Do Some Employees Have Fiduciary Duties, Too? Wisconsin Appellate Courts Tilt Toward Yes
Under Wisconsin law, business owners, as well as persons in named managerial roles (e.g., directors and officers), owe fiduciary duties to the enterprise and other owners based on their positions. That concept is embodied in the multitude of statutes that govern business entities in the state. The same duties also may extend to employees. Here is a roundup of the fiduciary duties owed to a business enterprise.
Duties of Officers, Directors, Partners, Members, Managers
Wisconsin’s statutes prescribe the standards of conduct for partners within a partnership, which include the fiduciary duties of loyalty and care. Similarly, under state business law, corporations are generally obligated to indemnify their officers and directors in proceedings whenever they are made a party because of their status with the company. The indemnity obligation does not apply, however, if the liability was incurred because the officer or director breached or failed to perform a duty owed to the corporation, including:
- Willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the officer or director has a material conflict of interest;
- Violation of a criminal law;
- Transaction from which the officer or director derived an improper personal profit; or
- Willful misconduct.
A similar concept applies to officers and directors of a Wisconsin nonstock corporation as well as both managers and members in a limited liability company in the state.
The duties of loyalty and care are based in Wisconsin common law. In Modern Materials, Inc. v. Advanced Tooling Specialists, Inc., the court held that a corporate officer or director is under a fiduciary duty to act in good faith and deal fairly in the conduct of all corporate business. Also, in Grognet v. Fox Valley Trucking Serv., the court determined that an officer’s or director’s duty to act in good faith and deal fairly in the conduct of all corporate business extends to the corporation itself and its shareholders.
What About Employees?
What is lesser known, however, is that under certain circumstances, the fiduciary duty of care and loyalty can extend to the enterprise’s employees who aren’t directors, officers, or another type of manager. The supreme court addressed the issue in a case in which the employer, Burbank Grease Services LLC, challenged an appellate court ruling granting summary judgment (dismissal without a trial) for Larry Sokolowski, a former employee, and a competitor. Burbank Grease had alleged that Sokolowski misappropriated trade secrets and committed computer crimes and that the competitor aided and abetted him. In its ruling, the supreme court made the following observations:
A claim for the breach of an agent’s duty of loyalty may sound both in tort and in contract. . . . When such a claim is made against an employee, the first question is whether the agent has a fiduciary relationship with the employer. . . . If the employee is a “key employee,” then a fiduciary duty of loyalty will exist. . . . Whether an employee is a “key employee” depends on the precise nature of his or her employment duties, which determination requires a factual inquiry.
In other words, whether Sokolowski was holding a named managerial position was not the deciding factor, and it’s necessary to do a factual inquiry into the precise nature and duty of his role to determine whether he owed a fiduciary duty to the employer. Burbank Grease Servs., LLC v. Sokolowski.
Another Case Looks at Employee Loyalty
In another seminal Wisconsin case on the issue, Info- Corp, LLC, sued former employee Christopher Hunt and a competitor that hired him, alleging (among other things) a breach of the duty of loyalty. The alleged transgression occurred when Hunt—who was an at-will employee and not a corporate officer or the policy-making equivalent of one—sought to divert exclusive sales of a technologically advanced chalkboard away from InfoCorp and to a competitor. Ultimately, he was successful in the effort. The competitor became an authorized reseller of the chalkboard, and InfoCorp lost its status as a reseller.
Initially, the trial court dismissed all but one of the claims InfoCorp filed against Hunt, including the charge he breached his duty of loyalty to the former employer. The court’s reasoning: He didn’t occupy a named managerial role. From the trial court’s perspective, the fact he was an at-will employee (who could be fired at any time for any legal reason or no reason at all) rather than an officer or manager was a deciding factor on the breach of the duty of loyalty issue. The appellate court, however, disagreed with the lower court, noting:
Where a sufficient factual record has been made our supreme court has upheld a finding that the employee who is not an officer or director beached a duty of loyalty by taking actions within the scope of the employee’s responsibilities that were directly contrary to the employer’s interest. . . . [Hunt], while still employed by [InfoCorp], used his authority at [InfoCorp] to divert business from [InfoCorp] (by withholding customer orders until he joined [competitor]), and to actively attempt to shift business . . . from [InfoCorp] to [competitor], thereby breaching his duty of loyalty.
Ultimately, with reliance on Wisconsin case precedent, the court of appeals concluded as follows:
There may be “key employees” whose job responsibilities are of such a nature, in the context of the employer’s business, that they may be used to harm the employer. If such employees do harm to their employer during the course of their employment, the employer has a common law remedy for breach of the employee’s duty of loyalty. Whether an employee has such responsibilities as an agent of the employer to create a duty of loyalty must of necessity be determined in the context of the employer’s business and the specific role the employee plays in that business. As we have seen, case law demonstrates that for an employee who is not an officer or director, the status of “key employee” is determined by the specific job responsibilities and the harm to the employer resulting from misuse of those responsibilities.
For the court of appeals, the fact Hunt was directly involved with preserving the relationship as the reseller of the chalkboards presented enough evidence to reverse the trial court’s decision and send the claim back to develop the pertinent facts. InfoCorp, LLC v. Hunt.
The statutory and common-law duty of loyalty that applies to the conduct of directors, officers, owners, and other managerial types within Wisconsin business entities also covers employees who, by virtue of their unique roles, become subject to a similar duty of loyalty. This is obviously a significant precedent for both Wisconsin employers and employees to keep in mind when considering their relationship with each other and how it might end.
This article, slightly modified to note recent updates, was featured in the April 2019 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.