Employees Can Breach Duty of Loyalty Competing with Employer for Government Contracts

Yesterday, the U.S. Court of Appeals for the Fourth Circuit held that employees in Virginia can breach their duty of loyalty to their employers and tortiously interfere with a business expectancy by competing against their employer for the same contracting opportunity.

In Adnet, Inc. v. Rohit Soni, et al., Case No. 21-2182 (4th Cir. 2023), the U.S. Army awarded Adnet, Inc. a contract to develop certain computer software. Adnet hired defendants Rohit Soni and Laura Barr as employees and Jason Laird as an independent contractor to work on the contract. While employed by Adnet, the defendants incorporated their own company, RoLaJa, LLC.

GDIT contacted Adnet to discuss the possibility of Adnet becoming a subcontractor to GDIT on the project. While GDIT was in discussions with Adnet leadership, Laird sent a GDIT Senior Director an unsolicited email on behalf of RoLaJa to inform her of RoLaJa’s interest in the subcontract. GDIT determined, unsurprisingly, that RoLaJa was able to perform the work and decided to conduct a competitive process for selecting the subcontractor.

GDIT ultimately awarded RoLaJa the subcontract and informed Adnet that its proposed bid had not been selected. Adnet sued the individual defendants, alleging that Soni and Barr breached their duty of loyalty to Adnet and that all defendants tortiously interfered with Adnet’s business relationship and committed business conspiracy.

The U.S. District Court for the Eastern District of Virginia granted summary judgment in favor of the employees, finding that the employees were merely preparing to compete against their employer, which is permissible in Virginia. The court reasoned that Adnet merely hoped to win the follow-on subcontract and therefore could not establish that it had a reasonable business expectancy.

On appeal, the Fourth Circuit reversed. Recognizing that employees in Virginia owe their employers a fiduciary duty of loyalty, the court found that “an employee cannot compete with his employer during his employment.” The court acknowledged the difficulty in determining what constitutes “competition,” finding that the line between making preparations for future employment (which is permitted) and “direct competition requires balancing the desire for a competitive marketplace” (which is not). The court found that Adnet’s employees transgressed that line 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; and (3) doing so while still employed by Adnet.

The Fourth Circuit also clarified the evidence needed to support a claim of interference with business expectancy. The court held that there was sufficient evidence for a jury to decide whether Adnet had “more than a hope it would be awarded the subcontract,” particularly given evidence that GDIT’s subcontracts manager had not competed for a similar subcontract in more than 10 years with the company.

The Fourth Circuit’s decision demonstrates that Virginia employers may have tort-based remedies in addition to contract-based claims if employees act disloyally and engage in direct competition. The Adnet decision is particularly important given recent trends toward curtailing the use of non-compete agreements.