Breach of Fiduciary Duty -- Traps for the Unwary

Many unfair business practices cases, such as those involving conspiracies, arise out of claims that the defendants breached their fiduciary duties. So what does that mean? In Virginia, Maryland and the District of Columbia, officers, directors and employees (“Employee”) owe the company an undivided duty of loyalty. In other words, an Employee cannot allow his own self-interest to conflict with his duty to his employer. PM Services Co. v. Odoi Associates, Inc., 2006 U.S. Dist. LEXIS 655 (D.D.C. January 4, 2006); Adelman v. Conotti, 213 S.E.2d 774 (Va. 1975); Maryland Metals, Inc. v. Metzner, 382 A.2d 564 (Md. 1978). These duties are particularly significant in that they are based upon the common law and are applicable even in the absence of a written covenant not to compete.

Such claims often arise when an Employee makes plans to go to work for a competitor or form a competing company. They usually involve one of the following: (1) the departing Employee solicits other co-workers to join her at the new company; (2) the departing Employee solicits clients to follow her, thus guaranteeing immediate work and income; or (3) the Employee takes his employer’s confidential information without permission and uses it to benefit the new employer. Unless the Employee follows certain rules, such conduct may make him liable to the former employer for breach of the duty of loyalty or breach of fiduciary duty.

First, while an Employee may make plans to compete, he may not recruit his co-workers to join him while still employed if it leads to a mass resignation. Feddeman & Co. v. Langan Associates, 530 S.E.2d 668 (Va. 2000); Maryland Metals, supra; Riggs Investment Management Corp. v. Columbia Partners, LLC, 966 F. Supp. 1250 (D.D.C. 1997).

Second, the Employee may not solicit his employer’s customers to move their accounts to the new entity. Furash & Co. v. McClave, 130 F. Supp.2d 48 (D.D.C. 2001); PM Services, supra; Maryland Metals, supra; Feddeman, supra. Similarly, an individual, while still employed, may not divert to a competitor business opportunities presented to him if it is within the employer’s line of work, the employer can afford to take advantage of it and, after disclosure, the employer is interested in the opportunity. PM Services, supra.

Finally, the Employee may not use his employer’s confidential information to benefit the new employer or help it gain a competitive advantage. Furash & Co., supra; Riggs, supra; PM Services, supra; Maryland Metals, supra; Feddeman, supra. This preclusion continues after the Employee joins a new company. Bull v. Logetronics, Inc, 323 F. Supp. 115 (E.D.Va. 1971).

Of course, whether an Employee’s conduct rises to a level of breach of fiduciary duty is, in each case, very fact specific. These rules, however, seek to strike a balance between the need to protect vigorous competition and the strong policy that competition be conducted with honesty and fair dealing.