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In this edition of Ask General Counsel, the business and litigation attorneys of General Counsel P.C. discuss a recent court decision involving defendants who used information obtained from their former employer to compete on federal contracts against that former employer.
In Adnet Inc. v. Soni et al., the court considered whether employees who bid against their employer breached a duty of loyalty or committed tortious interference with contractual relations.
Adnet, a technology company, sued its former employees for competing against them. Adnet’s software contract with the Army was about to expire without an option to renew. Adnet learned that GDIT would be awarded the contract and was in discussions to serve as a subcontractor for the technology services.
Two employees and an independent contractor for Adnet learned of the negotiations and formed an LLC called RoLaJa to compete for the contract. These employees contacted GDIT, unsolicited, to submit a bid of their own. When GDIT determined that RoLaJa was qualified they initiated a competitive bidding process. The RoLaJa bid was less than the bid submitted by Adnet, and GDIT ultimately awarded RoLaJa the contract.
Adnet sued these employees under Virginia law for breach of the duty of loyalty, tortious interference with a business relationship and business conspiracy. The district court granted summary judgment for the defendants.
However, on appeal, the Fourth Circuit remanded the case back to the district court finding sufficient evidence for a jury trial. This case provides insight into the type of evidence that, if present, can sustain a jury trial for each of these claims.
Duty of Loyalty
In Virginia, all employees have a duty of loyalty to their employers during the term of employment. Employees may not compete against their employer while employed.
Traditional forms of breach include misappropriation of trade secrets, misuse of confidential information or soliciting an employer’s clients or employees before employment ends. However, in Adnet the court held that these three situations were not exhaustive, and an employer can prove of breach of the duty of loyalty through other circumstances on a case-by-case basis. In Adnet, the employees were in direct competition with their employers during the bidding process. This was determined to be sufficient for a jury trial.
Tortious Interference with Contractual Relations
To establish tortious interference with a business relationship in Virginia, the plaintiff must prove:
- The existence of a business relationship or expectancy, with a probability of future economic benefit to the plaintiff
- The defendant’s knowledge of the relationship or expectancy
- A reasonable certainty that absent defendant’s intentional misconduct plaintiff would have continued in the relationship or realized the expectancy
- Damage to the plaintiff
Proving a probability of future economic benefit is essential in establishing the first and third elements. Hope and belief that a relationship will continue are not enough to establish a future economic benefit. Statements from a deciding individual that indicate the likelihood of a continued business relationship are strong evidence of future economic benefit.
In Adnet, the prime contractor made statements indicating that Adnet would be awarded the contract. Additionally, but for the employees undercutting Adnet’s bid, it would not have been a competitive bidding process, and GDIT was likely to award Adnet the contract.
If you would like additional information on how employees can legally prepare to compete against their employer, review this article: Preparing to Compete: How to Legally Prepare to Compete while still employed.
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