Fourth Circuit: Employers Can Enforce Fiduciary Duty Claims Against Employees Competing For New Contract

A link to the decision can be found here.

Background

The factual background is a well-worn territory in the government contracting industry. The plaintiff-appellant, Adnet, Inc., had an existing contract with the Army. When the contract was approaching its expiration, the Army notified Adnet that it would be transitioning the work to GDIT, another contractor. GDIT sought to team with Adnet (as a subcontractor to GDIT) on the transitioned work, and after meeting with Adnet started the subcontracting process which included Adnet submitting its rough order of magnitude (ROM) to GDIT. Adnet informed its employees about the subcontract. During teaming discussions, three Adnet employees, the defendants-appellees, independently and unbeknownst to Adnet, contacted GDIT and stated that their company – RoLaJa – wanted to compete for the subcontract. GDIT competed the subcontract, and both Adnet and RoLaJa submitted bids. GDIT awarded the subcontract to RoLaJa. Adnet sued the employees for breach of fiduciary duty, tortious interference, and business conspiracy. The district court granted the employees’ motions for summary judgment on all counts.

Opinion

On appeal, the Fourth Circuit reversed in part and vacated in part, citing a number of issues with the district court’s opinion, all of which are relevant for Virginia employers generally, and government contractors specifically, moving forward.

As to the fiduciary duty claim, the Circuit reversed summary judgment and held that the district court erroneously limited breach of fiduciary duty claims to situations in which there is (1) misappropriation, (2) misuse of confidential information, or (3) improper solicitation of clients or employees before the end of employment.

To the contrary, the Circuit clarified, this is a non-exhaustive list of conduct that might qualify for the claim and reiterated that the claim stands when there is evidence of a breach of duty of loyalty – which includes employees not being able to compete with their employer during their employment. Though the Circuit recognizes the ability to prepare to compete while an employee, it draws a clear distinction with the allegations here in which employees actively worked to compete against their employer for a contract they knew their employer sought to perform. Finally, the Circuit squarely rejected the notion that a fiduciary duty claim in this context requires the employer to have had “an objective business expectancy” in the subcontract, stating that “whether Adnet had such an expectancy is irrelevant.”

As to the tortious interference claim, the Circuit reversed summary judgment and held that Adnet’s communications with GDIT demonstrated more than a “mere hope” that it would be awarded the contract, relying heavily on the factual record with respect to Adnet’s communications with GDIT in this regard.

Finally, the Circuit vacated summary judgment on the conspiracy claim because the district court had relied upon its grants of summary judgment on the fiduciary duty and tortious interference claim to reach that decision.

Takeaways

A few important takeaways for Virginia employers to keep in mind:

• Fiduciary duty claims are not limited to a definitive set of circumstances, but rather encompass the broader common law duty of loyalty employees owe to their employers;
• Fiduciary duty claims for loss of a contract do not require the showing of an “objective business expectancy” with respect to the contract at issue; and
• Fiduciary duty claims for the impermissible competition are viable even in the absence of a written noncompete.

The Fourth Circuit’s decision comes at an interesting time, given the FTC’s Proposed Rule banning non-competes and a wave of state legislation limiting their use, including in Virginia. Indeed, Judge Wilkinson references this in his concurring opinion, noting that “factual disputes preclude summary judgment in this narrow context,” but adding that he is “wary of giving license to common-law torts beyond the strict limits countenanced by Virginia law.” But ultimately, the decision confirms that, at least in Virginia, commercial torts offer noncontractual alternatives to address the competitive acts of employees.