Chapter 18 - § 18.2 • EMPLOYEE'S DUTY TO EMPLOYER

• Jurisdiction: Colorado

§ 18.2 • EMPLOYEE'S DUTY TO EMPLOYER

§ 18.2.1—Duty Of Loyalty

The general rule is that employees are subject to a duty to act solely for the benefit of the employer in all matters connected with the employment. See Restatement (Second) of Agency § 387. The landmark Colorado decision addressing the common law duty of loyalty owed by employees to employers is Jet Courier Service, Inc. v. Mulei, 771 P.2d 486 (Colo. 1989). Jet Courier Service (Jet) operated an air courier company that specialized in transportation services for customer banks. It hired Mulei to open a Denver office and manage the Western Zone operations from that office. The parties agreed that Mulei would be vice president and general manager, and that he would receive as annual compensation $36,000 plus commissions based on net profits of the Western Zone.

Jet did not compute or pay Mulei the promised commissions. Dissatisfied, despite having signed a geographically unrestricted covenant not to compete for two years post-termination, Mulei contacted an air charter operator about setting up a courier company that would compete with Jet. While still employed by Jet, he discussed his plans with two of the four Jet employees. He also met with Jet pilots, ground couriers, and office staff to discuss potential future employment, including offering better working conditions and part ownership in his proposed company. He also contacted several bank customers of Jet for the purpose of soliciting their business for his new company.

Upon learning of Mulei's competing enterprise, Jet fired Mulei. That same day, Mulei filed suit against Jet seeking unpaid compensation, a penalty on unpaid amounts, and a declaratory judgment that the noncompete covenant was void. Jet counterclaimed for breach of contract, breach of fiduciary duty, and civil conspiracy. The trial court ruled and the court of appeals affirmed that the noncompete covenant was void and that Mulei did not breach any duty of loyalty owed to Jet because Mulei's new company did not commence competing with Jet until after Mulei had been discharged. Jet owed salary and bonus compensation to Mulei, plus a 50 percent statutory penalty pursuant to C.R.S. § 8-4-104. See Jet Courier Serv., Inc. v. American Check Trans., Inc., 739 P.2d 889 (Colo. App. 1987).

The Colorado Supreme Court reversed and remanded, holding that an employee's solicitations of customers and fellow employees to compete with his employer constitutes a breach of the employee's duty of loyalty. In so holding, the court cited to § 387 of the Restatement (Second) of Agency, which provides: "Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency." One facet of the employee's duty of loyalty is the "duty not to compete with the principal concerning the subject matter of his agency." Jet Courier, 771 P.2d at 492-93 (quoting Restatement (Second) of Agency § 393 (1957)). The Jet Courier court also recognized, however, the competing public policy consideration in "fostering free and vigorous economic competition." Jet Courier, 771 P.2d at 493. To balance the two policies, courts allow employees a privilege to "prepare or make arrangements to compete with their employers prior to leaving the employ of their prospective rivals without fear of incurring liability for breach of their fiduciary duty of loyalty." Id. (citing Maryland Metals, Inc. v. Metzner, 382 A.2d 564, 569 (Md. 1978)). Therefore, the court analyzed whether Mulei's pre-termination meetings with Jet's customers and co-employees amounted to impermissible solicitation in violation of his duty of loyalty or whether such encounters were legally permissible preparations to compete.

The court first looked to the commentary to § 393 of the Restatement (Second) of Agency, which notes that "an employee is not 'entitled to solicit customers for [a] rival business before the end of his employment.'" Jet Courier, 771 P.2d at 493 (quoting Restatement (Second) of Agency § 393 cmt. e). Hence, the court noted, it is important to distinguish between advising current customers that the employee is leaving current employment, which does not violate the duty of loyalty, and solicitation of those customers for a new competing business, which does. Jet Courier, 771 P.2d at 493-94. The issue of whether an employee's actions constitute breach of the duty of loyalty is a question of fact "to be determined by the trial court in the first instance based on a consideration of all the circumstances of the case." Id. at 494.

With regard to Mulei's meetings with co-employees, the court of appeals had held that an employee is not liable for a breach of duty of loyalty unless he "causes fellow employees to breach a contract." Mulei v. Jet Courier Serv., Inc., 739 P.2d 889, 893 (Colo. App. 1987), citing Electrolux Corp. v. Lawson, 654 P.2d 340 (Colo. App. 1982). The court of appeals in Electrolux cited Restatement (Second) of Agency § 393 cmt. e, which states that an "employee is subject to liability if, before or after leaving the employment, he causes fellow employees to break their contracts with the employer." 654 P.2d at 341. Rejecting the court of appeals' reasoning in Electrolux and Mulei, the Colorado Supreme Court emphasized that "the Restatement neither implies nor explicitly states . . . that causing co-employees to break their contracts is the only instance where an employee will be liable for breaching his duty of loyalty by soliciting co-employees." Jet Courier, 771 P.2d at 495. The court concluded that "[t]he distinction between contracts terminable at will and those not terminable at will is not dispositive in a breach of duty of loyalty analysis." Id. at 496. To hold otherwise would be to apply tort law — wrongful contract interference — instead of the greater duty under agency law. Id. The Jet Courier court cited cases from other jurisdictions that have recognized an employee's liability for soliciting co-employees under contracts terminable at will. Id. at 495 n. 11.

Additionally, the Colorado Supreme Court found the question of whether the personnel Mulei solicited acted as Jet employees or independent contractors to be irrelevant to the issues. The Jet pilots and ground couriers Mulei contacted were "integral and necessary" to Jet's operations; therefore, the supreme court referred to the workers as "employees" throughout the decision. Jet Courier, 771 P.2d at 490 n. 4.

The court created a test to determine whether an employee's conduct amounts to an impermissible solicitation of co-workers. It concluded that a court should consider:

• The nature of the employment relationship;
• The impact or the potential impact of the employee's actions on the employer's operations; and
• The extent of any benefits promised or inducements made to co-workers to obtain their services for the new competing enterprise.

No one factor is dispositive of this analysis. The court "must examine the nature of an employee's preparations to compete...