In the previous installment, we focused on the ruling of Judge David Carter in the case of Mattel Inc., v. MGA Entertainment, Inc., in which he emphatically quashed notions of a general duty of loyalty owed by an employee towards his employer. In the final part of the series, we consider alternative remedies an employer may invoke against an employee that forms a rival business.
Alternative remedies for employers
One of the arguments against the notion of a common law duty of loyalty submitted by Judge Carter in Mattel was that plaintiffs should not attempt to make “kitchen sink complaints,” e.g., throwing in all conceivable causes of action without demonstrating a proper legal and factual basis for each one. Rather, lawsuits should be suitably focused on causes of action based on recognized legal wrongs.
The ruling, however, does not preclude employers from defending their legally protectable commercial interests using recognized causes of action, including:
Unlawful conduct. Employers with substantive evidence of a former employee’s unlawful conduct, such as misappropriating trade secrets, are not restrained from filing a claim.
Breach of fiduciary duty. In certain cases, an employee may breach a fiduciary duty to their employer — for example, setting up a rival business while working for the employer with the full intention of using the employer’s key contacts to successfully compete with them.
Breach of employment contract. Certain employment agreements may contain clauses restricting an employee from soliciting other employees for a certain period after leaving their position. In Loral Corp v Moyes, a one-year non-solicitation cause was found to be valid.
A duty of loyalty to support termination for cause
An employee engaging in competition with his or her employer likely creates a conflict of interest. California courts have long held that an employee getting involved with a direct competitor creates a serious conflict of interest, which constitutes good cause for termination of employment. Although Judge Carter clarified that a duty of loyalty does not exist as a basis for a claim in tort, the cases of Fowler v Varian Associates and Stokes v Dole Nut suggest that it may be a legitimate basis for termination.
Although not a precedential decision, Judge Carter’s ruling marries well with California public policy and is likely to be adopted by employee defendants and California courts. It encourages employers and attorneys to litigate prudently and is likely to have a lasting legacy on employment law.