Louisiana Municipal Police Employees’ Retirement System v. Laub et al., Del. Ch., C.A. No. 4161. The Delaware Chancery Court ruled from the bench on May 19, 2009 in this matter involving a contested Poison Pill of Amtel Corporation in connection with a merger proposal. The complaint filed with the court is available here. Courtroom View Network…

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.

Procedural History

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.)

Issues Addressed

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).
60 Id.

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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This post continues below the break.Continue Reading Chancery Court Addresses Duty of Loyalty and Other Fiduciary Duties of Departing Salaried Employee; Duty to Preserve Data; and Panoply of Related Claims

Fisk Ventures, LLC v. Segal, Inc., C.A.No. 3017-CC (May 15, 2009), read opinion here.

Prior Chancery Court decisions in this case have been summarized on this blog here.

Kevin Brady, a well respected Delaware litigator, provides us with the benefit of his following review of this case.

 Court Permits Stay Pending Appeal without Bond…

Green v. LocatePlus Holdings, Corp. et al., C.A. No. 4032-CC (May 15, 2009), read opinion here.

Kevin Brady, a well respected Delaware litigator, provides us with the benefit of his following review of this Chancery Court decision.

On May 15, 2009, Chancellor Chandler granted defendants’ motion to dismiss the amended complaint without prejudice…