was no evidence that Molloy had taken secrets concerning a manufacturing process; and, while customer lists had been taken, there was no evidence that such lists were developed from anything other than public sources.

Lesson Learned

Absent the taking of some trade secret or the commission of fraud/misrepresentation by these departing employees, and given the absence of restrictive agreements signed by the employees, they were free to go and could even plan their departure (and subsequent competition) while they were still in the employment of Spring Steels, Inc.  Spring Steels, Inc.'s failure to obtain relief is instructive.

Carefully drafted Employee Restrictive Covenant Agreements are enforceable when they are reasonable in terms of duration and geographic scope.  Also, identifying and protecting proprietary information about markets, customers, and processes can deter departing employees from taking that information and may form the basis for a court granting the kind of relief Spring Steels, Inc. was unable to obtain.