• Federal Jury Awards Employer $2.17 Million In Breach Of Employee Duty Of Loyalty Case
  • July 20, 2010 | Authors: Dennis J. Buffone; Cami L. Davis; Barry R. Elson; Jeffrey R. Gordon; Kurt A. Miller; Robert H. Shoop; Richard V. Sica
  • Law Firms: Thorp Reed & Armstrong, LLP - Pittsburgh Office ; Thorp Reed & Armstrong, LLP - Princeton Office ; Thorp Reed & Armstrong, LLP - Philadelphia Office ; Thorp Reed & Armstrong, LLP - Pittsburgh Office
  • A common belief among employers is that, without non-competition agreements, they have no legal basis to prevent employees from competing against them. A recent jury verdict in the United States District Court for the Western District of Pennsylvania, however, demonstrates that employers have certain common law and statutory protections against unfair competition by employees and former employees, even in the absence of non-competition agreements.

    In Crown Coal & Coke Company v. Compass Point Resources LLC, James H. Hoyt, and Courtenay O. Taplin, Civil Action No. 2:07-cv-1208 (W.D. Pa.), the plaintiff, Crown Coal & Coke Company (“Crown Coal”), was a Pittsburgh company that is engaged in the business of selling coal, coke, and other raw materials, on behalf of coal producers and coke manufacturers. Crown Coal hired Defendant, Courtenay O. Taplin, in 1989, and hired Defendant, James H. Hoyt, in 1998. Taplin and Hoyt worked for Crown Coal as sales representatives, out of a sales office in Willoughby, Ohio. They had no non-competition agreements with Crown Coal.

    In 2004, Crown Coal entered into an oral agreement with Colcarbon C.A. S.I. (“Colcarbon”), a Colombian manufacturer of coke for use in the steel industry. Under that oral agreement, Colcarbon agreed to use Crown Coal as Colcarbon’s exclusive agent for the sale of Colcarbon coke in North America, and to pay Crown Coal a commission of $5.00 for each ton of coke that Crown Coal sold on behalf of Colcarbon. Gordon Reid, a Crown Coal Executive Vice President, secured the oral agreement with Colcarbon, and initially was Crown Coal’s principal sales representative for the sale of Colcarbon coke. In 2005, Reid experienced health problems, and Taplin and Hoyt assumed primary responsibility for the Colcarbon account. Reid retired from Crown Coal in September 2006.

    In November 2006, less than two months after Reid’s retirement, Taplin and Hoyt began discussing, with Colcarbon, the possibility that Taplin and Hoyt would resign from their employment with Crown Coal, and that Colcarbon would utilize Taplin and Hoyt, rather the Crown Coal, as Colcarbon’s sales agent. Taplin and Hoyt did not inform Crown Coal that they were engaging in these discussions with Colcarbon, and did not report to Crown Coal that its sales agency relationship with Colcarbon was in jeopardy. Taplin and Hoyt incorporated a new business, Compass Point Resources LLC (“Compass Point”), in January 2007, and Compass Point entered into a seven-year written sales agency agreement with Colcarbon in April 2007. Under its sales agency agreement with Colcarbon, Compass Point agreed to charge Colcarbon commissions of between $1.00 and $3.00 per ton, based on the amount of Colcarbon coke that Compass Point sold. Compass Point also agreed to allow Colcarbon to share in Compass Point’s profits.

    In May 2007, approximately one month after Compass Point entered into its written sales agency agreement with Colcarbon, Taplin and Hoyt resigned from Crown Coal. Crown Coal learned of Taplin’s and Hoyt’s formation of Compass Point and of their diversion of the Colcarbon sales agency relationship, through the discovery of emails which Taplin had sent to Colcarbon from a home computer, copies of which he had sent to Hoyt at Hoyt’s Crown Coal email address.

    After discovering the Defendants’ actions, Crown Coal sued Taplin and Hoyt for breach of fiduciary duty of loyalty, and sued Taplin, Hoyt, and Compass Point for tortious interference with Crown Coal’s business relationship with Colcarbon, violation of the Pennsylvania Uniform Trade Secrets Act, and civil conspiracy. On May 27, 2010, a jury returned a verdict in favor of Crown Coal on each of its claims against Taplin and Hoyt, and on Crown Coal’s claim against Compass Point for tortious interference with Crown Coal’s business relationship with Colcarbon. The jury awarded Crown Coal damages in the amount of $2,169,960, including $1,213,439 in compensatory damages and $925,000 in punitive damages. The $2,169,960 verdict amount also included $23,641 and $7,880 that the jury concluded that Taplin and Hoyt, respectively, were required to repay Crown Coal for salary, commissions, benefits, and other compensation that Crown Coal had paid to them during the period of time when they were in breach of their duty of loyalty.

    The jury’s verdict in the Crown Coal case suggests the following pieces of practical advice for employers:

    1. Although employees have the legal right to make arrangements to compete with their employer while still employed, an employee’s engaging in actual competition while still employed constitutes a breach of the employee’s fiduciary duty of loyalty to his or her employer. Breaches of this duty include soliciting or diverting customer or supplier relationships while still employed, or utilizing the employer’s confidential business information or resources in order to establish a competing business.

    2. Employers have common law and statutory protections against unfair competition by their employees, even in the absence of non-competition agreements.

    3. Juries may be willing to award substantial damages against disloyal employees and their new employer, depending on the egregiousness of the employees’ breach of their duty of loyalty.

    4. Employees, especially sales representatives, who are compensated based on revenues that they generate often will not leave an employer to go to work for a competitor, without having secured a commitment from customers to continue to buy from the employee or to continue to use the employee’s services. Employees who solicit, encourage, or obtain these customer commitments while still employed may be in breach of their common law duty of loyalty.

    5. While the common law and statutes protect employers against unfair competition by employees even in the absence of a non-competition agreement, an employer’s best protection against unfair competition is a reasonable, carefully-drafted, properly-implemented non-competition agreement.