An Employee’s Duty Of Loyalty To An Employer In Pennsylvania

Elsewhere in this website, we discuss the duties an employee owes to an employer under a written non-competition agreement. Such issues now arise more frequently than in years past as an increasing number of employers rely upon non-compete covenants, confidentiality agreements and countersigned codes of ethics to define the obligations of employee to employer. Yet in order to fully understand exactly what the employee is contracting away in signing these agreements, and also to understand the employee’s rights and obligations in the absence of signed documents, it is necessary to examine the fundamental nature of the employer-employee relationship as it has developed over the years under Pennsylvania common law.

It should go without saying that an employee is bound to furnish service to the employer in accordance with the terms of any express employment contract, whether it be oral or written. But over and above the agreed employment terms, the employee is also obligated to render loyal, diligent and faithful service to the employer even in the absence of any specific agreement to that effect. This means, among other things, that an employee owes a duty to act with the utmost good faith in the furtherance and advancement of the employer’s interests. Sylvester v. Beck, 406 Pa. 607, 178 A.2d 755 (1962). The question, then, is how these duties of loyalty and good faith translate into the day-to-day obligations of an employee to an employer. Among other things, the duty of loyalty includes an employee’s duty not to act or to agree to act during the period of his employment for persons whose interests conflict with those of the employer in matters for which the employee is employed. Restatement (Second) of Agency § 394. Thus, in the absence of the employer’s consent, “no man can serve two masters,” at least where the interests of those masters conflict. Onorato v. Wissahickon Park, Inc. , 430 Pa. 416, 244 A.2d 22 (1968), citing Matthew 6:24. An agent is a fiduciary with respect to matters within the scope of the agency, and is required to act solely for the benefit of her principal in all matters concerned with the agency. SHV Coal, Inc. v. Continental Grain Co. , 376 Pa.Super. 241, 545 A.2d 917 (1988).

As a result, when an individual is employed to acquire business opportunities for one company, it is a breach of the employee’s duty of loyalty to divert business to a competing company with whom the employee has agreed to accept employment. Further, it is a violation of the duty of loyalty to use an employer’s time or resources in order to locate or procure replacement employment. Likewise, even in the absence of a signed confidentiality agreement, it is a violation of the employee’s duty of loyalty to divulge an employer’s trade secrets to a competitor, and also a violation of the duty of loyalty to use trade secrets acquired in the employment of one employer for the benefit of another.

Yet there are limits to the duty of loyalty. It is obviously not a violation of the duty of loyalty for an employee to seek employment with a competitor, so long as the job search is conducted outside of company time and not in violation of any written covenant against competition. Further, an employee may solicit or accept customers of a former employer after the termination of the previous employment, unless there is a written covenant prohibiting such solicitation. However, an employee who expects to terminate his employment may not solicit customers for a rival business before the termination of the employment, nor may he do other similar acts in direct competition with the employer’s business. Colonell v. Goodman, 78 F.Supp. 845 (1948).

Nor is it a violation of the duty of loyalty for an employee to use in his new employment the experience, knowledge, memory and skill which he gained in the old. Pittsburgh Cut Wire Co. v. Sufrin, 350 Pa. 31, 38 A.2d 33 (1944). In order for an employee to be prohibited from using particular information as a trade secret or confidential information, that information must be more than the general skill and knowledge acquired by the employee in the course of employment. Instead, in order to be protected against disclosure to or for competitors, the information must be the particular secret of the employer, not readily discoverable by ordinary means, and not merely the general secrets of the trade in which one is engaged. Thus, regardless of whether there is a written covenant against the employee’s use or appropriation of trade secrets, the employee will be permitted to use his general skills and knowledge in later employment, but will not be permitted to use or reveal any information that could not be discovered by independent investigation. In other words, the duty not to divulge trade secrets arises not as a function of a written confidentiality agreement, but as part and parcel of the employee’s fundamental duty of loyalty. A written confidentiality agreement typically serves as little more than evidence of the confidential nature of the data sought to be protected.

Accordingly, an employee may not use a list of customers made surreptitiously during the employment without the knowledge or consent of the employer, when the list is a confidential one. Morgan’s Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1958). Indeed, the Pennsylvania Crimes Code prohibits the theft or unlawful appropriation of a trade secret, but further provides that it is a complete defense to a prosecution to show that the information comprising the alleged trade secret was rightfully known or available to the employee from a source other than the owner of the trade secret. 18 Pa.C.S.A. §3930.

Criminal prosecution for the misappropriation of trade secrets is the exception, and not the rule, particularly in cases where the employee initially came upon the information by lawful means. But in any case where a breach of the duty of loyalty can be established, the employee can be held liable in a civil action for any financial losses the employer can prove it suffered as a result of the employee’s breach. The potential damages recoverable against the employee include not only the profits lost to the employee’s misappropriation of business opportunities or trade secrets, but also, in the case of deliberate and knowingly wrongful conduct, punitive damages as well.

Thus, even when there is no written non-compete covenant or confidentiality agreement, a Pennsylvania employee seeking to jump ship to a new employer competitive with the existing employer should proceed carefully and preferably with the advice of legal counsel. Likewise, PA employers should be conscious of the fact that their present and former employees may owe them duties of loyalty under Pennsylvania common law, even in the absence of specific written non-compete or confidentiality agreements.

If you require legal representation for an employment matter, the attorneys of Wolf, Baldwin & Associates, P.C. have the experience to represent you through court or arbitration. Click here now to contact us and to schedule an appointment. We will be happy to advise you about your employment rights under Pennsylvania law.

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