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Corporate Titles Carry Risks.

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Businessman contestCorporate titles of your key people can really hurt you or help you. Two real cases show why.

The first case: Brady and two friends were officers and employees of a company which flew small planes to ferry people from little city airports to a major airport.

One day, they learned that an opportunity was coming up: a chance to do the same thing to a new city. They figured this was a great chance to do their own thing. So they quit the company they’d been working for, formed a new company for themselves, and bought the new route.

The only problem: the new route was the kind of business their old employer did, and would have done.

The second case: Bellomo was hired to be “Director of Wireless Sales” for a company which did wireless networks. Two years later, while still employed by that company, he and a partner secretly formed a new company to do the same thing.

A few months later, Bellomo had a pay dispute with his employer and they parted ways. But he wasn’t out in the cold because his new company was already in business, doing competing work!

Bellomo promptly wooed a big account which he had brought to his former employer. You guessed it, that account hired Bellomo’s new company.

Both former employers — the commuter air cargo business in the first case and the wireless company in the second case, sued their respective former employees. One won and the other lost. 

Bellomo’s former employer (Avion) lost. And to add insult to injury, Bellomo claimed that Avion owed him his bonus, and sued them back.  The case went to a jury which found for Bellomo, awarding him six-figure damages and another six-figure amount for attorney’s fees.  And the Georgia Court of Appeals affirmed this result.

In the first case, the former employees lost and the airline prevailed. And they lost in a big way: the jury awarded damages of $30 million, plus punitive damages, to their former employer.

Where’s the difference? Simple: it’s in the titles. And it applies to businesses of every size. So if you own one and have employees: be careful.

In the airline case, Brady and his two cohorts were not just employees. They were corporation officers, too. And officers owe the company the highest legal duty to protect the company’s money and property.

Stealing a corporate opportunity for one’s own personal gain is not protecting the company.

In fact, breaching this duty makes one liable for damages – what one dictionary calls the “ill-gotten profit.” The threesome in the first case owed what’s called a “fiduciary duty.” It’s what a trustee owes to a trust’s beneficiary and an executor owes an estate’s beneficiaries. It applies to companies and its officers. The officers are, in effect, agents of the principal: the company.

So why is this different than the Bellomo case? Turns out that Mr. Bellomo was not an officer of any kind. He was only an employee of Avion. He was hired to be a “Director of Wireless Sales.”

And as the Court of Appeals put it, Bellomo couldn’t be liable for taking that account since he was just an employee hired to solicit potential customers.

Now in some cases, an employee might have a fiduciary duty. As a practical matter, though, being an employee with the word “director” in your title does not create any principal-agent relationship with the employer. Thus, there’s no fiduciary duty.

Clearly, the job title matters.

So as an employer, do your “couldn’t-do-without” employees have the right title to create the responsibility and loyalty to your company that you want? Or maybe you should consider Non-Competition Agreements, which are much easier to enforce in Georgia than they used to be.

A footnote. Shareholders in a corporation elect corporate directors who, in turn, elect the company’s officers.  This kind of director is different than putting “director” on an employee’s card, g.,  Bellomo’s “Director of Wireless Sales.” It’s a blur of sorts, but one that is easily avoided by using another word in an employee’s title.  (Associate? Manager? Executive in charge of . . . ? Grand Poobah? You get the idea.)

© Fox+Mattson, P.C., Atlanta, GA 2016. Note: this article is not intended to be legal advice. Do not take any actions based on it without first consulting your advisors.

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