Opinion ID: 783032
Heading Depth: 2
Heading Rank: 2

Heading: Breach of the Duty of Loyalty

Text: 4 The primary issue on appeal is whether EBI may bring a claim under Hawaii law against its employees for directly competing against it. In deciding state law claims, we apply Hawaii law as we believe the Hawaii Supreme Court would apply it. See Gravquick A/S v. Trimble Navigation Int'l, Ltd., 323 F.3d 1219, 1222 (9th Cir.2003). We conclude that Hawaii law would recognize EBI's claim against Riley and Kunimitsu for their breach of the duty of loyalty. 5 It is clear under Hawaii law that employees owe their employer a duty of loyalty. See Stout v. Laws, 37 Haw. 382, 392 (1946). Although the Hawaii Supreme Court has not explicitly stated that the employer may bring a claim for a breach of this duty, Hawaii courts have recognized the authoritative nature of the Restatement (Second) of Agency. See, e.g., Hawai'i Hous. Auth. v. Uyehara, 77 Hawai'i 144, 883 P.2d 65, 72 (1994). We thus believe that the Hawaii Supreme Court would follow the Restatement in finding that such a cause of action exists. 6 The Restatement recognizes that an agent is subject to a duty not to compete with the principal concerning the subject matter of his agency. Restatement (Second) of Agency § 393. This duty extends to employees. See Restatement (Second) of Agency § 429 cmt. a. Although an employee is entitled to make arrangements to compete with his employer prior to terminating the employment relationship, the employee is not entitled to solicit customers for such rival business before the end of his employment. Restatement (Second) of Agency § 393 cmt. e. The Restatement also provides that the employer may maintain an action for a violation of the duty of loyalty. See Restatement (Second) of Agency § 399. 7 This is the classic case the Restatement envisions. The material facts are not disputed. While still employees of EBI, Riley and Kunimitsu formed their own partnership, Kamaaina Pumping. Merely preparing to compete does not itself breach the duty of loyalty. Restatement (Second) of Agency § 393 cmt. e. When the partnership submitted a bid for a County of Hawaii drywell and culvert cleaning project, however, Riley and Kunimitsu engaged in conduct equivalent to the solicitation of customers. Id. EBI was the only other bidder, and it ultimately lost the contract to Kamaaina Pumping. Moreover, Riley and Kunimitsu executed the contract with the County of Hawaii while still employees at EBI and without EBI's knowledge. It is therefore clear from the record that Riley and Kunimitsu breached their duty of loyalty by directly competing with EBI. 8 Riley and Kunimitsu argue that EBI nevertheless has no claim against them because they were only low-level employees. Nothing in the Restatement indicates, however, that ordinary employees have no duty of loyalty. Further, other courts have recognized the liability of employees who are not officers or directors. See, e.g., Eaton Corp. v. Giere, 971 F.2d 136, 141 (8th Cir.1992) (concluding that a product engineer breached his duty of loyalty by soliciting his employer's customers for himself). Thus, Riley and Kunimitsu are liable. 9 The employees also contend that any claim EBI had is barred by Hawaii's two-year statute of limitations for torts. The district court, however, correctly applied Hawaii's six-year contractual statute of limitations to EBI's duty of loyalty claim. The six-year statute of limitations applies to [a]ctions for the recovery of any debt founded upon any contract, obligation, or liability. Haw.Rev.Stat. § 657-1. The Hawaii Supreme Court has held that the words obligation and liability encompass actions that are hybrids of tort and contract and that primarily involve an injury to intangible property interests. See Higa v. Mirikitani, 55 Haw. 167, 517 P.2d 1, 5 (1973). A claim for a breach of an employee's duty of loyalty is such a hybrid. Under the Restatement, the employer has a cause of action either in tort or for breach of contract when the employee violates the duty. See Restatement (Second) of Agency § 403 cmt. b. Thus, section 657-1(1)'s six-year limitation period applies to EBI's claim for the breach of the duty of loyalty. See Higa, 517 P.2d at 4-5(applying the six-year limitations provision to a claim for legal malpractice that generally arises out of a contractual relationship between the parties).