Articles/Publications

Loyalty Duties for Corporate Executives

By J. Jordan Scott

In certain circumstances, an effective non-competition agreement can help protect company assets and interests. However, the law recognizes some protections that exist even outside of a signed agreement. A recent Massachusetts appellate court case, AGERO, INC. v. RUBIN, addressed some of these protections. Agero involved a company suing two former employees who were alleged to have taken confidential information from their employer to start a competing business. One of the employer’s claims was that, in the absence of a contractual obligation, the employees still owed the company a “duty of loyalty” that prevented the employees from leaving the company with confidential information to start a competing business.

The law has long recognized that employees occupying positions of confidence and trust owe a duty of loyalty to that employer, which requires the employees to protect the employer’s interests. Employees subject to the duty of loyalty are not mere common employees who are easily replaceable. The courts will only impose such a duty on high-ranking executives and individuals with access to truly sensitive, proprietary information. This includes officers and directors although the individuals in question need not be officers and directors to trigger the duty (corporate directors are also subject to other legally imposed duties beyond the scope of this article).

The duty of loyalty means such employees are bound to act solely for their employer’s benefit during their employ, and among other things are barred from actively competing with the employer during the term of employment. Access to confidential information can also trigger the duty of loyalty, but such confidential information must be of high value and truly confidential, meaning the employer has taken measures to protect the information.

In Agero, the trial court sided with the employees, and that decision was upheld on appeal. Although the courts acknowledged the duty of loyalty argument, the employees in question were not subject to the duty. The two employees were best categorized as “rank and file,” both answering to higher level managers and lacking the authority to move forward on the projects discussed in the suit. Further, the information the employees possessed had minimal value and was not particularly secret.

There are a few takeaways from Agero. Even absent contractual agreements, high-ranking employees are still legally bound to loyalty to their employer. However, only employees occupying positions of trust and confidence will be bound by such a duty, so employers should consider non-competition agreements for lower-ranking but still valuable employees, assuming that employers can demonstrate legitimate business interests. Finally, merely labeling information as “confidential” does not necessarily make it so; the information must be truly valuable and affirmative steps must be taken to preserve its secrecy. Employers should still seek to have non-competition agreements with high-level employees, but even absent such an agreement, employers may still have recourse against a rogue former executive. Under either scenario, employers should contact a Massachusetts employment attorney to maximize their protection. 

 

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