Employees owe a duty of loyalty to refrain from competing with their employer prior to terminating their employment. The 9th Circuit Court of Appeals recently confirmed that this duty existed under Hawaii law, and clarified the remedies for its breach in Eckard Brandes Inc. v. Riley.
Eckard repairs and maintains sewer pipes and other structures that convey sewage, debris and rainwater. Randell A. Riley and Lee T. Kunimitsu worked for Eckard as a superintendent and a laborer, respectively. While still employed by Eckard, they formed their own partnership and successfully bid against Eckard for a County of Kauai drywell and culvert-cleaning project. Eckard learned about the employees' partnership and terminated their employment.
Riley and Kunimitsu sued Eckard for federal wage and hour violations. Eckard counterclaimed against the employees for breach of their duty of loyalty The US. District Court granted summary judgment against the employees' wage-and-hour claim and in favor of Eckard on the breach of duty of loyalty. The court ordered the employees to disgorge the profits they made on the Kauai county project and to pay Eckard prejudgment interest and attorneys' fees.
The 9th Circuit affirmed the District Court's judgment. The Court of Appeals explained that although the employees were entitled to make arrangements to compete against Eckard prior to terminating their employment, they were not entitled to solicit customers for their rival business before they left.
The employees had argued that the duty of loyalty did not apply to them, because they were low level employees, and that the public procurement code was the company's exclusive remedy for their breach. The Court of Appeals rejected these arguments, and affirmed the award of prejudgment interest and attorneys' fees.
There are now clear remedies in Hawaii against an employee who breaches his duty of loyalty by competing with his employer prior to terminating his employment. An agreement not to compete may be needed to impose reasonable restrictions on competition by an employee after he terminates employment. The trade secrets law may also prevent him from using the company's confidential information for his own purposes before or after he terminates.
Jeffrey Harris is a partner in the law firm of Torkildson Katz Fonseca Moore & Hetherington. He specializes in labor and employment law. He can be reached at 523-5393.