S.E. 2d
THE STATE OF SOUTH CAROLINA
In The Supreme Court
James Morgan Futch, Petitioner,
v.
McAllister Towing of
Georgetown, Inc., Respondent.
ON WRIT OF CERTIORARI
TO THE COURT OF APPEALS
Appeal From Georgetown County
Sidney T. Floyd, Circuit Court Judge
Opinion No. 24976
Heard January 6, 1999 - Filed July 26, 1999
REVERSED
Robert L. Widener and Celeste T. Jones, both of the
McNair Law Firm, Columbia, for petitioner.
Marvin D. Infinger and Julie O. Medich, both of
Sinkler & Boyd, P.A., of Charleston, for respondent.
WALLER, A.J.: James M. Futch (Futch) won a jury verdict, as well
as treble damages and attorney's fees, in an action he brought pursuant to the
state Payment of Wages Act. Futch lost on appeal when the Court of Appeals
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FUTCH v. MCALLISTER TOWING
reversed the trial judge's denial of McAllister Towing's (Employer's) directed
verdict motion. We granted Futch's petition for a writ of certiorari to review the
Court of Appeals' decision. We reverse.
FACTS
The facts of this case are undisputed. Employer, headquartered in
New York, employed Futch as a tugboat captain and local manager of its
operations at the port in Georgetown. Futch, who was eighty-eight years old
when this dispute arose, had begun his life on the water in the early 1920s by
running mail and supply boats to South Carolina's coastal islands. He had
worked as a tugboat captain in the ports at Charleston and Georgetown since at
least the 1960s. His longevity and expertise had made him a respected, well
known figure among the lowcountry shipping community. In 1981, after
Georgetown's only tugboat company stopped operating, Futch personally leased
tugboats for six months to keep the city's port open for business until Employer
took over the defunct company's operations.
Employer discussed the possibility of retirement with Futch in late
1992. Futch told Employer's representative that he had no plans to retire, shook
hands with the representative, and left believing his job would continue
indefinitely. Employer, however, informed Futch by a written memorandum in
December 1992 that his job would terminate at the end. of 1993.
Futch knew that Employer often had debated whether to cease
operations in Georgetown. Employer discussed those concerns in a letter to the
port's director in January 1993. Believing Employer might cease operations and
realizing his job would end in December 1993 in any event, Futch and a long
time co-worker, Norman Assey Jr., began discussing the possibility of starting
their own tugboat company. Futch and Assey, without revealing anything to
Employer, began taking steps to establish their own company. Assey considered
Futch a respected mentor. He testified that he and Futch worked as a "team"
to start the new company.
An official of a local steel manufacturer declined to commit his
business to Futch's new company, stating in a February 1993 letter addressed
only to Futch that he made the decision after giving "a great deal of thought to
the discussion we had in my office a while back." Officers of two shipping
agencies, including one that handled ninety percent of all ships visiting the port
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FUTCH v. MCALLISTER TOWING
of Georgetown, prepared letters in March 1993 stating they would employ Futch
and Assey's new tugboat company. The letters named both Futch and Assey,
and Futch met directly with at least one of the shipping officers.
Futch and Assey prepared a business plan and sought a $300,000
loan from a bank in spring 1993. The business plan states the men would
compete directly with Employer and. intended to set their pricing structure
fifteen percent below Employer's rates. A letter from a bank officer addressed
to Futch and Assey indicates he met with both men. Futch and Assey purchased
one tugboat, leased another, and obtained insurance on both boats in April 1993.
Futch, acting as incorporator, reserved a name for the new company with the
South Carolina Secretary of State's office in May 1993. Futch signed an annual
registration form for the new company required by the South Carolina State Port
Authority in August 1993, listing himself as president and Assey as vice
president. Assey approached other workers of Employer to discuss whether they
would like to work for the new company.
Futch by all accounts continued to ably perform his duties for
Employer while secretly laying the groundwork for the new company. Futch's
duties as a tugboat captain for Employer did not include customer development
or sales. Futch, with decades of experience, did not develop any new skills or
contacts while working for Employer. He had known all the companies and
people he approached with his idea for a new company for years, long before
Employer ever came to Georgetown.
