At-will Fiduciaries? the Anomalies of a "duty of Loyalty" in the Twenty-first Century

• Publication year: 2021
• Citation: Vol. 93

93 Nebraska L. Rev. 267. At-Will Fiduciaries? The Anomalies of a "Duty of Loyalty" in the Twenty-First Century

At-Will Fiduciaries? The Anomalies of a "Duty of Loyalty" in the Twenty-First Century

Marian K. Riedy(fn*) and Kim Sperduto(fn**)

TABLE OF CONTENTS

I. Introduction .......................................... 267

II. The Employee's Duty of Loyalty in the Courts ......... 272
A. Overview .......................................... 272
B. Representative Cases .............................. 279

III. A Riddle Wrapped in a Mystery Inside an Enigma ..... 283
A. The Riddle-The At-Will Employee as Fiduciary? . . 283
B. The Mystery-Who Owes a Duty? ................. 288
C. An Enigma-What is a Breach? ................... 292

IV. Why "Loyal?" ......................................... 296
A. The Loyal Servant ................................ 296
B. The Vulnerable Master ............................ 299

V. Alternative Remedies ................................. 301
A. Conduct Prohibited and Remedies Available ....... 301
B. An Alternative Duty ............................... 306

VI. Conclusion ............................................ 311

I. INTRODUCTION

Oceans of ink have been expended describing, analyzing, and applying the "duty of loyalty" owed by corporate directors and officers.(fn1)

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Comparatively little attention has been paid to the common law "duty of loyalty" owed by employees to their employers-a duty imposed virtually unanimously by the courts of every state.(fn2) Given the unique status of corporate directors and officers-guardians of billions of dollars of corporate assets-the extensive discourse on the nature of their legal duties is eminently reasonable, if not imperative. But given the fact that the employee's duty of loyalty embraces roughly 140 million people,(fn3) employee job mobility has never been higher, and the number of lawsuits involving the duty has "mushroomed" in the last few years,(fn4) the concept deserves close scrutiny. This article proposes the at-will employee's common law duty of loyalty fails the tests of reason and fairness. The bases for the duty appear too flimsy to justify the burdens it imposes and the uncertainties it causes, and this duty, therefore, has no legitimate role in today's business environment.(fn5)

For the vast majority of the employees in the United States, their employment relationship is "at-will."(fn6) This common law doctrine means, as any law school graduate knows, the relationship can be terminated by either the employer or employee at any time, for any reason, or for no reason at all, with or without cause,(fn7) and without prior notice. There are only limited exceptions: a termination that violates a federal or state antidiscrimination statute or a "fundamental public policy of the jurisdiction" is prohibited.(fn8) Only such rare circumstances

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may give rise to a wrongful termination cause of action,(fn9) and these exceptions are "quite narrow and often difficult to prove."(fn10)

The at-will doctrine has for many years been roundly criticized,(fn11) though it also has strong advocates.(fn12) Without becoming submerged in the scholarship, these opposing positions can be summarized as follows: the "anti" position centers on the proposition that the doctrine is harsh and unfair. The employer exercises the termination power inherent in the at-will doctrine far more frequently than the employee, and at the same time employees suffer far more from termination and the threat of termination than the employer because employees are simply more vulnerable than the employer.(fn13) The proponents of the doctrine rely primarily on economics: at-will employment is so widely prevalent that it must be "market mimicking,"(fn14) which means it is efficient. One of the market forces at work, theoretically, is that employment at-will reduces the cost of both firing and quitting because either can be accomplished without the threat of litigation.(fn15) From the point of view of the employer, "[t]he flexibility afforded by the contract at-will permits the ceaseless marginal adjustments that are necessary in any ongoing productive activity conducted, as all activities are, in conditions of technological and business change."(fn16) The employee benefits as well, in that she is free to leave rather than succumb to whatever "enormous demands" the employer could make if the employee were subject to a fixed-term contract.(fn17) Otherwise stated, workers would demand a fixed-term contract if it were more economically advantageous than at-will employment.(fn18)

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Whatever the relative merits to employers, employees, and the public welfare of at-will employment compared to a contractual relationship, it is quite likely that at-will employment is here to stay.(fn19) As the percentage of the unionized workforce continues to decline(fn20) and worker mobility-inherent in the twenty-first century global economy-continues to increase, the percentage of at-will employ-ees-already the predominant employment relationship in this country-seems likely to increase. Given these facts, it is imperative that the at-will relationship be defined at law in such a way as to maximize its benefits and minimize potential harms.

