FACTS: The most common fact pattern is usually generally as follows: The employer finds out that a former employee created a competing business. The Employer loses clients/customers to the former employee’s new competing business. As a result, employer accuses employee of breaching his/her fiduciary duties to the company.
NOTE: This analysis puts aside the possible breach of contract claims the employer might have against the employee arising out of a non-solicitation agreement or non-compete agreement. For the purposes of this discussion, we’re assuming there is no non-solicitation or non-compete agreement.
The first question is whether an employee even owes a fiduciary duty to their employer. The answer is a resounding “yes”. Employees owe a duty of good faith and loyalty to their employer in the performance of their employment duties. (See Wallack Frgt. Lines v. Next Day Express, 273 A.D.2d 462, 463, 711 N.Y.S.2d 891; Mahuson v Ventraq, Inc., 118 AD3d 1267, 1269 [4th Dept 2014]; Lamdin v. Broadway Surface Adv. Corp., 272 N.Y. 133, 5 N.E.2d 66; CBS Corp. v. Dumsday, 268 A.D.2d 350, 353, 702 N.Y.S.2d 248; American Map Corp. v. Stone, 264 A.D.2d 492, 492–493, 694 N.Y.S.2d 704; Maritime Fish Prods. v. World–Wide Fish Prods., 100 A.D.2d 81, 88, 474 N.Y.S.2d 281; 30 FPS Prods., Inc. v. Livolsi, 68 A.D.3d 1101, 1102, 891 N.Y.S.2d 162).
However, this does not mean that an employee cannot create their own business, even a competing business, prior to leaving their employer. An employee can incorporate a competing business prior to leaving their employer unless the employee makes improper use of the employer’s time, facilities, or proprietary secrets in doing so. (See Wallack Frgt. Lines v. Next Day Express, 273 A.D.2d at 463, 711 N.Y.S.2d 891; CBS Corp. v. Dumsday, 268 A.D.2d at 353, 702 N.Y.S.2d 248; Chemfab Corp. v. Integrated Liner Tech., 263 A.D.2d 788, 790, 693 N.Y.S.2d 752; Schneider Leasing Plus v. Stallone, 172 A.D.2d 739, 739, 569 N.Y.S.2d 126; Maritime Fish Prods. v. World–Wide Fish Prods., 100 A.D.2d at 88, 474 N.Y.S.2d 281; 30 FPS Productions, Inc. v Livolsi, 68 AD3d 1101, 1102 [2d Dept 2009]; Schneider Leasing Plus v. Stallone, 172 A.D.2d 739, 741, 569 N.Y.S.2d 126 [1991], lv. dismissed 78 N.Y.2d 1043, 576 N.Y.S.2d 211, 582 N.E.2d 594 [1991] ); Don Buchwald & Assoc., Inc. v Marber-Rich, 11 AD3d 277, 278 [1st Dept 2004]; Beverage Mktg. USA, Inc. v. South Beach Beverage Co., Inc., 58 A.D.3d 657, 658, 873 N.Y.S.2d 84).
What about soliciting the employer’s customers/clients? The answer depends on when. In general, an employee may solicit an employer’s customers but only when the employment relationship has been terminated. See A & L Scientific Corp. v. Latmore, 265 A.D.2d 355, 356, 696 N.Y.S.2d 495; Catalogue Serv. of Westchester v. Wise, 63 A.D.2d 895, 405 N.Y.S.2d 723); Is. Sports Physical Therapy v Burns, 84 AD3d 878, 878 [2d Dept 2011].
However, even where the employment relationship has been terminated, the former employee may be liable for soliciting his prior employer’s customers if the prior employer’s customer list could be considered a trade secret, or there was some wrongful conduct by the employee, such as physically taking or copying files or using confidential information, or secretly pursuing and profiting from an opportunity properly belonging to his employer. See Starlight Limousine Serv. v. Cucinella, 275 A.D.2d 704, 705, 713 N.Y.S.2d 195; see Walter Karl, Inc. v. Wood, 137 A.D.2d 22, 27, 528 N.Y.S.2d 94; see also Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 391–392, 328 N.Y.S.2d 423, 278 N.E.2d 636.
That being said, the use of information about an employer’s customers which is based on casual memory is not actionable. (See Levine v. Bochner, 132 A.D.2d 532, 533, 517 N.Y.S.2d 270; see Anchor Alloys v. Non– Ferrous Processing Corp., 39 A.D.2d 504, 507, 336 N.Y.S.2d 944; see also Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 328 N.Y.S.2d 423, 278 N.E.2d 636); Is. Sports Physical Therapy v Burns, 84 AD3d 878, 878-79 [2d Dept 2011]).
If you can show that an employee engaged in “improper means” to build his competing business while acting as an employee, then the employee should have to account to the employer for his secret profits AND forfeit his right to compensation for services rendered by him if he proves disloyal. See Mar. Fish Products, Inc. v World-Wide Fish Products, Inc., 100 AD2d 81, 88 [1st Dept 1984].