Employer learned about Futch's plans from a local shipping agency
on August 2, 1993. Employer fired Futch the next day and refused to pay him
$4,200 in monthly commissions he had earned docking and undocking seven
ships during July and August 1993. Futch's new company began operations the
day after Employer fired Futch.
Futch brought an action seeking $4,200, plus treble damages and
attorney's fees, under the Payment of Wages Act. See S.C. Code Ann.§§ 41-10
10 to -110 (Supp., 1998). Employer answered, asserting Futch's disloyalty as a
defense, and counterclaimed to recover all wages paid to Futch during the entire
period of his disloyalty. Tugboat companies owned by Futch and Employer both
were operating in Georgetown when the trial occurred in October 1995.
At trial, Employer argued the trial judge should grant it a directed
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FUTCH v. MCALLISTER TOWING
verdict because Futch clearly had violated his duty of loyalty to Employer, thus
forfeiting any right to compensation. The judge denied Employer's motion.
The judge instructed the jury to decide whether Futch had proven
that Employer had breached its employment agreement by refusing to pay him.
If Employer had breached the agreement, the jury next had to decide whether
Employer had proven it did not have to pay Futch because he had breached his
duty of loyalty to Employer. The jury awarded $4,200 to Futch after deliberating
sixteen minutes. The judge trebled the damages and awarded attorney's fees
and prejudgment interest to Futch, for a total award of about $16,402. Employer
appealed.
The Court of Appeals reversed, holding 2-1 that the trial judge
should have granted Employer's directed verdict motion. Futch v. McAllister
Towing, 328 S.C. 312, 491 S.E.2d 577 (Ct. App. 1997). We now review that,
decision.
ISSUES
1. Did the Court of Appeals err in adopting a bright-
line rule that an agent or employee's breach of
the duty of loyalty results in the forfeiture of all
compensation?1
2. Did the Court of Appeals err in reversing the trial
judge's denial of Employer's directed verdict
motion?
1The Court of Appeals and the parties have used the terms "employee"
and "agent" interchangeably. Distinguishing between these two types of agency
relationships - principal-agent and employer-employee - often is difficult, with
the only real difference being one of degree. See 2A C.J.S. Agency §16 (1972)
(discussing similarities and distinctions between the two relationships); Jet
Courier Service, Inc. v. Mulei, 771 P.2d 486, 492 n.10 (Colo. 1989) (discussing
same). We believe the Court of Appeals and the parties correctly recognize that
Fut ch was an agent of Employer, given his duties as the local manager of
Employer's operations. Regardless, the principles outlined below apply with
equal force to agents and ordinary employees.
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FUTCH v. MCALLISTER TOWING
DISCUSSION
1. THE PROPRIETY OF THE BRIGHT-LINE RULE
Futch contends the Court of Appeals erred in adopting a bright-line,
general rule "that an agent guilty of disloyalty to his principal forfeits all
compensation." Futch, 328 S.C. at 316,491 S.E.2d at 579 (emphasis added). He
argues an agent forfeits compensation only during a period of disloyalty and,
when an agent's compensation is apportioned, the agent ought to get paid for
time periods or tasks performed while acting loyally. Futch urges the Court to
adopt a particular circumstances or balancing test that examines the nature of
the employment relationship, the type of disloyalty, and the benefit received by
the employer during the period of disloyalty.
Initially, we note the Court of Appeals correctly concluded that
today's version of the Payment of Wages Act, like its predecessors, does not
prohibit an employer from asserting valid defenses or disputing payment in good
faith. This Court has stated, in interpreting a predecessor statute of the present
Act,2 that the Legislature did not intend to prevent employers from asserting
valid defenses or counterclaims against employees. See Cato v. Grendel Cotton
Mills, 132 S.C. 454, 456-61, 129 S.E. 203, 205 (1925) (emphasizing the remedial
nature of the statute and the sound public policies underlying it, and refusing
to allow employers to ignore the statute by claiming their employees had by
contract or custom waived their statutory right to prompt payment of wages)
(citing Wynne v. Seaboard Air Line Railway , 96 S.C. 1, 79 S.E. 521 (1913))-)
accord Rice v. Multimedia, Inc., 318 S.C. 95, 99, 456 S.E.2d 381, 383 (1995)
(concluding that award of treble damages and attorney's fees under today's
Payment of Wages Act is discretionary, and Legislature did not intend to deter
employer from asserting valid defenses or disputing payment in good faith).
