Judge Young on Employee Breach of Fiduciary Duty Claims, Interference With Contract and Pleading

by Lee Gesmer on September 3, 2008

U.S. District Court Judge William Young’s recent decision in Talentburst, Inc. v. Collabera, Inc. is worth study. Talentburst is the former employer of Raj Pallerla. While employed by Talentburst, Pallerla signed a noncompete agreement with Talentburst. He then resigned and went to work for Collabera, Inc. For ease of reading I’ll refer to these three parties as Former Employer, New Employer and Employee.

When the Former Employer discovered that its Employee had gone to work for New Employer, it pursued an unorthodox legal strategy: rather than sue the employee for breach of the noncompete agreement, it sued only the new employer, alleging that the New Employer had “aided and abetted” a breach of fiduciary duty by the Employee. It also claimed that by hiring the Employee the New Employer “interfered” with the noncompete contract. The case was filed in Massachusetts Superior Court, but the Former Employer was able to “remove” it to federal court (based on diversity jurisdiction). To the Former Employer’s misfortune, the case was drawn by Judge Young, who was almost certain to give the case closer scrutiny than it would have received in state court.

The Former Employer filed a motion to dismiss, which is usually a long shot. However, Judge Young allowed the motion and dismissed the suit on the basis of the complaint alone. In his decision Judge Young reasoned that the Employee, who was a non-managerial “worker bee,” did not owe a fiduciary duty to his employer. The New Employer could not have interfered with a non-existent fiduciary duty, and therefore this claim failed.

As to the tortious interference claim, the judge zeroed in on the requirement of “improper means or motive.” Mere advancement of one’s economic interests is not, however, “improper,” and since the Former Employer couldn’t make anything more than a “generalized” allegation of improperness, this claim failed as well.

I have a few observations about this case.

First, in addition to Massachusetts appellate precedent, Judge Young relied heavily on “unpublished” Superior Court decisions (using Westlaw citations when available). I can’t think of a federal district court decision that has made as much use of Massachusetts trial court decisions as this one. However, Judge Young is a former Massachusetts trial court judge, and he often expresses his great respect for that court. The use of state court decisions is also a function of the Business Litigation Session, which has produced many more written decisions than other sessions of the trial court.

Second, Judge Young rejected the Former Employer’s argument that it was not required to make anything more than a generalized allegation of improper means/motive at the pleading stage, holding the plaintiff to the higher pleading standard established by the Supreme Court in the Bell Atlantic v. Twombly decision in 2007. As noted in this post, this standard has now been adopted by the Massachusetts Superior Court as well. Although Twombly was an antitrust case, this is another example of its broad application, extending here so far as to bar a state tort claim; before Twombly, this case likely would have survived dismissal. It probably would have survived dismissal if it had remained in state court.

Third, and lastly, what the plaintiff/Former Employer had in mind when it sued the New Employer but not its Former Employee (against whom it appears it had the stronger claim) continues to elude me, but the strategy clearly back-fired in a major way.

Bottom line: This case is important precedent in the area of employee breaches of fiduciary duty, by reason of its careful legal analysis and the gravitas of the judge who authored it. I expect the case to become part of every business lawyer’s legal arsenal when issues of employee fiduciary duty are raised.

Previous post:

Next post: