Triton Construction Co., Inc. v. Eastern Shore Electrical Services, Inc., Del. Ch., No. 3290-VCP (May 18, 2009), read opinion here.
This 76-page Delaware Chancery Court opinion contains many statements of Delaware law that are of practical importance to both businesses and their lawyers, regarding issues that arise in connection with “important employees” leaving and competing against their former employer. The decision describes the elements of several workhorse causes of action for corporate and commercial litigators.
The court’s analysis and application of the prerequisites for these claims (that should be familiar to all commercial/corporate litigators), can be viewed as basic tools that should be in the toolbox of every business litigation lawyer. Instead of describing the extensive factual background contained in this lengthy decision, I will highlight the key facts and then address what I think are the 13 or so most important legal rulings contained in the court’s opinion.
Very Brief Factual Background
Triton Construction Co. is a Delaware non-union commercial electrical contractor. Defendant Tom Kirk was an employee of Triton from 2004 through 2007. He was hired as an estimator and a project manager, a full-time salaried position. Kirk was privy to confidential information about Triton’s overhead, labor rates, material costs, equipment costs, profit, salaries and general financial information which he discussed with Triton executives on at least a weekly basis. Defendant Eastern Shore Electrical Services, Inc. is a non-union commercial electrical contractor that competes directly with Triton for some of the jobs it bids. Beginning in November 2005, Kirk also began to work part-time for Eastern, offering his estimating services at the same time he maintained a full-time position at Triton. Neither Kirk nor Eastern ever informed Triton of the part-time job at Eastern. Following Kirk’s resignation from Triton, he was hired full-time to work at Eastern.
In October 2007 Triton filed a Verified Complaint requesting injunctive and other relief and a Motion for Temporary Restraining Order (TRO). The court granted the TRO and in November 2007 the court also granted a stipulated Temporary Restraining Order and Preliminary Injunction. A four-day trial was held in March 2008 and extensive post-trial briefing and argument followed. The court also considered a Motion for Contempt due to a violation of the preliminary injunction. The court granted that Motion for Contempt with an award of attorneys’ fees incurred in that motion only.
The court described the evidentiary standard applicable in this case which was proof by a preponderance. In essence, this meant that Triton must merely prove that “it is more likely than not that it is entitled to relief.” (See footnote 23.)
1) Spoliation of Evidence and Duty to Preserve Evidence. The court considered a claim that Kirk intentionally destroyed evidence, including electronically-stored data, and a request for an adverse inference against Kirk as a result. The court accepted expert testimony on this point and found that Kirk installed a wiping program on his computer thereby making certain files irretrievable. The court did not find credible the denials of Kirk that he used the wiping program. The court also noted that Kirk never produced his home computer or thumb drive; and found not believable that Kirk “no longer owned either of them.”
The court acknowledged the Delaware law which imposes an affirmative duty “to preserve evidence [which] attaches upon the discovery of facts and circumstances that would lead to a conclusion that litigation is imminent or should otherwise be expected.” (See footnote 39.)
In order for an adverse inference to be drawn, Delaware requires a determination “that the party acted intentionally or recklessly in failing to preserve the evidence.” (FN 40.) The court found that Kirk either intentionally or recklessly destroyed or failed to preserve evidence relating to this litigation at a time when he knew such litigation was imminent or otherwise to be expected.
Thus, the court found an adverse inference to be appropriate based on the inference that Kirk either destroyed or discarded his thumb drive and home computer or recklessly failed to fulfill his duty to preserve that potential evidence.
2) Fiduciary Duties of an Employee. Did Kirk as an employee owe a fiduciary duty to his employer, Triton? The court observed that under “fundamental principles of agency law, an agent owes his principal a duty of good faith, loyalty and fair dealing. These duties encompass the corollary duties of an agent to disclose information that is relevant to the affairs of the agency entrusted to him and to refrain from placing himself in a position antagonistic to his principal concerning the subject matter of his agency.” (FN 43 and 44.) The court emphasized that these “hallmark principles of agency law apply to traditional corporate fiduciaries, such as officers and directors, and to key managerial personnel.” (emphasis added.) (FN 48.)
The court explained that because Kirk was not a “key managerial employee” he did not owe the same general duties as a corporate officer or director, but he still owed fiduciary duties to his employer based on the principles of agency law.
The law enunciated in this opinion regarding fiduciary duties as applied to a salaried employee (who in this case was expressly found not to be a "key manager"), is so important to businesses and their lawyers, and so rarely explained to the extent this opinion expounds on it, that it warrants a "block quote" with original footnotes. Note also in the quote that follows, the "carve-out" that gives an employee a privilege (exceeded in this case) to make plans to leave.
