Wage & Hour
Employee Duty of Loyalty and CUTSA Displacement Clarified on Demurrer
Updated
In Guild Mortgage Company LLC v. CrossCountry Mortgage LLC, the Fourth District Court of Appeal reversed a judgment entered after the trial court sustained a competitor’s demurrers without leave to amend. The court held that Guild had adequately alleged that its employees owed a duty of loyalty—and that one owed fiduciary duties—and that the California Uniform Trade Secrets Act did not displace Guild’s remaining claims. The opinion was certified for publication.
Background
Guild Mortgage and CrossCountry Mortgage (CCM) are rival nationwide residential mortgage lenders. Guild alleged that, over an 18-month period beginning in January 2020, CCM induced and conspired with employees at Guild’s Kirkland, Washington branch to recruit colleagues to CCM, divert customers, and convert active loan applications—all while those employees were still on Guild’s payroll.
Among the alleged conspirators were the branch manager, a senior loan officer, and a branch operations manager, each of whom had signed employment agreements barring solicitation and competition. Guild alleged the scheme cost it virtually the entire Kirkland branch and its staff.
Guild had already obtained an arbitration award against three former employees. It then sued CCM in San Diego County Superior Court, asserting interference, computer-fraud, unfair-competition, and aiding-and-abetting claims. The trial court sustained three successive demurrers, ultimately without leave to amend, and entered judgment for CCM. Guild appealed.
What the Court Held on the Duty of Loyalty and Fiduciary Duties
Reviewing the demurrer de novo, the Court of Appeal held that California law imposes on an employee an actionable duty of undivided loyalty while employed. An employee may prepare to compete, but may not transfer allegiance to a competitor. The court declined to follow a prior decision to the extent it suggested no such tort duty exists.
The court also held that fiduciary duties can arise by operation of law based on the trust, confidence, and discretion an employer reposes in an employee, not on job title. Crediting the allegations, it found the branch manager entrusted with a sizeable branch could be found a fiduciary. Because Guild alleged breaches of these duties that CCM aided and abetted, the aiding-and-abetting claim survived.
An employee owes an actionable duty of loyalty while employed, and fiduciary duties may arise by operation of law from the trust and discretion an employer reposes in the employee regardless of title. Allegations of breach can support a claim for aiding and abetting against a competitor.
What the Court Held on Trade Secrets Displacement
CCM argued that the California Uniform Trade Secrets Act (CUTSA), Civil Code section 3426 and following, displaced Guild’s interference and computer-fraud claims. The court explained that courts look to the gravamen, or “gist,” of a claim to decide whether CUTSA displaces it. Here, the heart of the interference claims was a coordinated scheme to sabotage a branch by poaching personnel, customers, and business—conduct that goes well beyond taking confidential information.
The court separately held that CUTSA does not displace a civil claim under the Comprehensive Computer Data Access and Fraud Act, Penal Code section 502. That statute targets different social ills and provides a statutory remedy the Legislature repeatedly expanded, placing it among the other civil remedies CUTSA leaves unaffected. Because the underlying claims survived, the unfair-competition claim was revived as well, and the judgment was reversed in full.
What This Means for You
This decision confirms that employees owe an actionable duty of loyalty during employment and that fiduciary duties can arise by operation of law based on the responsibility entrusted to an employee rather than a job title. It also clarifies that the California trade secrets act does not displace tort, computer-fraud, or unfair-competition claims whose gravamen lies beyond the taking of confidential information.
I write these summaries as general information about developments in California employment law. They are not legal advice and don’t create a mediator–client relationship. For guidance on a specific matter, consult a qualified attorney.