Opinion
No. CV 06-5004605S
February 23, 2011
1.
The Court will first make general references to the facts of the case before discussing the general legal principles it will rely on. More detailed reference to the facts will be made when it tries to apply those legal principles to the issues before it.
Several counts have been brought by the plaintiff against Mr. Zenie. The first count lies in breach of fiduciary duty, the second count and third count assert a breach of the employment and operating agreements. The plaintiff also advances a violation of CUTPA against Zenie and the company he set up in 2005, CPS. In the tenth count the plaintiff alleges Zenie and CPS violated § 53a-251 of the general statutes which makes it a crime to steal or engage in the unauthorized use of information stored on a computer system.
Regarding the breach of fiduciary duty claim the court will rely heavily on a decision it wrote in 2000, Custard Insurance Adjusters v. Nardi, 2000 CT Sup 5085 and a more recent opinion, CTRE LLC v. Thora Colburn, 2008 CT Sup 10477 which concerned breach of that duty in the employment context.
The alleged violation of fiduciary duty is central to all the counts against the defendant and in many respects underlies and supports the allegations and legal theories of these counts. Or to put it another way the factual allegations on which the breach of fiduciary duty claim lie, form the factual basis for the various legal theories advanced by the plaintiff in the various counts.
2.
The basic facts of the case do not appear to be in dispute. John Migueles and John Zenie are prosthetists who met each other in college. Mr. Migueles founded AAD New England in 1998. On November 25, 2002 AAD New England he entered into an "operating agreement" with Mr. Zenie, they described themselves as founding members of a new entity to be called Advanced Arm Dynamics of New England LLC which was formed under our Limited Liability Company Act, Connecticut Limited Liability Company Act, § 34-100 et seq. In the introductory section in paragraph A it states "AAD has developed specialized knowledge and methodologies for business development, marketing and providing high quality services to patients who need consultation and patient care services on upper extremity prosthetics (that is, artificial limbs for the shoulder, arm and hand area . . ."Mr. Zenie is described as "operator" and paragraph B states that he "provides patient care services in upper and lower extremity prosthetics (that is, artificial limbs for the arm and leg area)" and has expertise to manage and market such services. Paragraph C states AAD and operator (Zenie) "desire to establish the company to operate a business which provides consulting and advanced patient care services in upper extremity prosthetics." It then says "Accordingly, the parties agree to form, own, manage and operate the company on the following terms: (the provisions of the agreement follow)
Section 1 contains "organization provisions." In section 1.2 it says "Purpose: The company has been organized to attract new patients and requests for service by informing prospective patients and referral sources about available services for the provision of upper extremity artificial limbs (the 'Business') and for all other purposes for which a limited liability company may be formed under the act."
Section 6 of the Agreement will be quoted by the Court in relevant part:
6. Confidential Information.
6.1 Trade Secrets of the Company. Operator will help the Company develop and will have access to and become acquainted with various trade secrets, all of which shall be owned by the Company, used in the operation of the Company's Business, and maintained as confidential by Operator and the Company. Unless and until they become public information or of general knowledge, Operator shall not disclose any such trade secrets, directly or indirectly, or use them in any way other than for the Company's benefit or for any purpose other than performing services for and on behalf of the Company.
6.2 Property Ownership. Patient information, files contracts, manuals, reports, letters, notes, notebooks, lists, records, patient lists, vendor lists, purchase information, designs, computer programs and similar items and information, relating to the Business, coming into the Company's possession in connection with the Business, shall be the Company's property . . .
6.3 Confidential Data. Operator, in the course of Operator's duties will have access to and become acquainted with patient information, financial, accounting, statistical and personal data of the Company. Except for such information which is otherwise available through public means or general trade knowledge, all such data is confidential and shall not be disclosed, directly or indirectly, or used by Operator in any way, other than providing services to patients for and on behalf of Operator and the Company.
6.4 Protection of Confidential Information and Other Property . . . Operator acknowledges that the Company cannot protect its trade secrets and other confidential information against unauthorized use or disclosure and cannot readily assure compliance with Sections 6.1 through 6.3 above if Operator holds interests in competitive businesses or engages in or assists competitive activities by others . . .
6.5 Further Protection. Operator agrees that for a period of two (2) years following any purchase of Operator's Member Interest by the Company or another Member, as provided in this Agreement, unless Employment is terminated 'without cause' under the Employment Agreement, Operator shall not directly or indirectly render upper extremity prosthetics services of a business, professional or commercial nature, whether alone, as shareholder, partner, or as a director officer manager employee, consultant, or holder of more than 5% of the capital stock of any other corporation or other entity, to or for any person or firm, whether for compensation or otherwise, that is competitive with the Company. Without restricting the scope of activity that may be competitive with the Company, any business engaged in any service related to upper extremity prosthetics shall be deemed automatically to be competitive with the company.