One of those harms is the employee's vulnerability to the economic disaster of suddenly losing a job.(fn21) A number of "fixes" to the at-will doctrine that could reduce the nature and extent of this particular harm have been proposed,(fn22) the most popular being some version of the "just cause" limitation on an employer's right to terminate.(fn23) But absent a wholesale judicial revision of the common law at-will doctrine, or legislative action, neither of which appears forthcoming,(fn24) the unfettered right of the employer to terminate an employee-so long as the reason is not specifically unlawful-will remain unfettered.

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This article proposes a means of improving the at-will world for employees-insofar as that world includes the threat of a sudden end to one's livelihood-that does not tamper with the "at-will-ness" of termination itself. As discussed below, the employee's common law duty of loyalty prohibits an employee from, inter alia, competing with the employer during the employment relationship, though he can "prepare" to compete. That distinction is a fine one, and arguably impossible to draw ex ante.(fn25) Therefore, to the extent the duty of loyalty deters employees from taking steps to prepare for a sudden termination for fear that those steps would later be deemed a breach of duty- or penalizes employees who have successfully transitioned to a new job but are then sued for breach of the duty of loyalty-eliminating that duty for at-will employees will reduce the emotional and economic toll of the at-will employment doctrine.(fn26) In addition, because the at-will employee's duty of loyalty rests on a shaky jurisprudential foundation and is unworkable, unfair, outdated, and unnecessary, it should be abandoned. In its place, an at-will employee should owe only the duty of "good faith and fair dealing" derived from contract law, which, in effect, would fill any hole left in the legal web defining the employment relationship when the duty of loyalty is excised.

Part II provides an overview of the duty of loyalty as it is applied by the courts in the various states. Part III returns to various aspects of the law regarding the duty of loyalty that are particularly ambiguous, and argues the ambiguity infects the very validity of imposing a duty of loyalty and renders it very difficult for employers and employees to understand and comply with the duty. Part IV illustrates why the jurisprudential provenance of the duty of loyalty-emanating from the medieval doctrine of master and servant-understandably does not map clearly onto the twenty-first century global employment market. Finally, Part V argues the duty of loyalty is not necessary to "protect" the employer from "bad" conduct on the part of the employee- which is its essential function-and that if removing the duty of loyalty does pose any significant threat, requiring good faith and fair dealing by the employee satisfactorily fills any perceived gaps.

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II. THE EMPLOYEE'S DUTY OF LOYALTY IN THE COURTS

All jurisdictions recognize the duty of loyalty in the employment context.(fn27) The duty of loyalty is a common law doctrine and, therefore, varies somewhat from state to state. Nonetheless, in all states, the doctrine has a similar contour, though the boundaries of that contour are quite "fuzzy." Despite the hundreds, if not thousands of reported cases implicating the duty of loyalty,(fn28) several aspects of the duty remain unsettled. This uncertainty exists not only between states, but also among the various courts of the same jurisdiction.(fn29) This section provides an overview of the similarities and differences in the case law on the origins of the employee's duty of loyalty; to whom it applies; what conduct it requires and prohibits; and the consequences of a breach. Three representative cases involving an alleged breach of the duty are then described in some detail to render the concepts more concrete.

A. Overview

The duty of loyalty finds its genesis in the law of agency. By definition, agency is a fiduciary relationship: "Agency is the fiduciary relationship that arises when one person (a 'principal') manifests assent to...