Conspiracy, collusion, conundrum, oh my . . .
Are these thoughts going through your mind? Did your biggest competitor just hire away your most critical employee? Are they stealing your customers? Are they stealing other employees? You’re mad as hell. What can you do?
In Michigan, when would the new employer be liable for your former employee’s wrongful conduct? Michigan recognizes different legal theories for this, but they all share two common elements:
- the new employer has some level of knowledge or intent; and
- the new employer takes some action taken in conjunction with your former employee.
The arguments usually focus (i) how much knowledge the new employer has, and (ii) and what action the new employer actually took.
Let’s apply this to a relatively-common legal theory former employers bring in departing-employee litigation: breach of fiduciary duty.
When your employee leaves you to work for a competitor, you may claim that (i) your former employee breached their fiduciary duty to your company, and (ii) the new employer “knowingly participated” in the employee’s breach of fiduciary duty.
How do you prove a claim like this? What kind of evidence do you need?
Do your employees owe you a “fiduciary” duty?
Before we get to that, we have to think about a more-fundamental predicate question: In Michigan, do employees owe their employers a fiduciary duty?
The short answer: “sort of.” Employees do not owe a strict “fiduciary” duty to their employers, but they do owe some duty.
I say “kind of” because a true fiduciary duty would include a duty to put the employer’s interests first and to disclose all material facts to the employer, but no one says an employee owes that kind fiduciary duty.
Michigan courts have concluded that an employee does not violate a fiduciary duty by (i) making plans to compete with its employer, and (ii) concealing those plans from its employer. So, in Michigan, when does the former employee violate their “fiduciary” duty? Well, the former employee will do so if they:
- misappropriate the company’s confidential information or trade secrets, or
- solicit the company’s employees or customers while still employed by the company.
The problem, from the former employer’s perspective, is that the Uniform Trade Secrets Act pre-empts your common-law (i.e., non-statutory) civil remedy for an employee misappropriating your trade secrets. So, despite references to misappropriation of trade secrets in fiduciary-duty cases, in Michigan you cannot assert a common-law breach of fiduciary duty claim based on allegations of taking or using trade secrets.
The open question is whether this Act also prohibits you from bringing a fiduciary-duty claim against your former employee that is predicated on their misappropriation of information that is confidential, but is not a trade secret. As of today, the Michigan courts have not decided.
Which means that in most cases your claim should focus on the former employee soliciting your employees or customers.
Why do you care about having a fiduciary-duty claim?
But why do you care if you have a fiduciary-duty claim if you have an employment agreement that prohibits all such solicitation? There are a few reasons:
- your employee may not have a contract that prohibits soliciting employees and customers;
- even if your employee already has a contractual, non-solicitation obligation, raising a breach-of-fiduciary-duty claim gives you remedies that a breach-of-contract claim does not: forfeiture or “disgorgement” of compensation as an alternative to actual damages;
- the fiduciary-duty theory gives you a potential claim against the second employer (with a deeper pocket) for “knowing participating” in a breach-of-fiduciary-duty, which enables you to recover damages from the second employer.
Knowing participation in breach of fiduciary duty
That brings us back to our original question: how can you prove “knowing participation” in a departing-employee lawsuit? Michigan case law sets forth 3 essential elements:
- the employee solicited while still employed by the company;
- the second employer knew about the solicitation; and
- the second employer participated in the solicitation.
As a practical matter, if the second employer participates in your former employee’s solicitation, it will usually be aware of the solicitation. I don’t think I’ve ever seen a case of “unknowing” participation. So the new employer’s active participation becomes the key element.
“Participation” doesn’t sound difficult, but it surely is not easy to define in the real world. To successfully allege “knowing participation,” you want to tie the new employer’s participation to the part of the scheme that breached the employee’s fiduciary duty, not just to the scheme in general.
It’s not enough to show that the new employer joined in a plan for your former employee to compete with you. Instead, you need to demonstrate that the new employer actually participated in (i) soliciting employees or customers, or (ii) some other conduct that violated the employees’ fiduciary duties. You have to show that the new employer took affirmative action even if the new employer knew about, and encouraged, your former employee’s solicitation actions.
You need to obtain evidence that the new employer contributed to causing your former employee to solicit other employees or customers. It may not be enough to show that your former employee and their new employer discussed soliciting your customers or other employees. In a perfect world, you would have evidence your former employee would not have solicited anyone without the encouragement of the new employer. But how do you get that?
If you’re confronted with a similar situation, talk to a lawyer who has been handling these sorts of cases for years. Call George Law at (248) 470-4300 24/7 to discuss your issues.