Want Loyal Employees? You Better Get Them to Agree to be Loyal in Writing

A former employee appears to be trading on her inside knowledge to the detriment of a company.  It appears that the common law “duty of loyalty” will not protect the company.  This case is a lesson for employers – have employees who have access to confidential information sign non-disclosure and non-compete agreements.  A current case in the Federal District Court for Maryland is testing the strength of an employee’s duty of loyalty to a former employer in regard to sensitive information. Allstate Ins. Co. v. Warns, 2012 U.S. Dist. LEXIS 26171 (http://www.mdd.uscourts.gov/Opinions/Opinions/Allstate%2029%2002%2012.pdf)

After 33 years of handling lead paint claims for Allstate Insurance Company, Jennifer Warns went to work for a plaintiff-side law firm, Bennett & Albright. Prior to her resignation, she accepted gifts from and partied with Albright and other plaintiffs’ bar attorneys. When Bennett & Albright hired Warns, the firm had 31 cases against Allstate; within a year they added 68 more.  As an Allstate claims adjuster, Warns worked closely with Allstate’s legal department, attended litigation strategy meetings, and was a trusted employee by Allstate and Allstate’s insureds.

Allstate filed suit for Warns’ alleged disclosure of confidential information to her new employer and for having derived personal benefit from using the confidential and proprietary information. Representing herself as pro se plaintiff, Warns asked the court to dismiss the case. The court denied her motion to dismiss, but pointed out some key weaknesses in Allstate’s case as it proceeds onto the next stage in litigation against Warns.

Noting the basic common law fiduciary duty of loyalty, the court explained that Allstate’s failure to have Warns sign a non-disclosure or non-compete agreement may prevent them from obtaining contract damages. This means that Allstate may be able to prove a breach of fiduciary duty, but that to prove the additional claim of breach of contract, they need to show that there was a clear agreement between Warns and Allstate regarding the misuse of proprietary information.

The clear agreement Allstate points to is a clause in its Code of Ethics which states,

“You may not appropriate for your own benefit information in which Allstate has a proprietary interest. You or another person may not derive personal benefit from confidential or ‘inside’ information’ that you obtained in the course of your work.”

However, Allstate did not ask its employees to sign the Code of Ethics, or clearly incorporate it into other written agreements between itself and employees.

Nevertheless, a document like a Code of Ethics can sometimes create contractual obligations, if employees are notified of the new obligation and then continue to work for the employer. Such contractual obligations have usually been found only in favor of employees, such as when an employee handbook sets out a procedure for employee discipline and termination, and then the employer fails to follow it. But, the court found it “plausible that the Code of Ethics could be considered an offer of a unilateral contract, accepted by Ms. Warns through her continued service with the company,” and then repudiated when she allegedly misused the information in her new job.

This is a case to follow because it presents some unsettled issues of law. The court noted that “Maryland courts have not yet articulated an independent cause of action for breach of fiduciary duty of confidentiality for former employees” and as of yet, “no Maryland court has held that an employee handbook or policy directive can function to create contractual obligations that enlarge the rights of employers.”

Regardless of how these legal questions are settled, the court made clear that a reasonable non-disclosure agreement is a better means of safeguarding goodwill.