This post started as a “5 Things You Need to Know about The Duty of Loyalty,” however, the many lessons to glean from the Western Blue Print case out of Missouri in 2012 covered below caused a title change. So here are 5 thoughts on the often neglected Duty of Loyalty, and reasons why it should not be ignored or abandoned:
1. What is the Duty of Loyalty? The Duty of Loyalty is defined in numerous ways in varying contexts:
- Cornell University’s Legal Information Institute defines the Duty of Loyalty as follows: “The duty of loyalty stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict. The duty of loyalty can be breached either by making a self-interested transaction or taking a corporate opportunity.”
- Black’s Law Dictionary defines the adjective “loyalty” as a “faithfulness or allegiance to a person, cause, duty, or government.”
- Black’s Law [Free Online] Legal Dictionary defines the Duty of Loyalty as follows: “A legal requirement in certain systems where the BOARD OF DIRECTORS and executives must ensure that any action taken is done in good faith and with the best interests of shareholders in mind. A breach of duty of loyalty can lead to legal action by shareholders.”
- In pretty much every state, every employee owes a Duty of Loyalty to his or her employer.
- For a complete analysis of the Employee’s Duty of Loyalty in all 50 states, see Malsberger’s Employee duty of loyalty : a state-by-state survey. Also available via Amazon.
- The [Employee’s] Duty of Loyalty can negate a statutory right to wages, and some stout wage payment remedies, including trebled damages and attorneys’ fees. As stated in our supreme court’s favorite legal treatise at 14 S.C. Jurisprudence 32 (Labor Relations) (citations omitted):
- “Wage Payment Act provisions requiring employer to pay wages due to terminated employees do not supplant employee’s common-law duties of loyalty and fidelity to employer; if employee breaches duty of loyalty to employer by soliciting employer’s customers for competing company while working for employer, forfeiture of employee’s wages is appropriate.”
- For example, Judge Ralph King Anderson, Jr.’s South Carolina Requests to Charge provides a charge for Employment Contract – Breach of Duty of Loyalty jury as follows: “An employee is not entitled to any compensation for services performed during the period he engaged in activities constituting a breach of his duty of loyalty even though part of those services may have been properly performed.”
- Other states, for example, Missouri, provide the following regarding the Employee’s Duty of Loyalty: “Every employee owes his or her employer a duty of loyalty.” Interestingly, the Missouri Supreme Court in Western Blue Print Co., LLC v. Roberts (quoted above) held that the employee(s) in question did not owe their employer a fiduciary duty, and the plaintiff there ABANDONED its Duty of Loyalty claim in favor of the theoretically broader Fiduciary Duty claim. The distinction drawn in casting off the Fiduciary Duty claim was the fact that the scheming employee, Myrna Roberts, was not an officer or a director in the company, and apparently the court was not apt to expand The Fiduciary Duty to all employees. Perhaps because they could affirm the result on the tortious interference claim. It appears that the ABANDONMENT of the Duty of Loyalty claim, in hindsight, may have been a mistake, but could also have been part of a trial strategy as it is commonly believed that the Duty of Loyalty is subsumed within The Fiduciary Duty. Still further, the practical differences between the facts required to prove a tortious interference with contract and a Breach of the Duty of Loyalty are, arguably, minimal in this circumstance given Myrna’s employment contract.
- A similar interplay of legal duties is involved for attorneys representing insureds under a policy requiring the insurer to indemnify and defend the insured.
Any or all of the above aside, when a jury gets charged on the Duty of Loyalty, we believe their instincts will inform them as to what it means. However the duty may be defined or charged, expect that the factfinder will understand very well the concept as one that is not likely to be twisted by knaves. They will be thinking about their Labrador Retriever that licks their face every morning and sits by their side every night loving them, and barks to warn of any change in circumstances at the house.
It may not be that the jurors can define loyalty, or even care to, but like Justice Potter Stewart / Alan Novak on hard-core pornography, they “know [disloyalty] when they see it.” The jury will not need Carrie Underwood to understand and decide if the accused defendant was “stand[ing] by” the plaintiff or merely or merely pretending.