This Court's precedent establishes that an employee who breaches
the common law duty of loyalty to an employer, often described as a "faithless
servant," forfeits the right to compensation. See Schuermann v. American Ka-ro
2The statute was Section 3812 of the Civil Code of 1912, one of the
predecessors of S.C. Code Ann. § 41-11-1.80 (1986). The Legislature repealed
Section 41-11-180 and related provisions in 1986 when it enacted the current
Payment of Wages Act.
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FUTCH v. MCALLISTER TOWING
Corp., 295 S.C. 64, 367 S.E.2d 159 (1988) (employee who was fired for cause due
to unspecified breach of duty of loyalty gives employer the right to abandon a
non-competition clause in contract and thereby avoid paying employee under
that clause); Berry v. Goodyear Tire & Rubber Co., 270 S.C. 489, 242 S.E.2d 551
(1978) (tire salesman who was fired by his employer after nineteen years
because he worked for competitor while on sick leave and never provided a
physician's statement was disloyal; therefore, he was not entitled to severance
pay).
This Court also has held that solicitation of an employer's customers
is a breach of the duty of loyalty, particularly when combined with other acts or
plans aimed at competing with the employer. See Lowndes Products, Inc. v.
Brower 259 S.C. 322,335-39,191 S.E.2d 761,767-70 (1972) (key employees who
contacted and met with investors and a customer of current employer to lay
plans to start a competing textile company, who left their employer without
notice, and who leased space and ordered materials to build manufacturing
equipment were guilty of disloyalty, and owed damages to employer); Ocean
Forest Co. v. Woodside, 184 S.C. 428,442-44,192 S.E. 413,420 (1937) (an agent
hired to collect a single debt who diverted the money to his own use was guilty
of disloyalty to the principal; therefore, he was not entitled to his commission);
accord Restatement (Second) of Agency, §§ 387 and 393 (1958); 30 C.J.S.
Employer-Employee Relationship §§ 110-113 (1992); 3 C.J.S. Agency §§ 271-287
(1973).
We have not, however, explicitly addressed whether a disloyal agent
or employee must forfeit all compensation or only the portion earned during a
period of disloyalty when compensation is apportioned. Nor have we explicitly
rejected a test that examines the particular circumstances of a case to decide
whether forfeiture of all compensation is appropriate when an agent or employee
breaches the duty of loyalty.3
3 Futch's case, as explained below, is one in which we conclude
apportionment is proper. His is not a case in which an agent was hired to do a
single task. In those cases, apportionment likely would not be proper and the
agent may be required to forfeit all compensation. See Ocean Forest Co., 184
S.C. at 443,192 S.E. at 420 (mentioning apportionment principle, which was not
app licable in that case). We leave for another day the question of whether the
(continued...
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FUTCH v. MCALLISTER TOWING
In debating these questions, we seek to harmonize two important
and occasionally conflicting policies: the employee's duty of loyalty and society's
interest in fostering free and vigorous economic competition. See Jet Courier
Service, Inc. v. Mulei, 771 P.2d 4862 493 (Colo. 1989) (discussing the conflict).
We agree with the Maryland Court of Appeals that "[f]airness dictates that an
employee not be permitted to exploit the trust of his employer so as to obtain an
unfair advantage in competing with the employer in a matter concerning the
latter's business.... [However,] it is important to the free competition basic to
our national development as well as to the individual rights of employees who
want to go into business for themselves that their spirit of enterprise be not
unduly hampered." Maryland Metals, Inc. v. Metzner, 382 A.2d 564, 568-69
(Md. 1978). Thus, while employees may lay plans and take limited steps to
begin competing with their employers, employees who go too far risk violating
their duty of loyalty. We acknowledge, as others have, that "the line separating
mere preparation from active competition may be difficult to discern in some
cases." Jet Courier Service, 771 P.2d at 493; Maryland Metals, 382 A.2d at 569.
We believe the bright-line rule applied by the Court of Appeals fails
to account for the conflicting policies at work in a disloyalty case. Accordingly,
we reverse the Court of Appeals on this issue and instead adopt the balancing
approach described below. Such an approach will protect employers from
employees' breach of the duty of loyalty, while ensuring employees are not
unduly stymied in their efforts to enter the competitive fray of our nation's free
enterprise system.
