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5th Circuit: Multimillion-dollar Verdict Against Disloyal Employees Affirmed

By Scott M. Wich   12/15/2007

At the core of the employment relationship is an expectation that employees will be loyal to their employer and fulfill their work obligations. When that basic expectation fails, employees can be liable for the damages incurred by their employer and that liability can total millions of dollars, according to the 5th U.S. Circuit Court of Appeals .

John Wilkinson and Sharon Taulman were managers for Navigant Consulting Inc. and in charge of its claims administration practice in Dallas. Wilkinson and Taulman were responsible for staffing, business development, client relations and negotiating contracts for Navigant. They were also parties to noncompete, nonsolicitation and confidentiality agreements with Navigant.

In April 2001, a Navigant competitor, First Union, expressed interest in purchasing its claims administration practice. Wilkinson and Taulman prepared a proposal that entailed a transfer of the practice’s clients and employees in exchange for $22.5 million. The transfer was to be effected by transferring Navigant’s existing engagements to a corporation owned by Wilkinson and Taulman. The corporation, in turn, would sell its capital stock to First Union.

The proposal to First Union included the disclosure of business information about the claims administration practice, including revenue projections, margin rates, potential engagements being bid and staffing rates. Wilkinson and Taulman did not advise Navigant that First Union had expressed an interest in purchasing the claims administration practice, nor that they had submitted a proposal that included a payment to their corporation. No agreement, however, was reached with First Union.

Throughout the rest of 2001 and 2002, Wilkinson and Taulman attempted to sell the claims administration practice to other competitors of Navigant. During this time, on behalf of Navigant, Wilkinson executed a four-year lease for office space in downtown Dallas.

In June 2002, a Navigant computer technician was directed to copy company information onto a portable, non-Navigant server and not to inform Navigant’s corporate office of the data transfer. Suspicious, the technician contacted the corporate office. In response, Navigant’s general counsel initiated an investigation into the Dallas office.

A few days after being advised by Navigant not to transfer company data to outside servers, Wilkinson contacted one of the possible purchasers, LECG, and advised that he wanted to “move quickly” on a deal, delivering a new proposal to sell the claims administration practice through Wilkinson’s and Taulman’s corporation in exchange for options on 250,000 shares of LECG stock and $1.2 million in cash.

Shortly thereafter, Wilkinson met with Navigant in an effort to obtain the claims administration practice in exchange for assuming Navigant’s obligation on the office lease that Wilkinson had negotiated. Wilkinson attempted to demonstrate the losses Navigant would incur, including the lease obligation (to which Wilkinson bound Navigant even if the claims administration practice dissolved), if it refused Wilkinson’s proposal.

Among other things, Wilkinson noted an “unprofitable contract with ‘negative cash flow’” if Wilkinson left Navigant as well as severance and accrued vacation payments that would need to be paid to departing employees. Navigant rejected Wilkinson’s offer. Wilkinson and Taulman submitted their resignations two days later and accepted employment at LECG.

Navigant filed suit against Wilkinson and Taulman, alleging claims of breach of fiduciary duty, breach of contract and misappropriation of trade secrets.

In the course of testimony, Wilkinson admitted that the proposals to sell the claims administration practice were made without Navigant’s knowledge or authorization and would have provided no proceeds to Navigant. A jury found each of them liable on each claim, awarding Navigant nearly $2 million in damages against both Wilkinson and Taulman, punitive damages of $200,000 against each of them and attorneys’ fees.

Navigant Consulting Inc. v. Wilkinson , 5th Cir., No. 06-11071 (Nov. 15, 2007).

Professional Pointer: Loss through employee disloyalty can be a significant injury to an employer. Employee use of company property for personal gain can be a severe problem when confidential information and trade secrets are involved. In addition to the use of confidentiality and nondisclosure agreements, employers are well advised to maintain policies preserving the security of such information and encouraging reports of violations.

Scott M. Wich is an attorney with the law firm of Clifton Budd & DeMaria LLP in New York.

Editor’s Note: This article should not be construed as legal advice. 

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