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    EMPLOYMENT LAW LEGAL RESEARCH BLOG

    Breach of Fiduciary Duty and Unfair Competition

    Posted by Nadine Roddy on Mon, Nov 26, 2018 @ 11:11 AM

    Nadine Roddy—Senior Attorney, National Legal Research Group
    John Buckley—President, National Legal Research Group

                A federal district court sitting in Pennsylvania has held that an employer may proceed with its unfair competition suit asserting contract and tort claims against a former employee and the employee’s current employer. The employer adequately stated claims of common-law breach of fiduciary duty and unfair competition against the employee, and of aiding and abetting the same against the competitor. However, the employer’s claim of tortious interference with prospective contractual relationship against the employee would be dismissed because the complaint failed to allege a sufficient likelihood of a prospective contract. Neopart Transit, LLC v. CBM N.A., Inc., 314 F. Supp. 3d 628 (E.D. Pa. 2018).

                The plaintiff in the case, an American corporate distributor of parts for transit buses (“employer”), brought suit against a former employee and the employee’s current employer, a Canadian corporation (“competitor”), alleging that the employee stole confidential and proprietary information before resigning to go to work for the competitor, which then used the stolen information to compete with and harm the employer’s business in the United States. The employee had worked for the employer for 17 years as a salesman and had access to the employer’s supplier and parts-related information. In his 15th year of employment, he signed a Confidentiality Agreement and Security Policy that prohibited him from divulging the employer’s confidential and proprietary information. After leaving the employer, however, the employee allegedly used such information to help the competitor gain an unfair competitive advantage, causing the employer to lose business from longtime customers. According to the employer, the knowledge of its supply chain, pricing methods, and part number cross-references that the employee took with him enabled the competitor to obtain contracts that the employer historically had won. The employer asserted several statutory, contract, and tort claims, and the defendants moved to dismiss on various grounds.

                The employee argued that the “gist of the action” doctrine barred the employer’s breach-of-fiduciary-duty claim because that claim arose solely from the Confidentiality Agreement and thus duplicated the breach-of-contract claim.  Acknowledging that the doctrine bars breach-of-fiduciary-duty claims if the duty alleged originated in the obligations of a contract, the court noted that many fiduciary obligations are nevertheless imposed as a matter of social policy, and, thus, they derive from principles of tort law rather than from an agreement of contracting parties. In this case, the Confidentiality Agreement appeared to govern only employees’ access to confidential information through the computer system, and the employee’s fiduciary duties under Pennsylvania law may well have extended to other types of information obtained by other means. Thus, the employee’s motion to dismiss this claim would be denied.

                The employee also argued that the employer failed to allege a sufficient likelihood of a prospective contract to state a claim for tortious interference with prospective contractual relations. Noting that Pennsylvania courts do not find a reasonable likelihood of a prospective contractual relationship when a plaintiff presents only evidence of a current or preexisting business relationship, the court determined that the employer’s historical relationship with the customers it lost to the competitor was insufficient to constitute such a likelihood. Thus, the employer failed to state a claim of tortious interference with prospective contractual relations, and the employee’s motion to dismiss this claim would be granted.

                The employee then argued that because he had actually been an employee of the employer’s predecessor rather than the employer itself, the unfair competition claim could not be maintained. Rejecting this argument, the court held that the complaint sufficiently alleged that the employer had succeeded to its predecessor’s legal claims. Further, an unfair competition claim under Pennsylvania law does not require an employment relationship, as Pennsylvania courts have recognized a cause of action for the common-law tort of unfair competition when there is evidence of trademark, trade name, and patent rights infringement, misrepresentation, tortious interference with contract, improper inducement of another’s employees, and unlawful use of confidential information, among other things. The employee’s motion to dismiss this claim would be denied.

                The competitor argued that the employee did not breach any fiduciary duty to the employer, and, therefore, the employer’s claim that the competitor aided and abetted the employee’s breach failed as well. Additionally, there were no allegations that the competitor knew of the alleged breach, assisted it, or encouraged it, as required to state a claim of aiding and abetting. The court noted its prior ruling that the employer had, in fact, stated a plausible claim against the employee for breach of fiduciary duty. Further, the amended complaint alleged that the employee knew he would be employed by the competitor when he announced his resignation from the employer, that the competitor knew the employee was taking the employer’s confidential information with him when he left, and that the competitor used this information to enter the transit bus part market in the United States. These allegations adequately stated an aiding and abetting claim, and, thus, the competitor’s motion to dismiss this claim would be denied.

                Finally, the court held that jurisdictional discovery was warranted, noting that when a plaintiff presents factual allegations suggesting with reasonable particularity the possible existence of the requisite contacts between the other party and the forum state, the plaintiff's right to conduct jurisdictional discovery should be sustained.

    Topics: Nadine Roddy, John Buckley, employment law, unfair competition, prospective contract

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