We find the case of Jet Courier Service instructive on the issue of
employee disloyalty. In that case, a dissatisfied local manager of an air courier
service laid extensive plans to compete with his employer, successfully solicited
most of his co-employees to come work for his new company, and successfully
solicited five of his employer's customers. The manager allegedly continued to
ably perform his duties while arranging to start the new company. The Colorado
Supreme Court reversed the lower courts' judgment that the manager had not
violated his duty of loyalty, and remanded the case for a new trial.
3 ( ... continued)
balancing principles discussed below apply in a non-apportionment case, such
that a disloyal agent may not have to forfeit all compensation.
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FUTCH v. MCALLISTER TOWING
We conclude that Jet Courier Service, drawing upon the
Restatement (Second) of Agency, offers a more accurate and complete statement
of the general rule than the rule stated by our Court of Appeals. "The general
rule is that an employee is not entitled to any compensation for services
performed during the period he engaged in activities constituting a breach of his
duty of loyalty even though part of those services may have been properly
performed." However, even when an employee breaches the duty of loyalty
during some periods, he may "still recover compensation for services properly
rendered during periods in which no such breach occurred and for which
compensation is apportioned in his employment agreement. Apportioned
compensation is that paid to an agent or employee that is allocated to certain
periods of time or to the completion of specified items of work." Jet Courier
Service, 771 P.2d at 499-500.
This principle is the same one espoused in Restatement (Second) of
Agency,§§ 456 and 469 (1958)4 and Restatement (Second) of Trusts, § 243
4 Section 456 states:
If a principal properly discharges an agent for breach of
a contract, or the agent wrongfully renounces the
employment, the principal is subject to liability to pay
to the agent, with a deduction for the loss caused the
principal by the breach of contract:
(a) the agreed compensation for services properly
rendered for which the contract is apportioned in
the contract, whether or not the agent's breach is
wilful and deliberate; and
(b) the value, not exceeding the ratable
compensation, of services properly rendered for
which the compensation is not apportioned if, but
only if the agent's breach is not wilful and
deliberate.
Section 469 states:
An agent is entitled to no compensation for conduct
(continued...
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FUTCH v. MCALLISTER TOWING
(1959)5 which courts have relied upon in disloyalty cases. Other courts have
endorsed the apportionment principle in cases involving an agent or employee's
breach of the duty of loyalty.6
4( ... continued)
which is disobedient or which is a breach of his duty of
loyalty; if such conduct constitutes a wilful and
deliberate breach of his contract of service, he is not
entitled to compensation even for properly performed
services for which no compensation is apportioned.
5 Section 243 states:
If the trustee commits a breach of trust, the court may
in its discretion deny him all compensation or allow him
a reduced compensation or allow him full compensation.
Comment c directs the court to consider factors such as whether the
trustee acted in good faith, whether the breach related to the management of the
entire trust or only a part of it, and whether the trustee's services were of value
to the trust.
6 See Musico v. Champion Credit Corp., 764 F.2d 102, 113 (2d Cir. 1985)
(noting the trend in New York law is toward the Restatement position of
apportioning forfeitures of a disloyal agent's compensation when that
compensation is allocated to periods of time or the completion of specified items
of work); Chelsea Industries, Inc. v. Gaffney, 449 N.E.2d 320, 326-28 (Mass.
. 1983) (stating disloyal executives could have been forced to repay only the
compensation that was in excess of the worth of their services during the period
of disloyalty, but the executives ignored two opportunities to present evidence
on the issue); Bessman v. Bessman, 520 P.2d 1210,1220 (Kan. 1974) (concluding
employer was not required to pay disloyal hotel manager during months he
embezzled funds, but was required to pay him during months he did not commit
any disloyal acts); Simulation Systems Technologies, Inc. v. Oldham, 634 A.2d
10342 1037 (N.J. Super. Ct. App. Div. 1993) (indicating that apportionment
principle likely applied under New Jersey law, but concluding employer could
not recover damages from disloyal employee because it failed to pinpoint pay
periods in which each disloyal act was committed and pay apportioned to that
(continued ... )
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FUTCH v, MCALLISTER TOWING
Whether an agent or employee's compensation is apportioned, i.e.,
allocated to certain periods of time or to the completion of specified items of
work, usually is a question for the jury. Whether the agent or employee acted
disloyally during a particular apportioned period or task also is a question for
the jury in most cases. In deciding whether an agent or employee acted
disloyally, the jury must focus upon the particular circumstances of the case.