6.6 Exceptions. Section 6.5 shall not prohibit Operator from purchasing, for investment purposes, up to 5% of the outstanding stock of a publicly-held corporation listed on the New York Stock Exchange, provided that the investment does not require Operator to participate in the operation of the company in which Operator invests.
6.7 Experience; Absence of Hardship. Operator acknowledges and represents that Operator has sufficient experience and expertise, particularly in lower extremity prosthetics and orthotics, to engage in noncompetitive activities after the expiration or termination of this Agreement (but while the provisions in Section 6.5 continue in effect), and that Sections 6.1 through this Section 6.7 will not impose any form of undue hardship on Operator.
In section 9 at 9.7 it states "9.7 Indemnification, except for a breach of fiduciary duty which a manager owes to a company and to its members, as provided by the act, the company agrees to indemnify the manager and the members against any and all judgments . . ." As noted Mr. Zenie is defined as the "Operator" in the opening paragraph of the agreement and section 1.3 states there shall be one manager and that "The first manager shall be the Operator," i.e. Zenie.
The first paragraph identifies AAD and John Zenie as the "founding members" of the new LLC.
Paragraph 1.5 of section 1 states "the company shall employ Operator pursuant to the Employment Agreement attached here to as Exhibit A ('Employment Agreement')."
The Employment agreement is between the new LLC, Advanced Arm Dynamics of New England LLC and "John R. Zenie an individual ('employee')." Paragraph 7 entitled "Disclosure of Information" which contains a long list of "proprietary information" it goes on to say that "in light of the highly competitive nature of the industry in which the company conducts its business" the employee agrees such information presently existing or obtained in the future "shall be considered confidential." The term of employment was to be for four years and the employee agrees that during the term and for two years thereafter he will not disclose any such information without the company's consent or make use of it for his own benefit or that of any other entity.
In paragraph A of section 3 of the agreement it states the ". . . employee shall serve as manager of the company and faithfully and to the best of his ability perform the duties that customarily pertain to such office . . ."
These agreements were signed and became effective in November 2002. Employees were hired to assist Mr. Zenie in the operation of the business and by 2004 there were four, Holly Hollo the administrative manager, Roy Ferneini the business development manager, and two technicians Joe Peloquin and Joe Gaetani. The various claims in this matter arise out of the fact that through his attorney Mr. Zenie terminated the operating and employment agreement on May 18, 2005 and formed another business Comprehensive Prosthetics Services (CPS). Soon joining him in his new venture were employees of AAD New England.
3 (a)
The first count sets forth a claim of violation of fiduciary duties by Mr. Zenie. To advance such a claim the plaintiff has the burden of establishing the existence of a fiduciary relationship. The court will first discuss whether such a relationship existed here and in the following subsections the duties such a relationship imposes.
In Hi-Ho Tower Inc. v. Com-Tronics Inc., 255 Conn 20, 38 (2000), the court said that: "In the similar cases in which this court has recognized the existence of a fiduciary relationship, the fiduciary was in a dominant position, thereby creating a relationship of dependency, or was under a specific duty to act for the benefit of another."
By the very act of signing the document setting up the new company in the "operating agreement Mr. Zenie established a fiduciary relationship with ADD New England as a founding member and manager and also assumed such a relationship to the company through entering into the Employment Agreement." Both agreements imposed specific duties on Mr. Zenie to act in the best interest of the newly formed company. Mr. Zenie signed both agreements and is presumed to know their contents and the duties the agreements imposed on him. The general law is that: "One who accepts a written contract is conclusively presumed to know its contents and to assent to them. A party signing a written contract has a duty to inform him or herself of its contents before executing it," "Contracts" 17 Am.Jur.2d, § 201, page 214; Calamari Perillo On Contracts, 5th ed, § 9.41, Page 392, cf Friezo v. Friezo, 281 Conn. 166, 199 (2007).
Apart from the specific obligations and status conferred by these two agreements section 34-141(a) of the Limited Liability Company Act states "(a) A member or manager shall discharge his duties under section 31-140 and the operating agreement in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances and in the manner he reasonably believes to be in the best interests of the limited liability company. . . ." Section 34-140 states members shall manage such an entity subject to its articles of organization which may set forth "provisions for regulation and management of its affairs."
Under the Employment Agreement Zenie is an agent of ADD New England and agency is a fiduciary relationship, Restatement (3d) Agency, § 1.01; comment C thereof states that "elements of common law agency are present in the relationship between employer and employee."
