A matter of trust: 4 ways to defend against employee disloyalty

North Carolina, like many states, recognizes that employees owe a certain level of duty to their employers. However, the North Carolina Supreme Court has specifically rejected any independent liability for breaching such duty.

In its 2001 Dalton v. Camp decision, the Supreme Court addressed a troubling situation. B. Dalton & Co. had a contract with a furniture company to publish its employee newsletter. David Camp was the Dalton employee in charge of the account.

After the publishing contract expired, but while Dalton was still publishing the newsletter, Camp quietly formed a competing publishing company, negotiated on the side to win the furniture company’s business and then resigned from Dalton.

The North Carolina Supreme Court held that there is no independent cause of action in North Carolina for an employee’s breach of his duty of loyalty. It held that a breach of the duty only served as a defense in a wrongful discharge claim.

So, what can an employer do to prevent an employee from taking business in such a way?

1. Seek early protection

One way for an employer to create an enforceable duty of loyalty is through employment contract language like this:

“The Employee agrees to devote to the business of the Company the Employee’s best efforts and time during all working hours. During the continuation of this Agreement, the Employee will not actively engage in any business for the Employee’s own benefit and will not accept any employment whatsoever from any other person, firm or corporation, without the prior written approval of the Company.”

In addition, properly drafted noncompete covenants, nonsolicitation covenants or confidentiality agreements can protect employers from disloyal acts and competitive transgressions. Noncompetition or nonsolicitation covenants typically prohibit employees from engaging in certain competitive activities while still employed and for a period of time following termination.

Confidentiality agreements prohibit employees from making use of defined company information. Confidentiality agreements are particularly useful, as they do not require the same scrutiny courts give noncompete and nonsolicitation covenants.

2. Watch specific employees

North Carolina courts have broadly defined a fiduciary relationship as one where an employee “in … good conscience is bound to act in good faith and with due regard to the interests of the employer.” An employee who has a fiduciary relationship with an employer owes a fiduciary duty to that employer. North Carolina does not recognize a cause of action for breach of the duty of loyalty, but it does recognize a cause of action for breach of a fiduciary duty—a duty to act in good faith and with due regard to the interests of the employer.

North Carolina statutes impose fiduciary duties on corporate directors, corporate officers who have discretionary authority and managers of limited liability companies. Those individuals may not compete with their employers while employed, may not divert corporate opportunities to themselves and may engage in transactions that involve conflicts of interest only under limited circumstances.

3. Beware trade secret theft

Certain disloyal conduct may be so egregious that it constitutes a legal wrong above and beyond a breach of the duty of loyalty.

The North Carolina Trade Secrets Protection Act prohibits employees from misappropriating for their own use (or for the use of others) an employer’s or former employers’ trade secrets. Trade secrets are:

“business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: (a) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The North Carolina Unfair and Deceptive Trade Practices Act might come into play. For example, in Sara Lee Corp. v. Carter, a 1999 case before the North Carolina Supreme Court, the employer sued an employee for fraudulent conduct that was outside of the scope of the employee’s work.

The court, in allowing a claim under the Unfair and Deceptive Trade Practices Act, found that the employee owed fiduciary duties to the employer, that the employee was entrusted with purchasing computer equipment for the employer at the best possible prices, that the employee formed several computer companies while actively concealing his involvement with those companies from his employer and that the employee schemed to sell computer equipment from his companies to his employer at inflated prices, reaping a $300,000 windfall.

4. Foster loyalty

Treating employees with loyalty and respect can increase the likeliness that they will do the same.

There’s no guarantee that taking any or all of these steps will eliminate employee disloyalty. But there’s every incentive for employers to try.