The goal is to avoid the unjust enrichment of either party by examining factors
such as the nature of the employment relationship, the nature and extent of the
employee's services and the breach of duty, the loss or expense caused to the
employer by the breach of duty, and the value to the employer of the services
properly rendered by the employee. See Hartford Elevator, Inc. v. Lauer, 289
N.W.2d 280, 287 (Wis. 1980) (refusing to adopt rigid rule requiring forfeiture of
all compensation during disloyalty; instead the court must focus upon the
particular circumstances of a case); accord Jet Courier Service, 771 P.2d at 497
(in deciding whether employee impermissibly solicited his co-employees,
consider factors such as the. nature of the employment relationship, the impact
or potential impact of the employee's actions on the employer's operations, and
the benefit received by the employer during the period of disloyalty).
Solicitation of an employer's customers likely will constitute a
violation of the duty of loyalty in almost every case, while merely preparing and
submitting forms to create a new corporation, for example, likely will be seen as
permissible pretermination planning. See Jet Courier Service, 7.71 P.2d at 493;
Auxton Computer Enterprises, Inc. v. Parker, 416 A.2d 952, 955 (N.J. Super. Ct.
App. Div. 1980) (employee, while still employed, may make arrangements to go
to work for a competitor or establish his own business in competition with his
employer, but he may not solicit his employer's customers for his own benefit
before he has terminated his employment).
The trial judge should instruct the jury that, in identifying
apportioned tasks or time periods in which an agent or employee acted
disloyally, one period of disloyalty may taint succeeding tasks or time periods.
6 ( ... continued)
period); Fidelity Fund, Inc. v. Di Santo, 500 A.2d 431, 439-40 (Pa. Super. Ct.
1985) (concluding employer could recover commissions paid to insurance agent
who wrote policies for a competitor, but not commissions paid to the agent for
properly written policies).
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FUTCH v. MCALLISTER TOWING
If, for example, the agent or employee's disgruntled attitude following a period
of disloyalty is so severe that it results in work that is of little or no value to the
employer, the jury may conclude the agent or employee should not be
compensated for the succeeding task or time period even though no explicitly
disloyal acts occurred during that task or time period.
Similarly, even in cases in which apportionment and partial
compensation would otherwise be proper, the jury may find that an agent or
employee forfeited the right to all compensation because the agent or employee's
unusually egregious or reprehensible conduct pervaded and corrupted the entire
relationship. See Bessman v. Bessman, supra ("faithlessness must 'permeate',
the service to cause a total loss of compensation") (emphasis in original); Roberto
v. Brown County Gen. Hosp., 571 N.E.2d 467, 470 (Ohip Ct. App. 1989)
(concluding that disloyal administrator's embezzlement of hospital funds so
pervaded the relationship that hospital was not required to pay him deferred
compensation he otherwise would have earned during his period of
unfaithfulness); ABC Trans Nat'l Transport, Inc. v. Aeronautics Forwarders,
Inc., 413 N.E.2d 1299, 1314-15 (Ill. App. Ct. 1980) (favorably citing
apportionment principle, but concluding key employees conduct in setting up
rival concern, soliciting lower employees, and conspiring against employer was
so egregious and pervasive that they forfeited their right to all compensation).
2. DIRECTED VERDICT MOTION
Futch contends the Court of Appeals erred in reversing the trial
judge's denial of Employer's directed verdict motion because he did not use
Employer's time or money to perform any disloyal acts, and it is undisputed that
he ably performed his duties in docking and undocking ships. Any disloyalty
occurred before Futch docked the ships in July and August 1993, which was the
period in which Employer refused to pay Futch's commissions. Therefore,
Employer is required to pay him, Futch asserts.