Before examining the general law on specific alleged violations of the fiduciary relationship alleged here, reference should be made to procedural issues which arise when a principal sues an agent for such violations. Several of the cases about to be discussed involve situations where an agent in a fiduciary relationship had direct dealings with the party to which a fiduciary duty was owed. But the general principles set forth would seem to apply to all breaches of fiduciary obligation where the breach is claimed to have harmed the party to whom the fiduciary duty is owed to the agent's benefit. In Murphy v. Wakelee, 247 Conn. 396, 400 (1998) the court said:
Our law on the obligations of a fiduciary is well settled. [A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other . . . The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him . . . (1994). Once a [fiduciary] relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary . . . Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence . . . Proof of a fiduciary relationship, therefore, generally imposes a twofold burden on the fiduciary. First, the burden of proof shifts to the fiduciary and second, the standard of proof is clear and convincing evidence.
See also Heaven v. Timber Hill LLC, 96 Conn.App. 294, 302-03 (2006). There is indication in the cases, however, that this burden shifting exercise comes into play when a fiduciary or confidential relationship exists and this is "shown together with suspicious circumstances." In the Heaven case at 96 Conn.App. 303-04, Murphy at 247 Conn. at page 456 the courts characterize prior cases by saying "In such cases, if the superior party obtains a possible benefit, equity raises a presumption against the validity of the transaction or contract," also see Cadle Co. v. D'Addario, 268 Conn. 441, 456 (2004).
Zenie, because of his management position and direct contact with and control over employees and confidential information and assets of the L.L.C. and the geographical location of Mr. Migueles, could be said to be the "dominant" member of the company and is in a "superior" position to Migueles as regards the company management and assets. This is somewhat analogous to burden shifting rules when one party has access to and control over facts and circumstances necessary to the establishment of a particular aspect of litigation — here with the added ingredient of a fiduciary relationship thrown into the mix.
(b)
Given the existence of a fiduciary relationship, the question becomes what is the nature and ambit of the fiduciary obligation owed by someone in Mr. Zenie's position a fiduciary relationship having been established. This question is best discussed in terms of agency law. Mr. Zenie is obviously the agent of the LLC through the employment agreement.
Also agency is defined as a fiduciary relationship in § 1.01 of the Restatement (3d) Agency and as noted in comment (c): "Agency encompasses a wide and diverse range of relationships and circumstances. The elements of common law agency are present in the relationships between employer and employee, corporation and officer, client and lawyer, and partnership and general partner." For example, Connecticut has applied this principle to so-called joint ventures. In Electronic Associates v Auto Equipment Development Corp., 185 Conn. 31, 35 (1981) the court said: "As a matter of law parties to joint ventures undertake fiduciary duties to each other concerning matters within the scope of the joint venture." Zenie as a member and "operator" (read "manager") of this LLC, under the Limited Liability Company Act had an agency relationship with it which carried along with it concomitant fiduciary obligations. Section 34-130 states in subsection (a) that except as provided in subsection (b) "every member is an agent of the limited liability company for the purpose of its business or affairs . . . subsection (b) states that merely being a member does not mean such person is an agent but "(2) even manager is an agent for the purpose of its business or affairs." The agreement defines Mr. Zenie as the "operator" by which clearly qualified him as a "manager" given the broad range of his duties under the founding agreement. Section § 34-140(a) just makes clear that the fiduciary duties imposed on members or managers runs back to the LLC and is not a statutory invention to protect entities dealing with LLC in that the latter's agents can bind the LLC or expose it to liability.
The broad principles on which a claim of violation of a fiduciary relationship are based is found in agency law where it has been said that "an agent or principal is bound to the exercise of the utmost good faith, loyalty and honesty towards his (her) principal or employer;" 3 Am.Jur.2d., "Agency," § 210. Encompassed within this fiduciary principle is the duty of loyalty. Restatement (3d) Agency in § 8.01 defines the following "general fiduciary principle": "An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship." Our case law subscribes to this broad principle, Town Country House Home Service v. Evans, 150 Conn. 314, 317 (1963), cf News America v. Marquis, 86 Conn.App. 527, 533 et seq. (2004). A count alleging a violation of the duty of loyalty by someone in a fiduciary relationship "is a common law cause of action independent of any statute," id. at 86 Conn.App. page 534, cf Sperry Rand Corp., v. Roth Lein, 241 F.Sup. 549, 559 (D.Conn. 1964) (applying Connecticut law).
Moving from the general to the specific the court will now try to discuss those various requirements and aspects of the duty of loyalty that form the basis of the allegations here. The court has relied heavily on the restatements of Agency, 2d and 3d. Connecticut Appellate courts have done so extensively, see Holiday Inc. v. Munroe, 37 Conn.Sup. 546 (1981) (Restatement 2d) and especially recently Middlesex Mutual Ins. Co. v. Komondy, 120 Conn.App. 117 (2010) (Restatement 2d); Yale University v. Out of the Box LLC, 118 Conn.App. 800 (2010) (Restatement 3d); Byers v. Berg, 116 Conn.App. 843 (2009) (Restatement 2d); Leblanc v. New England Raceway LLC, 116 Conn.App. 267 (2009) (Restatement 3d) Hollister v. Thomas, 110 Conn.App. 692 (2008) (Restatement 2d) National Publishing Co. v. Hartford Fire Ins. Co., 287 Conn. 664 (2008) (Restatement 2d) Ravetto v. Triton Thalassic Technologies Inc., 285 Conn. 716 (2008) (Restatement 2d); Mystic color lab Inc. v. Auctions Worldwide, 284 Conn. 408 (2007) (Restatement 2d) Bella Vista Condominium Assoc. v. Byers, 102 Conn.App. 245 (2007) (Restatement 2d).
