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Wisconsin Court Clarifies That a Duty of Loyalty is Not Limited to High-Level Employees

Commercial Litigation Law Update

The Wisconsin Court of Appeals recently provided employers with welcome assurance that the scope of employees who owe their employer a duty of loyalty is not limited. See InfoCorp. v. Hunt, 2010 WI App 3. In a previous decision, Modern Materials, Inc. v. Advanced Tooling Specialists, Inc., 206 Wis. 2d 435 (Ct. App. 1996), the court had seemed to suggest that only high-level employees - employees who were either policy makers or corporate officers - owed their employer such a duty. The court's decision in Infocorp clarifies its holding in Modern Materials - a decision that has vexed attorneys and judges alike for over a decade - and provides employers with some assurance that the duty of loyalty can extend to lower-level employees.

Facts of the Case and the Court's Ruling

The Infocorp case involved the question of whether a salesman of SMART boards (interactive chalkboards), Christopher Hunt, had breached a duty of loyalty to his employer, InfoCorp. Hunt handled major accounts for InfoCorp, including managing InfoCorp's exclusive relationship with a Cooperative Educational Service Agency ("CESA") district whereby InfoCorp was the only reseller authorized by CESA to sell it used SMART boards.

In September 2006, Hunt approached a rival company, Tierney Brothers, about a job. Throughout his interview process, Hunt set up meetings between CESA and Tierney Brothers where CESA and Tierney Brothers discussed the possibility of Tierney Brothers becoming authorized to sell SMART boards to CESA. In the middle of September, after these meetings took place, Tierney Brothers hired Hunt; however, Hunt did not resign from InfoCorp until October. During that one-month overlap, Hunt diverted InfoCorp's business, including business with CESA to Tierney Brothers. Indeed, Tierney Brothers became authorized to sell CESA SMART boards in October 2006, and CESA went on to terminate its agreement with InfoCorp in January 2007.

After Hunt's resignation, InfoCorp filed suit against him, accusing Hunt of breaching his duty of loyalty. InfoCorp argued that Hunt's duties gave him substantial control over InfoCorp's business as well as substantial knowledge of key aspects of InfoCorp's business. InfoCorp maintained that because Hunt had such control and knowledge, he owed InfoCorp a duty of loyalty. The trial court disagreed, concluding that prior Wisconsin cases limited the duty of loyalty to an employer's corporate officers and policy makers. Accordingly, even though Hunt was disloyal, he did not owe a duty of loyalty to InfoCorp.

The Wisconsin Court of Appeals disagreed. Carefully analyzing prior Wisconsin case law on the topic, the court concluded that a duty of loyalty extends beyond corporate officers and policy makers. The court concluded that when an employee's job responsibilities include the type that could be manipulated by the employee to cause direct harm to the employer, the employee owes their employer a duty of loyalty. The court further reasoned that an employee breaches that duty of loyalty when he uses his responsibilities to directly harm the employer.

Impact of the Court's Ruling on Employers

While the Court of Appeals decision could be reconsidered by the Wisconsin Supreme Court, for now InfoCorp allows an employer directly injured by the disloyal actions of a lower-level employee to pursue that employee for breach of the duty of loyalty.

If you have questions about this decision, breach of duty issues or other related claims, contact Jeff Davis at (414) 277-5317 / [email protected], Sean Scullen at (414) 277-5421 / [email protected], Nicole Druckrey at (414) 277-5777 / [email protected], Allison Cimpl-Wiemer at (414) 277-5697 / [email protected] or your Quarles & Brady attorney.

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