When a Customer Jumps Ship—Is Your Loss Fair Game for Your Employees to Pursue?
Matthew S. Miller, a Principal in the firm’s Litigation & Dispute Resolution group, has a unique practice that combines significant litigation experience with a substantial general counsel practice. As a trial attorney, he has successfully tried cases before judges and juries in federal and state courts. Matt also has helped clients achieve favorable decisions through mediation, arbitration and other forms of alternative dispute resolution. In addition, he frequently serves as general counsel to high-net-worth individuals and closely held companies, providing them with legal and business guidance on all matters. Matt can be reached at 312.521.2714 or mmiller@muchshelist.com.
By Matthew S. Miller
In Illinois, employees owe their employers a fiduciary duty of loyalty that precludes them from diverting opportunities that rightfully belong to the employer. This fiduciary duty is strictly enforced by the courts in order to deter disloyal conduct. Although these principles are well known and hardly the subject of debate, what if the customer fires the employer? Can employees freely pursue that business for their own benefit? This question is increasingly common in fiduciary duty litigation when defendants (usually former employees) raise the so-called “refusal to deal” defense, claiming that the customer would not have done any further business with the employer no matter what, and that the former employee played no role in that decision. The Illinois courts have not yet weighed in on this issue, making it all the more important for businesses and employees in Illinois to understand the issues and the risks.
Differing Perspectives
From the perspective of the employer, this “refusal to deal” theory, if valid, would essentially mean that your loss would be your employee’s gain. But how would you ever validate this “refusal to deal” theory? What if you were advised in advance of the customer’s dissatisfaction and afforded the opportunity to make things right?
These questions have led some courts in jurisdictions outside of Illinois to reject the “refusal to deal” defense entirely, noting that this defense would undermine the very purpose of fiduciary duty law, and would provide a disincentive for employees to remain loyal and to make every effort to maintain relationships for the employer’s benefit. It would also provide an incentive for employees to remain quiet about customer dissatisfaction, thus depriving the company of the opportunity to take action to right the ship. Worse yet, this might encourage collusion and foul play, which could easily be covered up with an unverifiable “refusal to deal” defense.
For these reasons, there have been decisions—though none in Illinois—rejecting the “refusal to deal” defense, and ordering former employees to cease the operations of their new venture and turn the proceeds over to their former employer. While this may seem unfair to the employee, these courts have concluded that the employer should have been fully advised by the employee—hardly an onerous obligation—and afforded the opportunity to repair the relationship and save the business. Otherwise, the courts have concluded, there would be no way for an employer to properly protect its business.
From the perspective of the employee, however, the “refusal to deal” theory looks much different. Employees would argue that they should be allowed to pursue opportunities lost by the employer. After all, we do have a free market system, and it is not hard to imagine a situation when a “refusal to deal” defense would have some validity. Unfortunately, the “refusal to deal” issue has yet to be squarely addressed in Illinois, leaving this as an unresolved, potentially problematic area for businesses.
A Recent Case
Here is an example of how the “refusal to deal” issue can come into play. I recently defended a new business venture in a case in Illinois where we raised a “refusal to deal” defense. After learning that their employer was about to lose a key contract, our clients formed their own company but were very careful about the actions they took before resigning their positions. They did not solicit the customer or begin their own operations before resigning, and, working with counsel, they limited their efforts to the allowable start-up activities. Following their resignations, they pursued and obtained a contract that their former employer lost, and they were immediately sued by their former employer. Despite this rush to judgment, the evidence established that the former employer had no chance at all to save the business. The evidence also indicated that the employer had made a prior effort to save the relationship, but failed. Based on the facts of our case, we were able to defeat a motion for a temporary restraining order and retain the business, and we ultimately settled the case. While this was a positive result for our clients, it left open the question of whether the Illinois courts will honor or reject the “refusal to deal” defense.
The lesson here is simple: whether you are the employee looking to pursue the business or the employer hoping to save it, you would be well advised to proceed cautiously and to confer with counsel experienced in fiduciary duty litigation. As an employee, you should review the facts with counsel before pursuing the business for yourself. Doing so will allow you not only to determine the viability of a “refusal to deal” defense, but also to avoid some of the common mistakes employees make when they pursue business for their own benefit. By proactively seeking legal advice, you will increase your chances of success should litigation ensue, and you may be able to avoid it altogether.
As an employer, you should review the facts with counsel to assess the viability of filing a lawsuit to stop the employee from pursuing the account, and to recover the proceeds from the diverted business opportunity. Whatever you do, avoid the all-too-common mistake of simply running to court whenever business changes hands. Sometimes your loss really is someone else’s gain, and not the result of any improper conduct. In these instances, the pursuit of litigation may do more harm than good for your own business. The trick is to know the difference between fair competition and foul play.
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