Midwest Ink demonstrates that, even in the absence of a restrictive covenant, an employer has a claim for breach of fiduciary duty against an employee who engages in disloyal activities during the course of his employment. Such duties, however, are subject to the “preliminary stages” exception, which allows an employee to set up a competitive business while still working for his employer, as long as the employee does not begin any competitive activities before termination of the employment relationship, as illustrated in the next case.
In Radiac Abrasives, Inc. v. Diamond Technology, Inc., Radiac Abrasives, Inc. (“Radiac”) filed suit for breach of fiduciary duties against several former employees who formed a rival corporation. During their employment, Peter Mertens, Wesley Lindquist, and Bernard Brady (“Defendants”) discussed their dissatisfaction with Radiac and the possibility of forming a competing company, Diamond Technology, Inc. (“Diamond”). Thereafter, and prior to resigning, Defendants sold certain used Radiac equipment and machinery to a third party and then repurchased some of the machinery for use by Diamond. In addition, the Defendants leased a building; entered negotiations to obtain financing for Diamond; began test marketing Diamond wheel products; started manufacturing; sold some products to Radiac customers; and spent time at Radiac making or engraving products for sales by and for benefit of Diamond.
The court in Radiac Abrasives held that, absent a restrictive covenant, an employee has the right to enter into competition upon leaving his employment. Prior to leaving his employment, an employee may form a rival corporation and provide it with the necessary resources to begin business. It is only when the employee goes beyond preliminary competitive activities, such as, soliciting customers for such rival business and beginning business as a competitor, that the employee breaches his fiduciary duty to his employer. While the court in Radiac Abrasives found that some of Defendants’ actions may have constituted a breach of Defendants’ fiduciary duties, such as the selling of equipment to a third party with the intent to repurchase the equipment later, most of the activities were preliminary steps to the formation of Diamond and would not form the basis of a claim for breach of fiduciary duty.
Illinois law allows employers to bind employees to restrictive covenants that prevent employees from soliciting customers or revealing or using confidential information for a period of time after employment ends. To be enforceable, however, the restrictive covenants must, among other things, be designed to protect a legitimate business interest, rather than simply to prevent competition, and be reasonable.
The cases discussed in this article demonstrate the applications and limitations of claims for breach of fiduciary duties against non-officer, “at-will” employees, who are not bound by restrictive covenants. If you have any questions relating to the fiduciary duties of non-officer employees and what activities might constitute a breach of such duties, please contact a member of the firm.