Earlier this year, the North Carolina Business Court (which handles complex business cases arising in the state) issued a decision that serves as a painful reminder of the consequences of failing to protect your business from disloyal employees. In Alamance Family Practice v. Lindley, the employer, a medical practice, alleged that two of its employees engaged in various forms of misconduct. While still employed by the practice, the employees allegedly formed a separate business to provide allergy testing for patients, stored supplies at the practice, and even conducted medical tests for the allergy business in the employer’s offices. One of the employees, a nurse practitioner, allegedly informed the practice’s patients on the employer’s letterhead that she would be moving to her own office and that the practice was about be shut down. The employees allegedly gave themselves pay raises and unauthorized perks. And, as a coup de grace, an employee allegedly refused to cede control to the employer of an email account that had been created for the practice.
Not surprisingly, the medical practice sued its former employees alleging multiple legal claims. All but one of these claims, however, were dismissed. In North Carolina, only officer-level employees owe a fiduciary duty to their employers. The Business Court, relying on well-established precedent, ruled that (1) the employees had no duty of loyalty to their employer; (2) the employees could not be liable for tortious interference with contract because there were no contracts between the practice and its patients; (3) the Unfair and Deceptive Trade Practices Act was not applicable due to the “learned professional” exemption; and (4) the practice did not have a protectable trade name. Only a claim for breach of contract against one of the employees survived the motion to dismiss.
What could the employer have done to protect its interests? First, employers can and should create contractual rights through intellectual property, ownership, and nondisclosure agreements. Second, employers can and should require key employees to execute noncompetition, customer non-solicitation, and employee piracy agreements. Third, businesses can and should seek trademark protection for business names, logos, and product names. And, of course, businesses should create a system of checks and balances to ensure that employees are not misappropriating business assets, and that no single employee controls information technology systems or assets. As this case points out, employers that fail to take such proactive steps cannot rely on North Carolina law to rescue their business assets.