Every employee owes a duty of loyalty to his or her employer under Illinois law. That means that the employee must act in the best interests of his or her employer at all times, and refrain from competing with his or her employer while employed. Corporate officers, however, are held to a higher standard of loyalty. They may not actively exploit their own positions within the company for their own benefit or hinder the ability of the corporation to pursue the business in which it is engaged.
These issues frequently arise in the context of a former employee seeking to compete with his or her former employer. Absent an enforceable restrictive covenant, Illinois law provides a former employee may compete with his or her former employer. Former corporate officers, however, can be held liable for transactions consummated by them that were initiated during their former employment or for transactions consummated based upon information acquired during their former employment.
Illinois courts have held that an employee does not need to hold the title of corporate officer to be held to this higher standard of loyalty, and, thus, broader legal exposure for potentially competitive activities. (While beyond the scope of this article, please know the converse is also true: nominally holding the title of “officer” does not automatically mean that an employee is held to a higher standard of fiduciary duty.) The employee may owe a greater fiduciary obligation to his former employer if his or her duties were “substantially intertwined” in corporate operations, or he or she held himself or herself out as a corporate officer, or previously exercised corporate powers.
These were the issues addressed by the court in the recent Illinois case of Exhibit Works v. Inspired Exhibits. In that case, four individuals, namely, the general manager of the office, account manager, account coordinator, and creative designer, none of whom signed any form of non-competition agreement, were fired when their employer learned they were planning to form a competitive entity. The employer sought to douse their competitive effort by maintaining that these persons, although not vested with an officer title, owed fiduciary duties equivalent to those of a corporate officer because they held management responsibilities.
The court reviewed the evidence and found that the four individuals were middle level managers whose duties were not “substantially intertwined” with their employer’s business, but limited in scope; they did not represent themselves to others as corporate officers; they did not take any benefits indicative of corporate authority; and did not exercise the authority of an officer while employed. Hence, the court ruled these individuals were free to compete with their former employer.
Exhibit Works, the former employer in the case, could have strengthened its position vis-a-vis its employees if it had imposed a corporate policy requiring all employees to sign a non-competition agreement when they were hired. Such a prohibition, even if unenforceable, is often a sufficient psychological deterrent to former employees to prevent competitive activities.
Please do not hesitate to contact us if you are an employer and want to protect your business from unfair competition, or if you are an employee or corporate officer and desire to know the extent of your loyalty obligations to your (about to be) former employer.