Can Attorneys Be Liable For Directing Clients To Breach Non-Competes? One Federal Court Says Maybe

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In a classic example of bad facts creating bad law, a federal judge in Kentucky recently denied a motion to dismiss claims brought against attorneys who allegedly counseled employees to breach a non-compete agreement and assisted in setting up a competing business. In Pinnacle Surety Services, Inc. v. Manion Stigger, LLP, the plaintiff sued its former attorneys and their respective law firms, alleging among other things that the attorneys tortiously interfered with a contractual relationship and aided and abetted Pinnacle’s former employees’ breaches of fiduciary duty, by encouraging them to violate their non-compete agreements and helping them set up a competing surety bond company.

The case has its origins from an earlier lawsuit, in which Pinnacle and the employees were sued by Wells Fargo, after Pinnacle hired the employees away from Wells Fargo. The defendants represented both Pinnacle and the employees in the Wells Fargo litigation, which settled shortly after it was filed. Approximately one year after Pinnacle hired the employees, Pinnacle alleges that the employees began planning to form their own competing business, with the defendants’ assistance and encouragement.

After Pinnacle failed to make a payment owed under the Wells Fargo settlement, the employees sued Pinnacle and on the same day, Pinnacle sued the employees for breaching their employment agreements. Pinnacle later filed a suit against the defendants, alleging that defendants told the employees that they could make more money on their own and helped set up the competing entity.

The court granted in part and denied in part the defendants’ motion to dismiss. In allowing the tortious interference with contract claim to proceed, the court held that Pinnacle’s allegations—that the defendants knew of the employees’ contracts with Pinnacle and “planted the seed” and directed and encouraged the employees to breach their contracts—were sufficient to show that the defendants intended to cause the breach and that their conduct did in fact cause the breach. Likewise, the court allowed the aiding and abetting breach of fiduciary duty claim to go forward, finding that Pinnacle adequately alleged that the employees owed a fiduciary duty, breached that fiduciary duty, and that they did so with “substantial assistance or encouragement” from the defendants.

Should the Pinnacle case cause lawyers who advise on non-compete issues to lose sleep at night? Probably not. The Pinnacle case is somewhat of an outlier because the defendants represented both the employer and the employees at one time or another. Had the defendants only represented the employees, their conduct would likely have been protected by the attorney-client privilege. Courts throughout the country have consistently barred non-clients from asserting aiding and abetting claims against attorneys of those alleged to have breached a fiduciary duty. See, e.g., Span Enterprises v. Wood, 274 S.W.3d 854, 858 (Tex. App. 2008) (“Texas courts have refused . . . to allow a non-client to bring a cause of action for ‘aiding and abetting’ a breach of fiduciary duty, based upon the rendition of legal advice to an alleged tortfeasor client”); Reynolds v. Schrock, 341 Or. 338, 350 (2006) (holding “that a lawyer acting on behalf of a client and within the scope of the lawyer-client relationship is protected by such a privilege and is not liable for assisting the client in conduct that breaches the client’s fiduciary duty to a third party”). Curiously, the defendants did not event attempt to argue that their conduct was protected by the attorney-client privilege, and accordingly, the court did not address it in its order.

If anything, the Pinnacle decision is a cautionary tale of joint representation of an employer and an employee. Oftentimes both an employee and his or her new employer are named as defendants in non-compete and trade secret misappropriation cases. In many instances, the same attorneys will represent the company and the individual. Those attorneys would be wise to consider the outcome in the Pinnacle case if they end up offering legal advice to one client that could be construed as detrimental to the other, otherwise they could end up defending an aiding and abetting breach of fiduciary duty claim.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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