Noncompete News: Is The Duty Of Loyalty Dead In California?

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Much to the chagrin of many business owners, California courts have consistently favored open competition and employee mobility, and will not enforce noncompete and nonsolicitation agreements that govern an employee's post-employment activities. Despite this, employers have taken comfort in the fact that California law recognizes that an employee owes a "duty of loyalty" to his or her employer during the term of employment. Although only a handful of cases have discussed the subject, courts have found a breach of the duty of loyalty to support an affirmative defense to a wrongful termination claim and have suggested that an employee may be liable for any resulting damages under a tort theory of liability.

Unfortunately, an employee's "duty of loyalty" has been turned on its head by the recent decision of a federal trial court in California. In Mattel, Inc. v. MGA Entertainment, Inc., the court held that "[i]n California, there is no tort for 'breach of duty of loyalty' that is distinct from the recognized tort of 'breach of fiduciary duty'. The fiduciary relationship is a prerequisite to the existence of a duty of loyalty." The court noted that imposing a duty of loyalty upon all employees would ignore the "consistent safeguards upon employee mobility and the freedom to work in the State of California."

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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