Even Without a Noncompete, Employees Must Remain Loyal While Employed

Noncompete agreements generally prohibit former employees from joining a competing organization for some specified length of time after the employment relationship ends. Some agreements restrict competitive activity even before the relationship ends. In the absence of such an agreement, many employees might assume that they are free to start competing with their employers at any time they wish. This isn’t necessarily true. Under Virginia law, employees owe a fiduciary duty of loyalty to their employer which prohibits competitive acts during employment. This duty exists irrespective of any contractual agreement. Employees may generally make certain arrangements during their employment to compete in the future (i.e., after they resign) but are prohibited from taking action that would cause competitive harm to the employer.

There are no precise rules regarding exactly what steps an employee can take to prepare for termination without actually engaging in direct competition. Each case is decided on its own facts. “This right, based on a policy of free competition, must be balanced with the importance of the integrity and fairness attaching to the relationship between employer and employee….Under certain circumstances, the exercise of the right may constitute a breach of fiduciary duty….Whether specific conduct taken prior to resignation breaches a fiduciary duty requires a case by case analysis.” (See Feddeman & Co. v. Langan Assoc., 260 Va. 35, 42 (2000)).

One such case came through the Fourth Circuit recently. The facts of Adnet, Inc. v. Rohit Soni, decided April 27, 2023, go something like this. In August 2016, the Army awarded a contract to Adnet for the development of computer software. Adnet hired employees and an independent contractor to work on the software. None of them were subject to any noncompete agreements. On October 23, 2018, while still employed by Adnet, the defendants incorporated their own company called RoLaJa, LLC. Adnet’s contract with the Army was set to expire on August 31, 2020, and the Army planned to transition the software work to General Dynamics Information Technology (GDIT). GDIT expressed interest in having Adnet as part of their team and initiated discussions regarding subcontracting work. However, defendants reached out to GDIT independently and expressed their own interest in the subcontract.

On July 23, 2020, GDIT decided to compete the subcontract, switching from a sole-source negotiation to a competitive process, due to concerns about communication and rates with Adnet. GDIT issued a request for proposal (RFP) to both Adnet and RoLaJa. RoLaJa submitted a proposal and Adnet submitted one but failed to provide resumes as requested. GDIT awarded the subcontract to RoLaJa, citing Adnet’s noncompliance with the proposal requirements. Consequently, Adnet terminated the defendants’ employment.

In January 2021, Adnet brought a legal action against the defendants, alleging breach of the duty of loyalty and other claims. The trial court held the defendants did not breach their duty of loyalty because Adnet had no existing relationship with GDIT and, alternatively, because all the defendants did was prepare to compete (as opposed to actively competing). The Fourth Circuit disagreed, finding that Adnet had presented sufficient chained-300x225evidence of a breach of loyalty such that summary judgment should not have been granted.

In Virginia, to demonstrate a breach of a fiduciary duty, the plaintiff must show: (1) a fiduciary duty; (2) breach; and (3) damages resulting from the breach. (See Carstensen v. Chrisland Corp., 442 S.E.2d 660, 666 (Va. 1994)). In a 2003 Virginia Supreme Court case, the court held that employees owe a fiduciary duty of loyalty to their employer during their employment, and noted three specific circumstances in which that duty would be breached: (1) when he misappropriates trade secrets, (2) when he misuses confidential information, and (3) when he solicits an employer’s clients or employees before his employment ends. (See Williams v. Dominion Tech. Partners, L.L.C., 576 S.E.2d 752, 757-58 (Va. 2003)). The trial court had apparently interpreted that case as providing an exhaustive list of the only three circumstances under which the duty of loyalty would be considered breached. The defendants hadn’t done any of these three things, so the court granted summary judgment in their favor. But this was an incorrect interpretation, according to the Fourth Circuit.

Another mistake in the ruling below was to hold that the defendants could not have breached their duty of loyalty if Adnet did not have an objective business expectancy in GDIT’s subcontract. That’s just not an element of a claim for breach of fiduciary duty.

The appellate court held that summary judgment was improper because there was sufficient evidence for a jury to find that the defendants had breached their duty of loyalty to Adnet. Noting that there’s not always a clear distinction between “making arrangements” to compete and actually competing, the Restatement of Agency offers instructive guidance by providing that an employee “is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer’s business.” (See Restatement (Second) of agency § 393 (2023)).

Black’s Law Dictionary defines competition as “[T]he effort or action of two or more commercial interests to obtain the same business from third parties.” Applying that definition, the court had a hard time viewing the defendant’s “competitive proposal to GDIT” in response to the RFP as anything other than competition. Even though the work would not begin until after the defendants left Adnet, bidding on and winning the contract was “competition,” not mere preparation. Competing with one’s employer while still employed violates the fiduciary duty of loyalty, so the district court’s decision on this issue was reversed.

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