2. In what context does the Duty of Loyalty most often arise? The great thing about writing a blogging piece and titling it as “The X Things You Need to Know,” is the blogger can offer themselves “softball” questions. But is this really a softball question? Does the duty arise most often in breaches by employees-to-their-employers or by fiduciaries-to-their-beneficiaries, as in the recently reported Tibble v. Edison Int’l case decided by the U.S. Supreme Court, a/k/a SCOTUS, or by Boards of Directors? Certainly the effects of the latter two breaches can be far reaching and impact many employees or shareholders.
3. How does the Duty of Loyalty interact with other legal duties? As noted in our previous “spectra” post, the Duty of Loyalty along with the Duty of Reasonable Care are generally considered to be embodied within The Fiduciary Duty. The Duty of Loyalty could also embody the same duties of confidentiality as provided for in a non-disclosure agreement. As noted above in the Western Blue Print case from Missouri, the Duty of Loyalty, in certain circumstances can be considered separate from The Fiduciary Duty. A key distinction worth noting is that an employee is often free to plan to compete with his or her employer if they chose to resign, however, by taking specific action to plan for competing with his employer while still employed there, they may well be subject to viable claims for breach of the Duty of Loyalty, trade secret theft, etc.
4. Who Can be Sued for Breach of Loyalty? In South Carolina, as provided in the 1972 case Lowndes Products v. Brower, our supreme court held that not just the disloyal employees, but also third-parties that knowingly aided-and-abetted the employees in their breach of loyalty were liable to the plaintiff, Lowndes Products. So the claim for breach of loyalty may not be limited only to the disloyal employees. Interestingly, in Lowndes, the supreme court affirmed the refusal of the trial court (and the master) of plaintiff’s claim for misappropriation of trade secrets because it found reasonable steps were not taken to protect the trade secrets, however, the court noted, “An employee has a duty of fidelity to his employer apart from the question whether he has an obligation to maintain the employer’s processes and system of operation in confidence.” It is not clear what the difference is, if any, between claims against the third-parties for: (i) aiding-and-abetting a breach of loyalty, and (ii) intentional interference with contract (employment contract).
5. How Does the Duty of Loyalty Arise in E.R.I.S.A. / 401(k) Litigation? In the above-referenced Tibble decision, the SCOTUS held that the 401(k) Plan fiduciaries owe the plan participants a Duty of Care in selecting and arranging for the plan’s administrative fees associated with purchasing the same shares from different channels (e.g., retail versus institutional shares). Specifically, the Court held the plan fiduciaries breached their legal duties to the plan participants by allowing retail funds to be available at a much higher per transaction cost to the plan participants, thus reducing the participants’ available investment funds. The court noted evidence in the record that it was customary to simply ask for a reduction in the institutional fee or for a waiver of the mandatory minimum transaction charges. Such a failure by the plan fiduciaries could fall under the category of a breach of the Duty of Care (i.e., not diligent in evaluating and selecting plan options), but could also, in certain circumstances, could constitute a breach of the Duty of Loyalty. For example, suppose that the party recommending the particular investment option had other arrangements with the party earning the higher sales commission? The Duty of Loyalty differs from the Duty of Care in that its adds the duty of disclosure (transparency) and also the duty to undertake to both avoid and disclose conflicts of interest.
Whether your analysis of the ever-present Duty of Loyalty arises in the context of: (i) employment relationships; (ii) publicly traded board-member-to-shareholder duties; (iii) as a member of an LLC or other closely held corporation; (iv) ERISA plan fiduciaries of defined contribution 401(k) plans; or (v) otherwise, knowledge of the duty, its breadth and nuances, and situations in which it has been consistently applied by the courts can be critical to the success (or failure) of your cases.
And remember, don’t ABANDON this duty in your individual obligations, or when you get your case to the jury. In the 1972 Lowndes Products case referenced above the Duty of Loyalty was used to save what was considered a trade secret misappropriation case. In the Western Blue Print case from 2012, the Court there allowed a tortious interference claim to save what was likely considered primarily a Breach of Loyalty case. These two cases illustrate very well why your pleadings should include all available options for relief (and defenses) for your clients.