3) Did Kirk breach his fiduciary duty of loyalty (as an employee)?
Under Delaware law, the relationship of agent to principal does not of itself give rise to fiduciary duties.56 A fiduciary relationship generally requires “confidence reposed by one side and domination and influence exercised by the other.”57 Nevertheless, where an agent represents a principal in a matter where the agent is provided with confidential information to be used for the purposes of the principal, a fiduciary relationship may arise.58 For example, if an employee in the course of his employment acquires secret information relating to his employer’s business, he occupies a position of trust and confidence toward it, and must govern his actions accordingly.59 The resulting relationship is analogous in most respects to that of a fiduciary relationship.60 (emphasis added).
Here, Triton gave access to its confidential information to Kirk, including during its Thursday morning meetings. Such information included its labor rates, volume, profit margins, equipment costs, material costs, leasing costs, existing contracts, and customer information. This information was not publicly available to other contractors, and was considered confidential by Triton. Defendants contend that the disclosure of this information does not give rise to fiduciary duties as contemplated in Brophy v.Cities Service Co. because the information does not constitute trade secret information. This argument misses the mark, because Brophy does not hold that the purloined information must be a trade secret. Fiduciary duties may arise, according to Brophy, when an employee acquires secret information relating to his employer’s business. Whether or not the information rises to the level of a trade secret, an employee has a fiduciary duty to safeguard that information, or at least, not disclose it to a competitor, if the information is secret and the employee has acquired it in the course of his employment.61 (emphasis added).
I infer from the evidence in this case, including the information Kirk failed to preserve, that Kirk used Triton’s confidential information for his own and Eastern’s benefit without Triton’s consent. In most cases, the bids Kirk worked on for both Triton and Eastern in connection with the thirteen overlapping projects were similar, with Eastern’s bid being slightly below Triton’s.62 Kirk also performed takeoffs for Triton and used them in his work for Eastern on the same projects.63 As discussed in more detail infra at Section II.D.5, because I find Kirk used Triton’s confidential information in his work preparing bids for Eastern, a competitor, he breached his fiduciary duty to Triton.
[Were Kirk’s Actions Within Limited Privilege of Employee to Plan for Next Job?]
Although employees do enjoy a privilege allowing them to make preparations to compete with their employer before their employment relationship ends, that privilege is not without limitations. Under some circumstances, the purported exercise of the privilege may breach the employee’s fiduciary duty of loyalty.64 For example, an employee may be denied the protection of the privilege when they have misappropriated trade secrets, misused confidential information, solicited the employer’s customers before cessation of employment, conspired to effectuate mass resignation of key employees, or usurped a business opportunity of the employer.65 Ultimately, the determination of whether an employee has breached his fiduciary duties to his employer by preparing to engage in a competing enterprise “must be grounded upon a thoroughgoing examination of the facts and circumstances of the particular case.”66
Even if Kirk did not misappropriate trade secrets or attempt to engineer the exodus of Triton employees, I conclude that he breached his fiduciary duty of loyalty by performing similar work for Eastern in direct competition, at times, with Triton over a prolonged period of time. (emphasis added)
56 Prestancia Mgmt. Group, Inc. v. Va. Heritage Found., II LLC, 2005 WL 1364616, at *6 (Del. Ch. May 27, 2005). Fiduciary duties will arise, however, in the context of an agent/principal relationship when “there is an element of confidentiality or a joint undertaking between the principal and agent. The hallmark of this form of special principal/agent relationship is when matters are peculiarly within the knowledge of the agent.” Metro Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015, at *3 (Del. Ch. July 5, 1995) (citations omitted).
57 BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *8 (Del. Ch. Aug. 3, 2004) (quoting Gross v. Univ. of Chi., 302 N.E.2d 444, 453-54 (Ill. App. Ct. 1973)).
58 Ramsey v. Toelle, 2008 WL 4570580, at *6 (Del. Ch. Sept. 30, 2008).
59 Brophy v. Cities Serv. Co., 70 A.2d 5, 7 (Del. Ch. 1949).
61 See id. at 7-8 (“A fiduciary is subject to a duty to the beneficiary not to use on his own account information confidentially given him by the [principal] or acquired by him during the course of or on account of the fiduciary relation or in violation of his duties as fiduciary, in competition with or to the injury of the beneficiary . . . .”). See also EDIX Media Group, Inc. v. Mahani, 2006 WL 3742595, at *5 (Del. Ch. Dec. 12, 2006) (“Not all confidential information is a trade secret.”).
