The U.S. Court of Appeals for the Fourth Circuit has found that employees can breach their duty of loyalty to their employers and tortiously interfere with a business expectancy by competing against their employer for the same follow-on contracting opportunity. The Fourth Circuit’s recent decision in Adnet, Inc., v. Rohit Soni, et al., Case No. 21-2182 (4th Cir. 2023),* clarifies the scope of an employee’s fiduciary duty of loyalty in Virginia, especially in the context of a federal contracting opportunity, and demonstrates that employers may have a common law remedy against employees even in the absence of non-compete agreements. This is especially important given recent legislative trends to curtail the use of non-competes.

Background

In Adnet, Adnet hired employees to support its Army contract. When the Army reallocated the work to another contractor, Adnet sought to continue performing the follow-on work as a subcontractor. Adnet was poised to receive a subcontract on a sole-source basis until current Adnet employees submitted a competing proposal for the same opportunity. Following a lawsuit against the employees, the U.S. District Court for the Eastern District of Virginia granted summary judgment in favor of the employees on the basis that, by submitting a competing proposal in a head-to-head competition with their employer, the employees were merely preparing to compete against their employer, which is permissible in Virginia. The district court further found that Adnet merely hoped to win the follow-on subcontract and therefore could not establish that it had a reasonable business expectancy. Finally, the district court rejected Adnet’s conspiracy allegation because Adnet did not establish either of the first two torts. The Fourth Circuit reversed summary judgment on both tort counts and vacated regarding conspiracy.

Duty of Loyalty in Virginia

In Virginia, employees owe their employers a fiduciary duty of loyalty. This broad duty encompasses the more specific duty not to compete against one’s employers. See Williams v. Dominion Tech. Partners, L.L.C., 576 S.E.2d 752, 757 (Va. 2003). The district court viewed Williams, the seminal duty of loyalty case in Virginia, as establishing only a “narrow” duty, preventing just three types of conduct: (1) misappropriation of trade secrets; (2) misuse of confidential information; and (3) solicitation of the employer’s clients. Since Adnet did not allege that its employees did one of these three things, the district court found that the employees’ competition against Adnet for the same follow-on contracting opportunity did not breach their duty of loyalty. The district court additionally found that since Adnet did not have a business expectancy in the follow-on work, no duty of loyalty regarding the work existed.

The Fourth Circuit reversed, finding that Williams was clear that “an employee cannot compete with his employer during his employment.” The Fourth Circuit acknowledged that “what exactly constitutes competition is more complex,” finding that the line between making preparations for future employment, which is permissible, and “direct competition requires balancing the desire for a competitive marketplace.” The Fourth Circuit found that Adnet’s employees “traversed that line here” by (1) approaching Adnet’s customer and causing the customer to compete the follow-on subcontract; (2) submitting a “competitive” proposal to Adnet’s customer, thus “compet[ing] against Adnet in the most direct sense of the word”; and (3) doing so while still employed.

In a concurring opinion, Judge Wilkinson cautioned that “Virginia employers and employees should view the disposition of this fact-bound case in the broader context of Virginia law,” but ultimately found that, here, “the workers may have used their inside information to undercut their own employer at the very time they were working for it.” Judge Wilkinson therefore joined the majority in finding that the particular facts at issue presented a question for the jury.

Tortious Interference with Business Expectancy

In addition to clarifying the duty of loyalty, the Fourth Circuit clarified the evidence needed to support a claim of interference with business expectancy. The Fourth Circuit found sufficient evidence for a jury to decide that Adnet had “more than a hope that it would be awarded the subcontract,” in part because the customer’s subcontracts manager had not competed for a similar subcontract in her more than 10 years with the company and did so only after Adnet’s employees presented themselves as an alternative. This evidence “suggests the existence of a business expectancy in the subcontract, with a probability of future economic benefit to Adnet,” and that “absent Defendants’ intentional misconduct, [there was] a similar reasonable certainty that Adnet would have been awarded that subcontract.”

Conclusion

Although Virginia law encourages employee mobility and disfavors non-compete agreements, employees cross the line when they compete against their employer while still employed. Especially for government contractors who regularly participate in competition cycles for follow-on work, the Fourth Circuit’s decision in Adnet demonstrates that Virginia employers may have tort-based remedies in addition, or as an alternative, to contract-based claims if employees act disloyally and engage in direct competition. The Fourth Circuit’s decision also establishes that a government contractor in Virginia can assert a viable claim for tortious interference with business expectancy in relation to its expected follow-on contract if its employees act disloyally and interfere with that contracting opportunity.

*Several authors of this article were counsel for the plaintiff in Adnet, Inc., v. Rohit Soni, et al. (Case No. 21-2182).