New Jersey Supreme Court Holds that Employees Breach Their Duty of Loyalty by Taking "Affirmative Steps" in Preparing for Their Future Employment with a Direct Competitor

The Employment and Labor Law Alert
(The Employment and Labor Law Department)
October 19, 2001

The Supreme Court of New Jersey, in Lamorte Burns & Co. v. Walters, 167 N.J. 285 (2001), recognizing the duty of loyalty in the workplace, held that former employees, while working for their former employer, breached that duty by taking "affirmative steps" in planning and preparing for their future employment with a direct competitor. While still employed, the former employees stole client contact information (e.g. names, addresses, phone and fax numbers and claim information) from the firm's files to create their own client contact list and compete with the employer immediately upon their resignation. The court ruled in favor of the employer, holding that these competitive acts against the employer violated the employees' duty of loyalty.

The duty of loyalty is owed by an employee to an employer and "consists of certain very basic and common sense obligations." This duty exists even without a covenant not to compete or confidentiality agreement. Essentially, an employee cannot act against the employer's interest while working for that employer, nor can he/she compete with their current employer. Under New Jersey law, an employee has the right to prepare and plan for future employment, even planning a competing business. The employee, however, cannot engage in "secret competition" through affirmative acts that injure the former employer's business while they are still employed by that company.

In Lamorte, the New Jersey Supreme Court further clarified the common law duty of loyalty, which it highlighted in its previous decision in Cameco Inc. v. Gedick, 157 N.J. 504 (1999). In Cameco, the Court held that the "egregiousness of the employee's conduct may affect the determination of both the commission of a breach [of loyalty] and the appropriate remedy." The Cameco Court made the distinction between an employee aiding a direct competitor as compared to assisting an "indirect or minimal" competitor. The Court further held that an employee breaches his duty of loyalty if he assists a direct competitor in a manner that injures his current employer. An employee, however, may have to provide "substantial assistance" to an indirect competitor to violate the duty of loyalty.

Faced with the issue of what constitutes sufficient "assistance" of a direct competitor to be a breach of the duty of loyalty, the Lamorte Court rejected the employees' argument that there was no breach because they did not solicit the employer's clients until after they resigned. The Court held that taking protected information from the employer's claim files "by stealth" and creating a separate client contact list for future competitive solicitation is sufficient assistance of a direct competitor to constitute a breach of the duty of loyalty. Such acts are "affirmative steps" of direct competition that go beyond the mere planning for future employment.

Employers should not construe the Lamorte decision as lessening the value of covenants not to compete or confidentiality agreements. For instance, the Lamorte Court also stressed that when a court determines whether a breach of loyalty has occurred, it must consider many factors, including the existence of a covenant not to compete. The Court held that "the employee's level of trust and confidence, the existence of an anti-competition contractual provision, and the egregiousness of the conduct are important factors to consider in the analysis." Therefore, employers should still use covenants not to compete and confidentiality agreements, because these agreements will make an employee's breach of the duty of loyalty more evident. These agreements can also set more specific standards of conduct than are provided by common law -- standards that could prevent such misconduct from occurring in the first place. Employers should consult with employment counsel when drafting such documents.