Find Legal Information

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

p.12

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

p.13

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

p.14

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?

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.

p.15

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

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.

p.16

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

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...

p.17

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.

balancing principles discussed below apply in a non-apportionment case, such

that a disloyal agent may not have to forfeit all compensation.

p.18

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

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...

p.19

(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

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 ... )

p.20

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.

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).

p.21

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

p.22

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

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).

p.23

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.

p.24