HNW Business Law, Employment Law

What actions can be brought against a management employee and officer of a corporation who secretly forms a competing business while employed by the corporation?

New Jersey courts have found that if a management employee secretly forms a competing corporation, then the management employee may be liable for a breach of duty of loyalty to the employer which can also be imputed to the newly formed competing corporation.

In a recent case, a vice president/director and his wife formed two businesses while still employed at Vibra-Tech. One of these businesses was in direct competition for the same customer base. The other business sold equipment to Vibra-Tech. Vibra-Tech had no knowledge that one of their own executives was competing with the corporation. A suit was brought against the defendants for unfair competition and breach of fiduciary duty. The defendants moved for summary judgment, arguing that there were no fiduciary duties that the two companies owed Vibra-Tech.

The court discussed earlier New Jersey case law on fiduciary duty and stated that “A hallmark of a fiduciary relationship is one party’s placement of “trust and confidence in another.” This relationship is generally one of unequal terms, where one party is dependent on the advice and care of another. This is the duty that management and directors customarily owe their employees. Directors and officers of a corporation also have both a duty of care and/or a duty of loyalty to the best interests of the business entity. Competitors of a business entity contract in their own self interest and have no such fiduciary duty.

The attorney for the defendants argued that the two businesses of the defendant had no fiduciary duty since they had no direct relationship with the plaintiff.

The court agreed that there was no direct fiduciary duty between the businesses, but found that New Jersey courts had in similar cases,” imputed the individual defendants’ conduct to the corporation and held it liable for breach of the fiduciary duty of loyalty.”   Since the proof of a breach of imputed fiduciary duty of loyalty involves an intensive inquiry into the facts, and an inquiry as to whether the individual utilized the corporate veil to facilitate a breach of duties, the court denied summary judgment, since the facts before the court were either missing or disputed.

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