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lwpat, Attorney
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Duty of Loyalty II

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Duty of Loyalty Lawrence Gaffney was the president and general manager of Ideal Tape Company (Ideal). Ideal, which was a subsidiary of Chelsea Industries, Inc. (Chelsea), was engaged in the business of manufacturing pressure-sensitive tape. Gaffney recruited three other Ideal executives to join him in starting a tape manufacturing business. The four men remained at Ideal for the two years it took them to plan the new enterprise. During this time, they used their positions at Ideal to travel around the country to gather business ideas, recruit potential customers, and purchase equipment for their business. At no time did they reveal to Chelsea their intention to open a competing business. The new business was incorporated as Action Manufacturing Company (Action). When executives at Chelsea discovered the existence of the new venture, Gaffney and the others resigned from Chelsea. Chelsea sued them for damages. Who wins? (answer must be a paragraph to 2 paragraphs in length).
Submitted: 5 years ago.
Category: Business Law
Expert:  lwpat replied 5 years ago.
Chelsea wins. I will post the paragraphs shortly.
Expert:  lwpat replied 5 years ago.
Sorry for the delay. Family emergency and had to go to the hospital.

Here is the case so put it into your own words

Employees occupying a position of trust and confidence owe a duty of loyalty to their employer and must protect the interests of the employer. Lincoln Stores, Inc. v. Grant, 309 Mass. 417, 420-421 (1941). See Restatement (Second) of Agency § 387 (1958); Lindsay v. Swift, 230 Mass. 407, 412 (1918); American Circular Loom Co. v. Wilson, 198 Mass. 182, 206 (1908). The master found that although none of the four joint venturers was an officer or director of Chelsea, they were trusted executives composing virtually all of Ideal's management. As such, they owed a fiduciary duty to Chelsea. See, e.g., Hartford Elevator, Inc. v. Lauer,94 Wis.2d 571, 580 (1980). Because he is bound to act solely for his employer's benefit in all matters within the scope of his employment, Restatement (Second) of Agency § 393 (1958); Quinn v. Burton, 195 Mass. 277, 279, 281 (1907); C-E-I-R, Inc. v. Computer Dynamics Corp.,229 Md. 357, 366 (1961), an

executive employee is "barred from actively competing with his employer during the tenure of his employment, even in the absence of an express covenant so providing" (emphasis in original). Maryland Metals, Inc. v. Metzner,282 Md. 31, 38 1978). Shulkin v. Shulkin, 301 Mass. 184, 190 (1938). See Raines v. Toney, 228 Ark. 1170, 1179 (1958); Hall v. Dekker, 45 Cal.App.2d 783, 786 (1941). The master's findings amply support the conclusion that the defendants violated their fiduciary duty of loyalty to Chelsea.20 See, e.g., Wormstead v. Town Manager of Saugus,366 Mass. 659 (1975).

Forfeiture of the defendants' compensation. Gaffney and McElroy contend that the judge erroneously awarded damages to the plaintiff equal to the entire compensation paid the defendants during the period they participated in a joint venture to compete with Chelsea. The defendants acknowledge that there is substantial authority in Massachusetts that a corporate officer, director, or trusted agent or employee can be required to forfeit the right to retain or receive his compensation for conduct in violation of his fiduciary duties. Swaney v. Clark-Wilcox Co.,331 Mass. 471, 475 (1954). Production Mach. Co. v. Howe,327 Mass. 372, 379 (1951). Raymond v. Davies, 293 Mass. 117, 120 (1936). Little v. Phipps, 208 Mass. 331, 334 (1911). Sipley v. Stickney, 190 Mass. 43, 46 (1906).

For such breaches, the defendants can be required to forfeit the right of compensation even absent a showing of actual injury to the employer. Quinn v. Burton, 195 Mass. 277, 279 (1907). See Restatement (Second) of Agency § 469 & comments (1958); J.C. Peacock, Inc. v. Hasko,196 Cal.App.2d 353, 358 (1961); American Timber & Trading Co. v. Niedermeyer,276 Or. 1135, 1155 (1976). See also Jacobs, Business Ethics and The Law: Obligations of a Corporate Executive, 28 Bus. Law.
[ 389 Mass. 14 ]

1063, 1084-1086 (1973). Further, the fact that Ideal made profits during the period in question "is no answer to the established violation of duty. The fact that the division may have made money does not prove that no breach took place." Wilshire Oil Co. v. Riffe,406 F.2d 1061, 1062 (10th Cir.1969). Consequently, unless Gaffney and McElroy proved the value of their services, Chelsea was entitled to recover their entire compensation. See Harry R. Defler Corp. v. Kleeman,19 A.D.2d 396 (N.Y. 1963). We conclude that they did not prove the value of their services to Chelsea.

Corporate officers, directors, members, and employees owe a duty of care to the corporation. Breach of duty is part of a negligence lawsuit. In a negligence lawsuit there are four elements to consider: duty, breach of duty, causation and damages. For breach of duty, it must be decided whether or not the defendant, the one being accused of negligence, behaved in a way that a reasonable person would have under similar circumstances given their position with the company and level of responsibility. If no duty is owed then there is no negligence lawsuit. Here they were all company executives and being paid while they used company time and money to plan and initiate a competing business. Chelsea would win. The damages would include lost profits, plus any monies Chelsea paid toward salary, travel, etc that were used by the men to further their own business.
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