ROBERT M. PRESTWOOD DBA PRIMETECH vs. COHEN RE: Miss Appropriation of trade
secrets: Cohen Exonerated, Primetech Appeal Denied
Primetech
v. Cohen: No Duty Of Loyalty To Past Employers
Posted on June 4, 2008 as reported by by Jason
Jarvis
The California Courts of Appeal recently concluded that a former employee
could not have breached a duty of loyalty to his employer where he entered into
competition with the employer only after leaving the company.
Primetech
Corp. v. Cohen, 2008 WL 1899976 (Cal. App. 4 Dist. April 30, 2008).
The plaintiff, Primetech Corporation, a supplier of aircraft parts to the
military and civilian industry, hired defendant Jonathan Cohen to help produce
a database of aircraft parts. A year after Cohen started, the United States Air
Force suspended Primetech and “debarred” many of its principals from any
government contracting because of allegations that the company had knowingly
delivered counterfeit parts to the Department of Defense. Around this time,
Cohen, and another employee of Primetech, formed Air Sonic, an aircraft parts
business, where they continued to use Primetech’s database. Cohen ultimately
separated from Primetech in July 2005, taking several computers with him, as
well as a database program containing Primetech’s financial information.
Primetech sued Cohen and his new aircraft parts company, Air Spectrum, which
had replaced the earlier Air Sonic. After a bench trial, the trial court
entered judgment for Cohen on most of the causes of action, rejecting
Primetech’s claims for breach of loyalty, misappropriation of trade secrets,
and unfair competition, among others. Primetech argued on appeal that the trial
court had erred in denying its motion for a directed verdict (nonsuit) on its cause
of action for breach of loyalty. Primetech alleged that Cohen had breached his
duty of loyalty when he began operating his own aircraft parts company while
still employed at Primetech. The trial court, however, concluded that Cohen was
never an officer of the company and furthermore, he had started Air Sonic with
the consent of Primetech’s vice president and had not actually decided to
compete with Primetech until
after he had separated from the company,
which he was entitled to do since there was no non-compete clause in his
employment contract. Reviewing the facts, the Courts of Appeal observed that
while substantial evidence supported a determination that Cohen was an officer
of Primetech when he set up a competing business using Primetech’s database,
Primetech had failed to demonstrate that Cohen had directly harmed the company
with his competing venture, so any error was not prejudicial and thus reversal
was not warranted. As a result, the Courts of Appeal held that the trial
court’s factual findings precluded Primetech from succeeding under a breach of
loyalty theory.This case should prompt companies to consider carefully the circumstances
under which they separate from former executives. Although non-competition
agreements can protect an employer, a company should not rely on breach of
loyalty claims to protect against contemporaneous competition where there is
any inference of an amicable split. Employers should also realize that to
pursue a breach of loyalty claim successfully , they must demonstrate that the
employee “formed the design to compete” while still employed with the company.
Similarly, without adequate trade secrets counseling and preparation, even a
company’s most valuable asset (in this case the airplane parts database) can be
used by former employees in competing businesses if the proper protections are
not in place.
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