A Federal court examines the pleading and proof elements of several business torts in a medical device company’s lawsuit against its former salesman and a rival firm. The plaintiff sued when it learned its former employee was selling on the side for a competitor.
Granting summary judgment for most of the plaintiff’s claims, the Court in HSI v. Pappas, 2016 WL 5341804, dives deep into the various employer remedies where an employee surreptitiously works for a competing firm.
The Court upheld the plaintiff’s breach of fiduciary duty claim against the former salesman as well as its aiding and abetting (the breach) claim against the competitor. In Illinois, a breach of fiduciary duty plaintiff must show (1) existence of a fiduciary duty, (2) the fiduciary duty was breached, and (3) the breach proximately caused plaintiff’s injury. An employee owes his employer a duty of loyalty. (Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003).
A third party who aids and abets another’s breach of fiduciary duty can also be liable where the third party (1) knowingly participates in or (2) knowingly accepts the benefits resulting from a breach of fiduciary duty.encourages or induces someone’s breach of duty to his employer.
Since the plaintiff proved that the ex-salesman breached his duty of loyalty by secretly selling for the medical supply rival, the plaintiff sufficiently made out a breach of fiduciary duty claim against the salesman. The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still reaped the benefits of his dual services. The competitor’s agent admitted in his deposition that he knew the salesman was employed by plaintiff yet continued to make several sales calls with the plaintiff to customers of the competitor. The court found these admissions sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.
The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still profited from his dual services. The competitor’s representative admitted in his deposition knowing the salesman was employed by plaintiff yet still made several sales calls with the salesman to some of the competitor’s customers. The court found this admission sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.
With liability against the individual and corporate defendants established, the Court turned its attention to plaintiff’s damages. Plaintiff sought over $400K in damages which included all amounts plaintiff paid to the defendant during his 10-month employment tenure, the amounts paid by the competitor to the defendant during his time with plaintiff as well as lost profits
An employee who breaches his fiduciary duties to an employer generally must forfeit compensation he receives from the employer. The breaching employee must also disgorge any profits he gains that flow from the breach.
This is because under basic agency law, an agent is entitled to compensation only on the “due and faithful performance of all his duties to his principal.” The forfeiture rule is equitable and based on public policy considerations.
Since the evidence was clear that the defendant failed to perform his employment duties in good faith, the Court allowed the plaintiff to recoup the nearly $180K in compensation it paid the defendant.
The plaintiff was not allowed to recover this amount from the competitor, however. The Court held that since the payments to the salesman never came into the competitor’s possession, plaintiff would get a windfall if it could recover the same $180K from the competitor.
The Court also allowed the plaintiff to recover its lost profits from both the individual and corporate defendants. In Illinois, lost profits are inherently speculative but are allowable where the evidence affords a reasonable basis for their computation, and the profits can be traced with reasonable certainty to the defendant’s wrongful conduct.
Since the corporate defendant didn’t challenge plaintiff’s projected profits proof, the Court credited this evidence and entered summary judgment for the plaintiff.
This case serves as a vivid cautionary tale as to what lies ahead for double-dealing employees. Not only can the employer claw back compensation paid to the employee but it can also impute lost profits damages to the new employer/competitor where it induces a breach or willingly accepts the financial fruits of the breach.
The case also cements proposition that lost profits are intrinsically speculative and that mathematical certainty isn’t required to prove them.