This is the opening installment of a three-part series discussing legal claims brought by employers against employees whom they claim breached a duty of loyalty. In this series, we consider the duty of loyalty in terms of California public policy, and the significance of the case of Mattel, Inc. v. MGA Entertainment, Inc.
When an employee resigns in order to create a rival business, an employer often feels betrayed. After all, in the mind of the employer, the employee should have been devoting full efforts and attention towards the success of the employer’s business, not planning a new venture to potentially steal away customers. If the employer discovers that the employee actually breached the terms of employment by using the employer’s resources to develop the rival business, this may give rise to a lawsuit alleging several causes of action. Typically, the causes of action include misappropriation of trade secrets, breach of fiduciary duty and breach of an assignment of inventions clause.
Duty of loyalty and California public policy
Another cause of action often relied upon in such situations is breach of the duty of loyalty that an employee owes to his or her employer. However, it would appear that notions of such a duty conflict with a clear policy found in both California statutes and case law, expressly supporting the right of an employee to compete directly with a former employer:
The California Business and Professions Code voids agreements that restrict a person from entering into any kind of lawful business, trade or profession.
California courts have held that an employee is allowed to plan and even incorporate a business that is designed to compete with their employer’s business — even while he or she is still employed.
These appear to suggest that where an employee is competing with their employer, as long as their conduct has not otherwise been unlawful, the employer has no cause of action under a breach of the duty of loyalty.
In the next installment, we consider the opinion of Judge David Carter on the duty of loyalty in Mattel v. MGA.