62 T. Tr. at 253-56, 270, 282.
63 Id. at 392.
64 Sci. Accessories Corp., 425 A.2d at 964-65.
65 Id. at 965 (citing cases).
66 Id. (citation omitted).
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4) The Corporate Opportunity Doctrine. The Corporate Opportunity Doctrine was discussed and its elements itemized. The court applied the Corporate Opportunity Doctrine to the employee as a fiduciary but found that the elements of that cause of action were not satisfied. (See pages 29 and 30.)
5) Duty to Disclose of Employee as Agent. The court discussed the duty of an agent to disclose relevant information if they have notice of facts “which they should know may affect the decisions of their principals as to their conduct. The duty to disclose arises in situations where an agent has, or represents another who has, interests adverse to the principal concerning matters within the scope of the agency. An agent also has a duty to disclose to his principal the fact that he is competing with the principal and using information acquired during the agency.” (footnotes omitted.) (See page 33.) After discussing the facts and applying the law, the court found that Kirk breached this duty to disclose in light of the long term “dual employment” when Kirk was assisting a competitor without informing his employer. (See page 33 and 34.)
6) Duty of Confidentiality of Employee as Agent. The court discussed the duty of confidentiality that an employee has “not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party." This duty includes a prohibition on the use of the principal’s confidential information in competition with the principal.
To constitute a breach of the duty of confidentiality, there is no requirement that an agent’s use of the principal’s confidential information revealed that information.” (footnotes omitted.) (emphasis added.) (See page 35.) The court found that Kirk breached this duty by using confidential information (in all likelihood) while preparing bids for a competitor.
7) Aiding and Abetting Breach of Fiduciary Duties. The court discussed the elements of aiding and abetting a breach of fiduciary duty. In the context of discussing these elements, the court noted the “general rule that knowledge of an officer or a director of a corporation will be imputed to the corporation.” (See footnote 94.)
8) Civil Conspiracy. The court found that the elements of civil conspiracy overlapped here with the claims of aiding and abetting which were based on the same facts and thus would be duplicative. (See pages 39 and 40.)
9) Tortious Interference with Contract and Tortious Interference with Prospective Business Relations. The court explained that an “at-will” employee is considered not to have an employment contract and thus Delaware does not recognize an action for tortious interference with at-will employment, however the separate elements of a claim for “tortious interference with prospective business relations or prospective economic advantage” does not suffer from the same prohibition. (See pages to 41.)
10) Unfair Competition. The court recited the elements for common law “unfair competition” and noted that the claim in this case was based on the same underlying facts as the claim for tortious interference with prospective economic advantage, and that the courts have “struggled” in Delaware with the boundaries of a claim under common law for unfair competition. In this case, there was no demonstration that the relief for the tortious interference claim would be any different than the claim for unfair competition and thus relief under this claim was not granted. (See pages 45 and 46.)
11) Duty of Employee to Speak when Silence is Fraudulent. The court discussed the common law elements of fraud in the context of the duty of a fiduciary to speak, based on agency law, when remaining silent would be a breach of that duty. The court explained that for the same reasons it found a breach of the fiduciary duty of disclosure, the same facts would support a claim here but would be redundant and would merely duplicate the prior ruling on the duty of disclosure. (See pages 47 and 48.)
12) Claim under the Delaware Uniform Trade Secrets Act. The court described the elements for a claim under the Delaware Uniform Trade Secrets Act which does not require a written employment agreement. Nor does it require a covenant-not-to-compete to prevail under the statute, which protects trade secrets as defined. The court however found that there was insufficient evidence produced at trial to demonstrate the misappropriation of a trade secret under the statute. ( See page 49.)
13) Negligence of Employee. The court noted that an agent (employee) “owes a fiduciary duty to his employer or principal to act with the care, competence and diligence normally exercised by agents in similar circumstances.” (See footnote 140.) The court found, however, that Triton failed to demonstrate that Kirk breached this duty.
In sum, the court found that Kirk is liable to Triton for: (i) Breach of the fiduciary duties of loyalty, disclosure, confidentiality and “not to place himself in a position antagonistic to his principal;” and (ii) Tortious interference with prospective economic advantage. Also, Kirk’s “second employer” was found liable to Triton for: aiding and abetting those breaches of fiduciary duty and tortious interference with prospective economic advantage.