Former Employees’ Parting Creates Sorrow (But Not The Sweet Kind) For Former Employer

• Posted on: Apr 27 2018

In Shakespeare’s Romeo and Juliet, Juliet utters the oft quoted phrase, “parting is such sweet sorrow,” when saying goodnight to Romeo.  While Juliet may have been upset that Romeo was leaving for the evening, the thought that she would see him again, and that she would be able to imagine their next meeting, made the parting “sweet”.

The Decision and Order issued by the New York Supreme Court (Kornreich, J.) in Young Adult Institute, Inc., et al. v. The Corporate Source, Inc. (April 11, 2018), illustrates why, to an employer, the parting of a group of employees may not be so sweet.

Very briefly stated, plaintiff Young Adult Institute, Inc. (“YAI”) is a not-for-profit organization that, through a network of agencies, provides a variety of services to developmentally and intellectually challenged individuals.  Defendant The Corporate Source, Inc. (“TCS”), one such network agency, provided management services to YAI pursuant to a five-year management agreement that, inter alia, did not contain non-compete or non-solicitation covenants.  The individual defendants are employees and independent contractors of TCS, many of whom previously worked for YAI.

During the term of the management agreement, TCS sought to change some of the terms of the agreement and YAI agreed to negotiate with TCS regarding same.  “Unbeknownst to YAI…TCS—through its senior management…–had been working covertly for months with YAI employees to terminate its relationship with YAI and transfer the business to a newly formed operation.”  To that end, while still employed, and getting paid, by YAI, some of the individual defendants recruited other YAI employees, negotiated deals for TCS with YAI’s vendors, established TCS’s back-office operations, among other things.  The e-mails of many of the individual defendants make plain that they knew that what they were doing was wrong and evince an effort to hide the true nature of their actions.

Ultimately, many of the individuals left YAI’s employ to work for TCS and some went so far as to lie about their future employment so as to hide the fact that they were leaving to work for TCS.  Upon leaving, one employee deleted e-mails and files on YAI’s computer system to “cover[] her tracks” and to make “it more difficult for YAI to uncover her and the other disloyal YAI employees’ wrongdoing.”  Other individual defendants copied computer files belonging to YAI and brought the files to TCS.  Many of the stolen computer files contained personal confidential information for many of YAI’s clients, which information was protected by federal and state law.  Accordingly, YAI spent significant sums of money complying with federal and state remediation and notification laws.

Plaintiff filed an amended complaint, which defendants moved to dismiss.  While the court addressed several legal issues in deciding the motion, a few stuck out as particularly interesting.

Plaintiff’s fifth cause of action sounded in conversion and was based on Plaintiff’s allegation that its former employee deleted numerous of YAI’s electronic files.  The court stated that conversion “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.” (Citation omitted.)  The elements of a conversion claim, as set forth by the court are: 1. “plaintiff’s possessory right or interest in the property” and 2. “defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights.”  (Citations omitted.) While normally, one thinks of conversion in conjunction with tangible property, the court noted that deleting electronic files can give rise to a conversion claim.

In Young Adult, however, the court found that the complaint failed to state a claim for conversion because plaintiff failed to plead that it was deprived of access to the deleted materials.  In this regard, the court stated that “just because one ‘deletes’ electronic files does not mean they cease to exist, therefore, “the employer should have to unequivocally allege in the complaint that, as a result of the deletion, it actually lost access to the files.  If such access was not lost, the employer has suffered no deprivation and, therefore, cannot maintain a claim for conversion.”  The court noted, for example, that the recipient of the e-mails should have electronic copies of the e-mails. Thus, the conversion claims was dismissed without prejudice and with leave to replead.

The court sustained Plaintiff’s first cause of action, sounding in breach of fiduciary duty of loyalty based on the faithless servant doctrine.  The court stated the “well settled” law that “employees owe a fiduciary duty of loyalty to their employer during the course of their employment.” (Citations omitted.)  “Fundamental to [the employer/employee] relationship is the proposition that an employee is to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.”  (Citations and internal quotation marks omitted.) An employee that breaches this duty is deemed a “faithless servant” that “forfeits the right to any compensation earned during the period of disloyalty.” (Citation omitted.)  A claim under the faithless servant doctrine is stated by an employer alleging that “a former employee, during the period of her employment and using company resources, secretly planned and organized a competing business.”  (Citations omitted.)  This Blog previously wrote about the faithless servant doctrine (here) and (here).

Plaintiff’s cause of action against TCS for aiding and abetting the fiduciary duty breaches by YAI’s former employees was also sustained.  To allege such a claim, the complaint must state: “(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) the plaintiff suffered damage as a result of the breach.” (Citations and internal quotation marks omitted.)  The court rejected TCS’s argument that the second element was not present in Young Adult.  The Young Adult complaint alleges that TCS’s senior management knew that some of the individual defendants were YAI employees, who “clearly knew that those employees were acting in TCS’s interests, and against YAI’s, in secret.”  Among other things, the complaint alleges that: TCS’s management did not typically communicate using e-mail so their plan would not be uncovered; the plan could have only originated with TCS; TCS provided substantial assistance to the breach by collaborating with YAI’s former employees by teleconference and otherwise; and, TCS secretly shared its separation plans with some of the individual defendants while they were still employed by YAI.  Based on the allegations in the complaint, the court found it “implausible to believe that the Former YAI Employees acted on their own and not at the direction of TCS.”  Therefore, plaintiff met its pleading burden under CPLR 3016(b) by alleging “facts that permit a reasonable inference of the TCS Defendants’ substantial assistance  to the Former YAI Employees’ breach.”   (Citations and internal quotation marks omitted.)

Also interesting is the court’s discussion surrounding the dismissal of plaintiff’s claim for misappropriation of confidential information.  The court held that such a cause of action can only be sustained where the allegedly confidential information qualifies for trade secret protection.  This Blog previously discussed related issues (here) and will not be reiterated.

TAKEAWAY

There are appropriate ways to depart from your former employment and move to a competitor (particularly where, as here, no restrictive covenants exist).  The manner in which the defendants proceeded does not seem appropriate and was not favored by the court.

Tagged with: Aiding And Abetting, Breach of Fiduciary Duty, Commercial Litigation, Conversion, Duty Of Loyalty, Employment Litigation