Court Allows Tortious Interference Claim to Proceed Against Attorneys Alleged to Have Directed Clients to Breach Non-Compete

Non-Compete, Attorney-Client Relationship, Kentucky, Legal Malpractice, Tortious Interference

Can an attorney who allegedly counsels an employee to breach a non-compete be sued by the employer for tortious interference with contract? The answer may be yes, at least according to the U.S. District Court for the Western District of Kentucky, which recently refused to dismiss such claim against the attorney defendants in Pinnacle Surety Services, Inc. v. Mannion Stigger, LLP.[1]

Plaintiff Hires the Employees & Has Them Sign a Non-Compete

In May 2013, Plaintiff Pinnacle hired two employees from Wells Fargo to open a surety bond business in Louisville, Kentucky. The attorney defendants who would later be sued for tortious interference represented the employees in the contract negotiations with Pinnacle. The agreement reached between Pinnacle and the employees provided for a 3-year employment term and imposed non-competition, non-solicitation and non-disclosure restrictions.

Wells Fargo filed suit against the employees and Pinnacle. In a twist that may have fueled the subsequent lawsuit, the attorney defendants undertook to represent Pinnacle in addition to representing their pre-existing clients, the employees. The Wells Fargo suit was settled a month after it was filed.

The Employees Resign & Begin Competing

The relationship between the employees and Pinnacle quickly soured and they began planning an early exit. In early May 2014, the attorney defendants sent a letter on behalf of the employees to Pinnacle proposing to end the relationship.

When Pinnacle refused, the employees moved forward with their plans and resigned on May 30, 2014. Pinnacle sued the employees and the employees countersued. Those cases were eventually resolved.

Plaintiff Sues the Employees’ Attorneys for Allegedly Causing the Breach

Not content with its suit against the employees, Pinnacle filed a separate action against the attorney defendants. Pinnacle alleged on “information and belief” that the attorney defendants “planted the seed” with the employees and “directed and encouraged” them to terminate their agreement with Pinnacle prematurely and breach their non-competes.

Pinnacle also alleged – again on information and belief – that the attorney defendants told the employees they could do better financially if they resigned early and then helped them execute their departure, including by forming a new company for them. Finally, Pinnacle alleged that its attorney/client relationship with the attorney defendants continued through June 2014 when the final payment was made under the Wells Fargo settlement agreement.

Based on these allegations, Pinnacle asserted claims for, among other things, legal malpractice, tortious interference with contract and aiding and abetting breach of fiduciary duty.

Court Denies Motion to Dismiss Tortious Interference and Aiding & Abetting Claims

The district court grants the attorney defendants’ motion to dismiss, but only in part. The court dismisses the malpractice claim. Even accepting as true that the attorney defendants continued to have an attorney/client relationship with Pinnacle through June 2014, the allegation that their conduct violated the Rules of Professional Conduct, standing alone, does not state a cause of action under Kentucky law.

In contrast, the court finds the complaint adequately states claims for tortious interference with contract and aiding and abetting breach of fiduciary duty. The complaint alleges that the attorney defendants “directed” the employees to terminate their contract with Pinnacle prematurely and to breach their non-competes.

“The Court concludes that these alleged facts are sufficient at this stage to show that Defendants intended to cause the breach and that their conduct in fact did cause the breach.”

Further, the complaint alleges the attorney defendants told the employees they would benefit financially from terminating their agreement with Pinnacle early and helped them form a competing entity while the employees still worked for Pinnacle. Accepting those allegations as true as the court must in ruling on a motion to dismiss, the complaint sufficiently alleges that the attorney defendants provided their clients with “substantial assistance or encouragement” in breaching their fiduciary duties.

Do Attorneys Giving Non-Compete Advice Need to Be Worried?

While potentially a troubling precedent, the case hopefully does not herald a wave of tort claims against attorneys who advise employees on non-competes. This case is somewhat unique in that the attorney defendants represented both Pinnacle and the employees in the Wells Fargo suit. Pinnacle alleged that the attorney defendants continued to have an attorney/client relationship with the company at the time they were helping the employees plan their exit. This fact may have been a driver of the litigation.

Pinnacle made very liberal – arguably too liberal – use of upon-information-and-belief pleading in its complaint. Pinnacle baldly alleged the defendant attorneys “planted the seed” and “directed” the employees to terminate their contacts. An allegation that the attorney controlled the client is the reverse of how the relationship typically works and seemingly should require more than a conclusory allegation to plausibly allege such a fact. But the court did not push Pinnacle on the issue and accepted as true even the most dubious upon-information-and-belief allegations.

Attorneys’ Honest Advice Privilege Should Protect Them

The decision also ignores arguably the key question – privilege. One element of an action for tortious interference under Kentucky law is that “defendant had not privilege or justification to excuse its conduct.” It is widely acknowledged that an attorney is privileged to give legal advice that may cause a client to breach a contract provided he or she does so honestly and within the scope of the request for advice.[2] Advising their long-time clients about how they could get out of the deal with Pinnacle falls squarely within the privilege, even if in doing so they may have caused their clients to breach the agreement with Pinnacle.

In many respects, the court seemed to get things backwards. The complaint alleged the attorney defendants continued to have an attorney/client relationship with Pinnacle while they were writing adversarial letters to Pinnacle on behalf of the employees. Although a dubious allegation (and one that many courts would have not accepted at face value on such thin facts), the allegation arguably states a claim against the attorneys. Conversely, the role the attorney defendants played in advising the employees about ending their relationship with Pinnacle is well within the bounds of appropriate attorney conduct and should have been held protected. Under these circumstances, the smart money would have been on the court dismissing the tortious interference claim, but allowing the malpractice claim to go forward. Yet the court did the exact opposite.

At the end of the day, there is reason to hope this decision will remain an outlier. An attorney who stays within the typical bounds of the attorney/client relationship and merely advises a client about its options regarding a non-compete should be on safe ground.

 

[1] Pinnacle Surety Services, Inc. v. Manion Stigger, LLP, Civil Action No. 3:15-cv-364-DJH (W.D. Ky. March 27, 2018).

[2] Restatement (Second) of Torts §772 (“One who intentionally causes a third person not to perform a contract .. does not interfere improperly with the other’s contractual relation, by giving the third person … honest advice within the scope of a request for the advice.”)

James Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry. This post is adapted from his article published by the Chicago Daily Law Bulletin on April 17, 2018.

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