Design Strategy, Inc. v. Marc E. Davis was a federal business dispute involving former Design Strategy employee Marc E. Davis, technology executive John Goullet, and companies associated with Goullet. The litigation centered on allegations that Davis diverted a significant business opportunity while still employed by Design Strategy and that Goullet and his companies participated in that alleged diversion. The U.S. Court of Appeals for the Second Circuit issued its decision in the case on October 19, 2006.
John Goullet was the chief executive officer of Info Technologies, Inc. and Info Technologies Web Solutions, Inc., commonly referred to in the case as Infotech and IT Web. Both companies, along with Goullet, were defendants in the litigation and were collectively identified by the court as the “IT Defendants.”
Design Strategy operated in the computer technology services industry, providing trained technical personnel to companies for specific projects. Marc Davis joined Design in 1987 as a sales representative and later became a sales manager. Davis was an at-will employee without a written employment agreement and was not subject to restrictive covenants concerning confidentiality, noncompetition or nonsolicitation.
The Contentville Opportunity
The dispute originated in 1999 when Davis learned through a Microsoft business contact about a proposed $10 million technology project that became known as Contentville.com. The project called for the creation of an e-commerce website using Microsoft technology and required the selected company to perform web-development “solutions” work.
Design Strategy alleged that Davis diverted the Contentville opportunity away from Design and toward IT Web while he was still a Design employee. According to Design, Goullet, Infotech and IT Web participated in the alleged diversion and subsequently hired Davis.
Davis disputed that characterization. He maintained that he first brought the Contentville opportunity to Design and only referred IT Web to Microsoft after Design’s president, Marsh Newmark, indicated little interest in pursuing the project and after it became apparent that Design might not qualify for the work.
John Goullet and IT Web
Goullet’s involvement became an important part of the case because Davis had interviewed for a position with the IT Defendants before he began actively promoting IT Web to Microsoft.
The District Court found that Davis first interviewed with the IT Defendants on September 22, 1999. However, the court found no evidence that Goullet or the other IT Defendants encouraged Davis to provide information about Contentville or affirmatively sought his assistance in obtaining the contract.
The court also found no evidence that Goullet, Infotech or IT Web offered Davis a job or payment in exchange for referring the Contentville opportunity or providing information concerning other Microsoft business opportunities.
According to testimony discussed in the court’s decision, Goullet knew that Davis had initially attempted to pursue the Microsoft opportunity for Design. Goullet testified that he and Davis had discussed whether Davis had brought the opportunity to Design president Marsh Newmark and that Davis indicated that he had.
The court concluded that, under the circumstances, Goullet had no reason to question Davis’s representations. It found that Goullet reasonably could have concluded that Design either was not interested in the Contentville project or was not qualified to perform the work.
Microsoft Awards the Contract to IT Web
By November 1999, Davis had stopped attempting to obtain the Contentville contract for Design and began promoting IT Web for the project. The District Court found that Davis contacted Microsoft representatives during November and early December and encouraged them to consider IT Web.
Microsoft ultimately awarded the Contentville contract to IT Web in December 1999.
The court nevertheless determined that Design would not have received the contract even if Davis had never promoted IT Web. According to the court’s findings, Microsoft and its project partner required prior web-solutions experience and an operational computer laboratory. Design lacked the experience and operational capacity necessary to meet those requirements within the project’s timetable.
IT Web offered Davis employment in a letter dated December 14, 1999. Davis accepted the offer in January 2000 and began working for IT Web in early February.
Design argued that Davis’s compensation arrangement with IT Web supported its contention that he had effectively been rewarded for bringing the Contentville business to Goullet’s company. The District Court rejected that argument and did not find that Davis had been offered compensation in exchange for delivering the project.
Design Strategy Files Suit
Design Strategy filed its lawsuit in July 2002.
The company asserted claims against Davis that included breach of an employment agreement, breach of fiduciary duty, unfair competition and unjust enrichment. Design also brought claims against Goullet and the IT Defendants, including aiding and abetting a breach of fiduciary duty, wrongful inducement of a breach of fiduciary duty and interference with employment.
Design’s position was that Contentville represented a corporate opportunity that should have belonged to the company and that Davis improperly redirected that opportunity while still employed there.
Following a bench trial, however, the District Court determined that Contentville did not constitute a corporate opportunity belonging to Design. Among other findings, the court concluded that Design would not have been able to satisfy Microsoft’s requirements for the project.
The court also rejected Design’s unfair-competition and unjust-enrichment claims arising from the alleged diversion.
Davis Found to Have Breached His Duty of Loyalty
Although the court rejected the central corporate-opportunity claim, it did find that Davis had been disloyal to his employer.
The District Court determined that Davis’s promotion of IT Web to Microsoft while he was still employed by Design was inconsistent with his fiduciary duty of loyalty. It identified Davis’s period of disloyalty as November 11 through December 9, 1999.
As a result, Davis was required to forfeit $6,538 in salary earned during that period.
The court did not require Davis to surrender commissions because those commissions resulted from separate transactions that were not affected by the conduct involving IT Web and Contentville.
The court also declined to award punitive damages, finding that the evidence did not establish the degree of extreme moral culpability required for such an award.
Claims Against John Goullet and the IT Defendants
A significant part of the litigation concerned whether John Goullet and the IT Defendants were legally responsible for assisting Davis in his breach of fiduciary duty.
To establish aiding and abetting a breach of fiduciary duty, Design needed to show not only that Davis committed a violation, but also that the IT Defendants knew about the violation and substantially assisted in it.
The District Court concluded that the evidence was insufficient to establish those elements against Goullet and the companies.
Although Goullet knew that Davis was employed by Design and knew that Davis had informed IT Web about a possible Microsoft opportunity, the court found insufficient evidence that Goullet knew Davis was violating a duty to his employer.
The court considered John Goullet’s testimony that Davis had represented that he had already brought the opportunity to Newmark. It also considered evidence that Davis had told the IT Defendants that one reason he wanted to leave Design was Newmark’s lack of interest in expanding the company into the web-solutions business Davis wanted to pursue.
Based on the circumstances, the court determined that Goullet was not under an independent obligation to contact Design Strategy to verify Davis’s representations.
The court therefore rejected Design Strategy’s claim that Goullet, Infotech and IT Web aided and abetted Davis’s breach of fiduciary duty.
Appeal to the Second Circuit
Design Strategy appealed the District Court’s judgment to the U.S. Court of Appeals for the Second Circuit.
Among the issues on appeal were the treatment of Design’s lost-profits claim, its request for a jury trial, the remedy imposed for Davis’s breach of loyalty, and the District Court’s determination that Goullet and the IT Defendants were not complicit in that breach.
The Second Circuit upheld the finding that Davis breached his fiduciary duty of loyalty and affirmed the requirement that he forfeit salary earned during the period of disloyalty.
Importantly for Goullet and the other IT Defendants, the appellate court also upheld the District Court’s finding that there was insufficient evidence that they knowingly aided and abetted Davis’s breach.
The Second Circuit concluded that the District Court had not committed clear error in finding that Goullet and the IT Defendants lacked the necessary knowledge of Davis’s disloyal conduct. It also rejected Design’s argument that Davis’s compensation after joining IT Web established that he had been paid for bringing the Contentville project to the company.
The Second Circuit ultimately affirmed the District Court’s judgment.
Thus, while the litigation resulted in a finding that Davis had breached his duty of loyalty to Design Strategy for a limited period, the courts did not find John Goullet or the IT Defendants liable for participating in that breach.
Source: https://law.justia.com/cases/federal/appellate-courts/F3/469/284/622271/