Accepting a Contingent Offer of Employment From An Employer’s Competitor Could Constitute a Breach of Fiduciary Duty in D.C.

Kelley Drye Client Advisory

The federal district court for the District of Columbia recently handed down a decision which sheds some light on which employee activities may constitute a breach of the fiduciary duty owed to their employer. In National Railroad Passenger Corporation v. Veolia Transportation Services, Inc. (D.D.C. May 9, 2011), the plaintiff National Railroad Passenger Corporation (“Amtrak”) and the defendant Veolia were both bidders on a government contract for railway services. As part of their proposals, bidders were required to list specific individuals who would make up the bidder’s five-member Key Management Team.” In preparing its bid, Veolia recruited three at-will Amtrak employees for these Key Management” positions. These employees accepted employment offers with Veolia that were contingent on Veolia winning the contract, and all three permitted Veolia to use their resumes on the Key Management” portions of Veolia’s proposal.

Amtrak and Veolia were the only two bidders on the contract. After the contract evaluation committee awarded the contract to Veolia, Amtrak filed a notice of its intent to file a bid protest. As part of that notice, Amtrak received copies of Veolia’s proposal, and discovered that Veolia had used Amtrak employees as Key Management individuals on its proposal. Amtrak subsequently sued Veolia, alleging, among other things, that Veolia had aided and abetted several Amtrak employees in the breach of their fiduciary duty to Amtrak.

As part of the analysis, the court had to determine on cross-motions for summary judgment if there was any genuine dispute of a material fact as to whether (1) there existed a fiduciary duty on the part of the Amtrak employees; and (2) whether the employees breached this fiduciary duty. The court first established that under D.C. law, a fiduciary duty of loyalty generally exists in the employer-employee relationship. Specifically, employees (and particularly managers, corporate officers, and directors) owe an undivided and unselfish loyalty to [their corporate employers]” - even if they are at-will employees, and even if they refuse to sign the employer’s conflict of interest policy. The court found that the three employees at issue - who were all management-level employees - had a fiduciary duty of loyalty to Amtrak.

As to the breach of this fiduciary duty, the court distinguished between entering into direct competition with one’s employer (which would constitute a breach of fiduciary duty) and merely planning to go into competition with one’s employer (which does not necessarily constitute a breach of fiduciary duty). The court explained that the difference between the two depends on whether the employee engaged in unfair acts’ or caused injury’ to his employer.” Activities that constitute actual competition, and thus a breach of the employee’s fiduciary duty, include:

  • Soliciting business for the employee’s own endeavor which he would otherwise have an obligation to obtain for his employer;
  • Competing with the employer for customers or employees; and
  • Engaging in behavior that leads to the mass resignation of the employer’s workforce.

In contrast, acts that merely constitute preparation to compete with the employer include:

  • Opening a bank account for the new business;
  • Obtaining office space and telephone service for the new business; and
  • Purchasing a rival business and, upon termination of employment, immediately competing with the former employer.

Although courts have found a breach of fiduciary duty in other cases where an employee of one company participated in the bid of one of its employers’ rivals, the National Railroad court noted that the ultimate determination was extremely fact-specific and had to be closely evaluated. The court found that the Amtrak employees’ acceptance of contingent employment offers from Veolia was not so egregious that it can be said to have constituted a breach of their fiduciary duties to Amtrak as a matter of law, but neither is it so benign to entitle Veolia to summary judgment on the issue.” The court concluded that there remained disputed factual questions - including whether Amtrak was put on notice that its employees were competing or preparing to compete with Amtrak - such that summary judgment was inappropriate.

To sum up, in D.C., employees owe a duty of loyalty to their employer regardless of whether they are at-will or contractual employees. Employers - and especially government contractors - should take measures to make their employees aware of this duty, particularly in industries where business competitors commonly recruit employees from one another. If an employee violates this duty by aiding a competitor in its bid for the employer’s business, or by otherwise directly competing with the employer, employers should be aware that they may have a cause of action against these employees.