Mass Resignation to Form Competing Business Leads to Litigation

No employer likes to see a large number of its employees band together and leave en masse to form a competing business. A large number of employees leaving at once can lead to a loss of institutional knowledge and experience, not to mention customers and revenues. Mass departures hurt morale and can lead to increased costs for recruitment and training. A company’s reputation can be irreparably damaged once word gets out that a mass resignation has taken place, making it more difficult for the business to attract new talent. Depending on the circumstances, litigation against the former employees, as well as against the company that hired them, may or may not be warranted.

Possible legal claims include breach of fiduciary duty, breach of non-compete and/or non-solicitation agreement, tortious interference, business conspiracy, misappropriation of trade secrets, and more. Let’s take a quick look at how a Hampton Roads body-piercing business dealt with the sudden resignation of seven employees who went on to form their own body-piercing business in the same region. In the case of Chanah, Inc. v. Summers, currently pending in the Chesapeake Circuit Court, the plaintiff pursued a number of business torts against the departing employees. Most of the counts survived demurrer.

The case was brought by Finder’s Keepers Body Piercing against seven of its former employees as well as the competing body-piercing business they opened in Chesapeake called “I’m Just Saiyan.” Finders Keepers, owed by Kimberly Summers, claims that her son Jordan Summers, an officer and director of the corporation, coordinated a mass resignation from Finders Keepers and that he recruited people to join I’m Just Saiyan while still in a fiduciary relationship with Finders Keepers. It claims that one of the former employees logged into piercings-300x199Finders Keepers’ YouTube account without authority and deleted one or more of its marketing videos.

Needless to say, Finders Keepers wasn’t thrilled about this alleged attack on its business and filed a lawsuit presenting claims for breach of fiduciary duty, tortious interference with contract, statutory business conspiracy, common-law conspiracy, conversion, and violation of the Virginia Computer Crimes Act. Finders Keepers asked for both damages and injunctive relief. Here’s how it fared when the defendants sought to dismiss the claims.

The court overruled the demurrer to the breach of fiduciary duty claims, allowing them to go forward. All employees owe their employer a fiduciary duty of loyalty, even if they are at-will employees. (See Williams v. Dominion Tech. Partners, L.L.C., 265 Va. 280, 289 (2003)). This duty of loyalty prohibits employees from competing with their employer while employed, though they are generally allowed to take steps to prepare to compete. The duty of loyalty also means that employees can’t steal trade secrets or other confidential commercial information, solicit other employees to leave and join a competitor, or solicit the employer’s clients. Here, Finders Keepers claimed the defendants solicited other employees and clients in a manner calculated to be devastating to the employer’s business. For these reasons, the court overruled the demurrer.

Finders Keepers also alleged that Jordan Summers tortiously interfered with the other employees’ employment relationship with Finders Keepers. Tortious interference with contract requires a showing of (1) the existence of a valid contractual relationship; (2) knowledge of the contractual relationship by the defendant; (3) intentional interference inducing or causing a breach or termination of the relationship; and (iv) resulting damages. (See DurretteBradshaw, P.C. v. MRC Consulting, L.C., 277 Va. 140, 145 (2009)). When a contract is terminable at will (as most employment agreements are), the plaintiff must also show that the defendant used “improper methods” in the course of the interference. (See Dunn, McCormack & MacPherson v. Connolly, 281 Va. 553, 559 (2011)). In this case, however, Finders Keepers was unable to convince the judge that it had a contractual relationship with its former at-will employees. Absent a contractual relationship, there could be no tortious-interference-with-contract claim, so the demurrer to this count was sustained.

Next, Finders Keepers alleged that the defendants conspired to harm its business, both in violation of the Virginia Code and Virginia common law. Common law conspiracy involves the combination of two or more people to accomplish an unlawful purpose or use unlawful means that results in harm. Statutory business conspiracy occurs where two or more people combine “for the purpose of willfully and maliciously injuring another in his reputation, trade, business or profession,” (see Va. Code § 18.2–499), resulting in damage to the plaintiff. (See Va. Code § 18.2–500). The defendants raised the intra-corporate immunity doctrine, which holds that employees working for the same company are immune from conspiracy claims when acting on behalf of their employer. (This is because a corporation acts through its employees, so the employees’ actions are really the corporation’s actions and a corporation cannot conspire with itself). The court, however, rejected this defense, finding that according to the allegations of the complaint, the defendants acted outside the scope of their employment in the course of conspiring to cause it harm. Therefore, the court overruled the demurrer to these counts.

The court also overruled the demurrer as to the claims for conversion and violation of the Virginia Computer Crimes Act. Conversion is “the wrongful assumption or exercise of the right of ownership over goods or chattels belonging to another in denial or inconsistent with the owner’s rights.” (See Economopoulos v. Kolaitis, 259 Va. 806, 814 (2000)). Basically, that’s legalese for stealing. And under the Computer Crimes Act, a person who uses a computer to steal another person’s property is guilty of “computer fraud.” Because the complaint alleged that one of the defendants used a computer to gain unauthorized access to Finders Keepers’ YouTube account and delete videos that were the property of Finders Keepers, the court found that it was appropriate to pursue both a conversion claim and a claim for computer fraud. It allowed these claims to survive demurrer as well.

Whether Finders Keepers will prevail on any of these claims remains to be seen.

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