In deciding motions for a directed verdict or judgment
notwithstanding the verdict, the evidence and all reasonable inferences which
may be drawn from it must be viewed in the light most favorable to the
nonmoving party. If more than one reasonable inference can be drawn from the
evidence, the case must be submitted to the jury. Crossley v. State Farm Mutual
Auto. Ins., 307 S.C. 354, 415 S.E.2d 393 (1992); see also Weir v. Citicorp Nat'l
Services, Inc., 312 S.C. 511, 435 S.E.12d 864 (1993) (illustrating an appellate
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FUTCH v. MCALLISTER TOWING
court must apply the same standard when reviewing the trial judge's decision
on such motions).
Under the analysis outlined in Issue 1, we find that Futch's
compensation was apportioned because his monthly pay was based on the
tonnage of each ship he docked or undocked at the port. The question, then, is
whether, viewing the evidence in the light most favorable to Futch, the trial
judge erred in denying Employer's directed verdict motion alleging that Futch
was disloyal, as a matter of law.
The jury, under the approach we endorse today, would have to
identify loyal and disloyal periods to determine whether Employer was required
to pay Futch the withheld wages.7 The only evidence in the record of any
allegedly disloyal act during July and August 1993 was Futch's signing of an
annual registration form submitted to the State Port Authority. We believe a
jury properly could conclude that act constituted permissible pretermination
planning under the particular circumstances of this case. Futch was an
apparently vigorous ninety-year-old man at the time of trial. He had "saved"
Georgetown's port operations in 1981 by personally leasing tugboats to keep the
port open. He had worked hard for decades and wanted to keep working.
Employer, the port's only tugboat operator, had talked about leaving town.
Even assuming Futch's earlier solicitations of Employer's customers
were disloyal acts, the record contains no evidence that the solicitation tainted
Futch's work during July and August. Nor is there any evidence that any
7 A jury also may have to decide whether an employer is entitled to
recover any wages paid to an employee during periods of disloyalty. Chelsea
Industries, Inc. v. Gaffney, 449 N.E.2d at 326-28 (indicating disloyal employee
may be required to pay back compensation received during periods of disloyalty);
Simulation Systems Technologies, Inc. v. Oldham, 634 A.2d at 1037 (same);
Fidelity Fund, Inc. v. Di Santo, 500 A.2d at 439-40 (same). In this case, however,
Employer abandoned its counterclaim to recover wages it paid to Futch during
alleged periods of disloyalty by failing to present it to the jury. Cf. Creech v.
South Carolina Wildlife and Marine Resources Dep't , 328 S.C. 241 491 S.E.2d
571 (1997) (issue cannot be raised for the first time on appeal, but must have
been raised to and ruled upon by the trial judge to be preserved for appellate
review).
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FUTCH v. MCALLISTER TOWING
purportedly disloyal acts so permeated and corrupted Futch's relationship with
Employer that he should forfeit all compensation. Futch continued to perform
his job well while making plans to compete with Employer.
Consequently, we reverse the Court of Appeals and hold that the
trial judge properly denied Employer's directed verdict motion. See Crossley v.
State Farm Mutual Auto. Ins., supra . We reinstate the jury's verdict for Futch
of $4,200, the wages Employer refused to pay him. However, we decline to
reinstate the award of treble damages and attorney's fees because there was a
bona fide dispute about whether Employer owed Futch any wages. The
balancing approach we adopt today is a new development in South Carolina
employment law, and it would be unfair to penalize Employer because the rules
of liability were not fully developed when the case was tried. See Rice v.
Multimedia, Inc., 318 S.C. at 98-99, 456 S.E.2d at 383 (imposition of treble
damages in cases where there is a bona fide dispute would be unjust and harsh,
and Legislature did not intend to deter litigation of reasonable good faith wage
disputes); S.C. Code Ann. § 41-10-80(C) (Supp. 1998).
CONCLUSION
We reverse the Court of Appeals' application of a bright-line rule
requiring a disloyal agent or employee to forfeit all compensation, and adopt
instead the balancing approach explained in Issue 1. We reverse the Court of
Appeals' holding that I the trial judge erred in denying Employer's directed
verdict motion. In light of our disposition of the case, it is not necessary to
address Futch's remaining issues. See Whiteside v. Cherokee County School
Dist. No. One, 311 S.C. 335, 428 S.E.2d 886 (1993) (appellate court need not
address remaining issues when disposition of prior issue is dispositive).
REVERSED.
TOAL, A.C.J., BURNETT, MOORE, JJ., and Acting Associate
Justice George T. Gregory, Jr., concur.
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