Recently, the Eighth Circuit Court of Appeals reviewed an appeal out of the District of Nebraska. The multiple claims against former employees, including a claim for tortious interference with business relationships, a claim not often considered by employees and employers, but which can make a wide array of damages available to a plaintiff. The claim often arises alongside claims that former employees have taken trade secrets or used confidential information to solicit clients or other employees. Read on to learn more!
Factual Background
Bryce Wells (“Wells”) was the president and shareholder of West Plains Company. Wells sold West Plains Company to West Plains, L.L.C. (West Plains), in February 2012. West Plains operated a freight brokerage operation called CT Freight. When Wells sold West Plains Company, the employee defendants and Jodi May (“May”) all continued to work for West Plains in the same positions they held prior to the sale. The employee defendants signed the West Plains Employee Handbook, “which prohibited employees from engaging in conflicts of interest and disclosing confidential information to a competitor.”
In October of 2012, Wells began forming Retzlaff Grain Company, a freight brokerage company. Retzlaff Grain Company did business as RFG Logistics. Wells recruited four of the employee defendants who “signed confidentiality and consulting agreements with Wells.” Wells provided them each with $5,000 as a consulting fee.
These four employee defendants worked with Wells in creating RFG Logistics and recruited the remaining employee defendants to join RFG Logistics by the end of January, 2012. The employee defendants then submitted their resignations from CT Freight.
Procedural History
In February 2012, West Plains brought suit, alleging “(1) misappropriation of trade secrets against all defendants; (2) tortious interference with business relationships against all defendants; (3) tortious interference with employment relationships against Wells and RFG Logistics; (4) breach of the duty of loyalty against the employee defendants; (5) civil conspiracy against all defendants; and (6) a violation of the Computer Fraud and Abuse Act . . . against [one of the employee defendants].”
The district court granted a temporary restraining order against the defendants “prohibiting them from contacting and providing freight brokerage services for the customer and carriers of CT Freight” until the court ordered and to return all documents taken from West Plains. The temporary restraining order was extended to April 5, 2013. The district court ruled in favor of the defendants regarding the claims for tortious interference with employment relationships and the claim under the Computer Fraud and Abuse Act.
At trial, the jury found in favor of West Plains on the tortious interference with business relationships claim as to all defendants except for three. The jury also found a breach of the duty of loyalty by all employee defendants. Finally, the jury found that all defendants, except May, entered into a civil conspiracy. According to these findings, the jury awarded West Plains $1,513,000 in damages and required forfeiture of compensation of all employee defendants. The defendants appealed.
Tortious interference with business relationships
In order to prove tortious interference with a business relationship in Nebraska, the following must be shown: 1) “the existence of a valid business relationship or expectancy”, 2) that the person interfering had knowledge of the business relationship or expectancy, 3) “an unjustified intentional act” by the interferer, 4) a showing that the interference caused the harm, and 5) damage to the party whose business relationship or expectancy was interfered with. The defendants alleged that that their conduct did not amount to unjustified interference and that West Plains did not prove their conduct caused that damages sustained by West Plains after the temporary injunction expired.
Acts of Unjust Interference
Often the key question in a tortious interference claim is whether the acts that interfered were justified and proper. In this case, the Eighth Circuit Court of Appeals determined that “a jury could find Wells unjustly interfered with West Plains’ business relationship by knowingly paying, recruiting, and seizing CT Freight’s workforce, infrastructure, and customer relationships.”
The court reasoned that Wells knew that by recruiting freight brokers away from CT Freight that he could essentially own CT Freight without having to pay for it. Although Wells instructed the employee defendants not to take any customers from CT Freight, he recruited the leaders of CT Freight and began a plan “that effectively would remove CT Freight’s business to RFG Logistics.” The group resignation resulted in an inability by CT Freight to “broker large quantities of freight.”
The court also found that “the employee defendants took it upon themselves to take CT Freight’s customer lists, documents, and confidential information.” There were messages between some of the employee defendants discussing how to send the customer information to their personal emails. During the process of their departure, the defendants took steps to not “disrupt their business with their existing customers, whom they admittedly planned to bring with them the moment they left CT Freight.” The court held that “[w]hile there was nothing unjust about the employee defendants’ choice to leave at-will employment with West Plains, there was evidence the employee defendants knew and understood their group resignation would decimate CT Freight.”
Damages after April 5, 2013
The defendants argued that there was not enough evidence to prove that the defendants’ resignations caused the losses suffered by CT Freight. The Eight Circuit determined that “[the defendant’s] concerted action . . . resulted in tortious interference that caused damage to West Plains.”
West Plains went from a profit of over $800,000 in 2012 to a net loss of $150,000. West Plains tried to preserve the business by recruiting employees but could not find employees for the business. The court reasoned that even though West Plains did hire new employees, these employees did not have sufficient experience or a customer base in the industry. The Eighth Circuit concluded that “the evidence was sufficient to show the defendants’ actions caused a loss of profits to West Plains, and that loss continued after the expiration of the temporary injunction.”
Breach of Duty of Loyalty
The Eight Circuit determined that the employee defendants breached their duty of loyalty, as well. The employee defendants, while employed by West Plains, “intended to hinder CT Freight’s business” by giving CT Freight information to Wells and resigning together in order to make sure customers followed. The employee defendants signed an agreement prohibiting them from partaking in conflicts of interests and distributing company information. Seven of the employee defendants signed the confidentiality and consulting agreements with Wells, violating their employment agreement with West Plains. Also, four of the employee defendants received the compensation from the consultation with Wells.
The employee defendants also argued that the forfeiture of their pay was excessive. The Eighth Circuit determined that there was “adequate support for each award” based on the extent of involvement with RFG Logistics.
Civil Conspiracy
A civil conspiracy can arise when two or more people accomplish, by concerted action, an unlawful object. A finding that the defendants committed unjustified interference with West Plains’ business or breached their duty of loyalty “would support the conspiracy claim.” The Eighth Circuit determined that “[t]here was abundant evidence showing the defendants entered into an agreement tortuously to interfere with West Plains’ business or to breach their duty of loyalty.”
Mitigation
The defendants argued that West Plains did not show that it mitigated its damages upon the resignation of the employee defendants. The Eighth Circuit determined that West Plains immediately transferred employees from another division to CT Freight and contacted its customers that left with the employee defendants in an attempt to retain their business. CT Freight even expanded its business into other sectors of the industry. This all satisfied its duty to mitigate damages.
West Plains, L.L.C. v. Retzlaff Grain Co., 870 F.2d 774 (8th Cir. Aug. 30, 2017).
Takeaway for employers
If you suspect former employees are appropriating your confidential information to consult with your clients or employees or may be planning to appropriate your information to form a competing venture, it is best to get your attorney involved right away. You may have rights to assert through a cease and desist letter, and could ultimately be vindicated in a court of law.