California Court affirms employee's duty of loyalty

In a decision released on December 22, 1995, a California Court of Appeals ruled that maangerial employees can be fired if they take active steps to set up a business in competition with their employer.

Case Excerpts

As Fowler and the other decisions cited above reflect, an employer has the right to expect the undivided loyalty of its employees. The duty of loyalty is breached, and may give rise to a cause of action in the employer, when the employee takes action which is inimical to the best interests of the employer. But an employer is not required to retain an employee while awaiting the commission of a tort. "'It would be monstrous to hold that the master was bound to retain the servant in his employment after he has thus voluntarily put himself in an attitude hostile to his master's interests.'" (Puritas Laundry Co. v. Green (1911) 15 Cal.App. at p. 660.) Thus, an employer is entitled to be concerned with conflicts of interest among its employees regardless whether an employee has engaged in an actual and provable wrong. It is a "self-evident truth, as trite and impregnable as the law of gravitation" that "a person cannot serve two masters simultaneously." (Thomson v. Call (1985) 38 Cal.3d 633, 637; Stockton P. & S. Co. v. Wheeler (1924) 68 Cal.App 592, 601.) An impairment of judgment can occur in even the most well-meaning employee when his or her personal interests are affected. (Stigall v. City of Taft (1962) 58 Cal.2d 565, 570.) Accordingly, an employer's right to undivided loyalty is compromised when an employee's outside activities give rise to a possibility of personal influences. (Id. at p. 569; see also Thomson v. Call, supra, 38 Cal.3d at p. 648.) The point at which an employee's outside activities warrant termination is dependent upon the particular circumstances of the case with appropriate deference to the exercise of managerial discretion.

We have set forth previously the facts of this case and need not repeat them here. Based upon these facts we agree with the trial court that Dole had sufficient cause for terminating plaintiffs' employment. Plaintiffs were managerial or supervisorial level employees. They, and particularly Embrey, had access to confidential company information. Extensive acts had been performed by them, or by their agents on their behalf, toward the objective of establishing a competing business. The documents they produced in support of their efforts to establish the competing business show that they understood they would be in competition with Dole and that they intended to rely upon the "key contacts" they had made through their employment with Dole in competing successfully with it. Under these circumstances Dole could properly conclude that it would be difficult, or even impossible, for plaintiffs to pursue Dole's interests with undivided loyalty. It was not necessary for Dole to wait to see whether they would engage in actual tortious misconduct; their outside activities had progressed to the point that conflicts of interest compromised Dole's right to their undivided loyalties. This was sufficient cause for termination.

Information here is correct at the time it is posted. Case decisions cited here may be reversed. Please do not rely on this information without consulting an attorney first.