Published on:

Without Written Confidentiality Agreement, Competing Does Not Breach Fiduciary Duty, Court Rules

 

A former shareholder, officer and director did not breach his fiduciary duty to a corporation when he started a competing company, and a former employee did not breach his duty of loyalty by joining, the First District Court of Appeal has ruled. Cooper Linse Hallman v. Hallman, No. 1-05-0597 (2006).

Plaintiff Cooper Linse Capital Management, a closely held financial services company, brought on Thomas Hallman in 1994 as a shareholder with 20% of stock shares. The remainder were divided evenly between Lori Cooper and Don Linse. Hallman served as vice president and CFO as well as an employee. Two years later, the company hired James McQuinn as an employee only. Neither man signed a written confidentiality agreement, and both disputed Cooper Linse’s contention that they entered into an oral confidentiality agreement. All parties agreed that Linse and Cooper made all of the business decisions.

In 2000, the company that held Cooper Linse’s clients’ accounts in trust got into financial trouble and had its assets frozen, leaving clients unable to access their accounts and Cooper Linse unable to pay its employees. Linse began negotiations to take over that company’s trust business; McQuinn and Hallman quietly began planning to start a business competing with Cooper Linse.

Five months after the assets were frozen, Hallman and McQuinn left for their new firm, taking client lists with them. They had used Cooper Linse computers to plan some aspects of the business, and negotiated to use a soliciting firm that Cooper Linse had previously used. Cooper Linse filed suit against Hallman and McQuinn for seven counts of corporate misconduct, including breach of fiduciary duty against Hallman and breach of duty of loyalty against McQuinn. The trial court found for Hallman and McQuinn on those two counts, and Cooper Linse appealed.

The appeals court affirmed, saying Hallman and McQuinn didn’t breach even the strictest duties they had to Cooper Linse. Under Illinois caselaw, the court wrote, former employees like McQuinn may compete with their former employers and even plan their businesses while they’re still employed, as long as they don’t start competing until they have terminated their employment.

By contrast, the court pointed out that directors and officers like Hallman have a fiduciary duty not to exploit their positions for personal gain, including starting a competing business without telling other officers. But in this case, the justices found no evidence for the breaches alleged by Cooper Linse. One of its allegations was that the two men had asked the soliciting firm for business before leaving Cooper Linse, which indeed could have been a breach. But because Linse himself was involved in some of the meetings and the men testified that they never solicited the business, the trial court found there was no breach and the appeals court agreed. Other arguments fell similarly flat; in particular, the court noted that there was no written confidentiality agreement. Thus, “their conduct did not rise to the level of a breach of their fiduciary duties because they neither exploited their positions for their personal benefit and to the detriment of plaintiff nor impeded plaintiff’s ability to do business…. To hold that Hallman’s and McQuinn’s actions were a breach of their fiduciary duties would be to virtually prevent all officers and directors from seeking new employment prior to resigning from their current positions.”