Tcl - the Duty of Loyalty and Preparations to Compete - November 2005 - Labor and Employment Review
| Publication year | 2005 |
| Pages | 61 |
| Citation | Vol. 34 No. 11 Pg. 61 |
2005, November, Pg. 61. TCL - The Duty of Loyalty and Preparations to Compete - November 2005 - Labor and Employment Review
November 2005
Vol. 34, No. 11 [Page 61]
Labor and Employment Review
The Duty of Loyalty and Preparations to Compete
by Kevin Allen, Jennifer Shlatter
This column is sponsored by the CBA Labor Law Forum Committee to present current issues and topics of interest to attorneys, judges, and legal and judicial administrators on all aspects of labor and employment law in Colorado.
Column Editor:
jhusband@hollandhart.com
About The Authors:
This article summarizes the current status of Colorado law regarding the duty of loyalty and permissible preparations to compete by employees, and the practical implications of advising employees and employers pertaining to such preparations.
Employers frequently face the possibility of employees resigning and going to work for a competitor. Occasionally, employees leave their current employer to start a competing business, and additional employees might accompany them in leaving the current employer to join the new business venture. To properly advise employees who are planning such a departure, attorneys must be mindful of the balance between the right of employees to pursue their livelihoods and the right of employers to avoid injury as a result of the opportunistic behavior of departing employees.
For example, consider the scenario of employees who leave an employer to start a competing business. The employees may rely on their skills and knowledge of the industry to start the rival enterprise. They may investigate potential markets, locations, and financing. While still employed, they also may obtain financing, purchase or lease a building for the new business, prepare and file articles of incorporation, acquire business cards and stationery, and install a fax and phone line. To elevate the stakes even more, the employees may make and receive calls on their cellphones relating to the new venture during business hours. They may discuss with current clients or co-employees the possibility of joining the new business. All of the above actions by the employees are done to prepare for the day they leave their current employment, and in an effort to immediately commence operations of the new business.
Colorado law provides that employees owe the employer a duty of loyalty and must not, while employed, act in a manner that is contrary to the employer's interests.1 However, employees need not wait until the morning after the employment terminates to begin preparing to compete with the former employer.2 The issue that often arises in such cases is determining at what point the preparations to compete become a breach of the duty of loyalty owed to the employer.
Despite the importance of the duty of loyalty and high stakes in drawing the line between permissible preparatory conduct and actionable disloyalty, this area of law has garnered relatively little detailed analysis in Colorado. As a result, courts, attorneys, and clients must deal with uncertainty when confronted with the nebulous area of "preparations to compete."
This article examines the current status of Colorado law regarding permissible preparations to compete, and the practical implications of advising employees pertaining to such preparations. After discussing the relevant case law, this article presents guidelines for advising clients who are planning to solicit customers, prepare new businesses, and resign from their current employment in a group.
The Genesis of the Duty of Loyalty
When approached by a client facing the above issues, there are few Colorado cases to which an attorney can turn. Practitioners representing such clients should be familiar with Jet Courier Service, Inc. v. Mulei,3 ("Jet Courier") and its progeny.
The Jet Courier Case
In the Jet Courier case, the plaintiff was an air courier company based in Ohio that supplied a specialized transportation service to customer banks. Jet Courier provided air and incidental ground courier service to carry canceled checks for the banking system. In 1981, Jet Courier established Denver operations. In February of that year, Mulei was hired to manage the Denver operations.
Before commencing employment with Jet Courier, Mulei worked for another air courier service in a management capacity and had worked in the business for several years. He also had numerous business connections in the banking industry in Denver and other cities. As a condition of his employment, Jet Courier required that Mulei execute an employment agreement containing a non-competition covenant, whereby Mulei agreed not to compete with Jet Courier for two years after termination, with no geographic restriction.
During his employment, Mulei became progressively dissatisfied with Jet Courier and, as a result, began to look for other work in the air courier field. In the course of seeking other employment opportunities and while still employed by Jet Courier, Mulei investigated setting up another air courier company that would compete with Jet Courier.
Mulei's pre-termination actions consisted of: (1) speaking and meeting with a Kansas air charter operator who was in the business of supplying air transportation services to discuss starting a partnership; (2) meeting with two Jet Courier employees to discuss starting a new business and acquiring customers; (3) communicating with Jet Courier's customer banks to inform them he would be leaving Jet Courier and that he would provide the same services to them; (4) communicating with Jet...
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