After setting forth these general principles the court will discuss the facts of this case to determine whether the particular claims of violation of the duty of loyalty have been met.
4. (a)
The plaintiff claims various specific violations of the duty of loyalty by Mr. Zenie. The court will first discuss the alleged solicitation by Mr. Zenie of employees of the plaintiff in his new business prior to his departure from the plaintiff LLC.
The cases are not uniform in their treatment of pre-departure solicitation of employees by defendant planning on leaving the company to work for a competitor or set up his or her own competing business. The majority view and this court believes better view bars such activity. This issue is dealt with in § 8.04 competition of Restatement 3d. That section says such an individual may prepare to compete after the agency relationship terminates as long as the action taken is "not otherwise wrongful."
It violates the duty of loyalty to encourage or arrange for fellow employees to work for a competitor or rival business one intends to establish while still working for a company that will be subjected to the competition, BBF Inc. v. Geramium Power Devices Corp., 430 N.E.2d 1221, 1225 (Mass. 1992); Sperry Rand Corp. v. Rothlem, 241 F.Sup. 549, 563 (D.Conn., 1964); Electronic Assoc. v. Automatic Equipment, 185 Conn. 31, 36 (1981); also see Nicholas Morris Corp. v. Monis, 174 F.Sup. 691, 698 (S.D.N.Y., 1959); Chusid Co. v. Leeman Co., 326 F.Supp. 1043, 1060 (S.D.N.Y., 1971); Bancroft-Whitney Co. v. Glen, 411 P.2d 921, 935 (Cal. 1966); Dames Moore v. Baxter Woodman Inc., 21 F.Sup.2d 817, 822 (N.D.Ill, 1998), also see comment e of § 393 of Restatement 2d and discussion in document (c) to § 8.04 of Restatement 3d which cites Ridal v. 520 S. Michigan Ave Assoc., 78 F.Sup.2d 748, 763 (N.D.Ill, 1999). See also numerous cases cited in 19 COA 745 "Cause of action by employer against party inducing employee to leave employment," at § 5, page 763.
Several cases hold that it is improper to solicit fellow employees particularly in two situations (1) where the person so soliciting is an officer of the business that will be subjected to the competition (2) where the solicitation is aimed at key employees. It should also be noted that comment (e) to the Restatement (2d) Agency says it is permissible for an employee to make arrangements to compete before he or she leaves an employment "however, a court may find that it is a breach of duty for a number of the key officers or employees to agree to leave their employment simultaneously and without giving the employer an opportunity to hire and train replacements." A fortiori it would be improper for one employee who is an officer to orchestrate such a departure under such circumstances.
Thus the cases attach some importance to the fact that solicitation of employees by an officer or manager has occurred. See Chelsea Industries Inc. v. Gaffrey, 449 N.E.2d 320, 362 (Mass. 1983); Electronic Associates Inc. v. Automatic Equipment Development Corp., 185 Conn. 31, 33 (1981); National Rejectors, Inc. v. Trieman et al., 409 S.W.2d, 37 (MO, 1966), of more recent case of Security Title Agency, Inc. v. Pope, 200 P.3d 977, 991 (Ariz.Ct.App., 2008).
See also reference to more recent cases in comment (e) to section 8.04 of the Restatement of Agency, GAB Business Services, Inc. v. Lindsey Newsom, 83 Cal.App.4th 409, 424 (2000). There the court noted that one of the defendant former officers of the plaintiff "used his insider's knowledge of employee skills and salaries to recruit valued employees away from the corporation he owed a fiduciary duty to, and into jobs with the corporation's competitor," id., cf Reading Radio, Inc. v. Fink, 833 A.2d 199, 211 (Pa.Super, 2003, appeal denied, 847 A.2d 1287 (Pa 2004)).
Comment (c) also notes that: "Some of the cases discuss a 'higher duty' applicable to corporate officers and directors but in the context in which the position held has enabled the defendant to inflict substantial competitive disadvantage," citing Veco Corp. v. Babacock, 611 N.E.2d 1054, 1059 (see App. 1993) where the court said:
In general, employees may plan, form, and outfit a competing corporation while still working for the employer, but may not commence competition . . . corporate officers, however, stand on a different footing; they owe a fiduciary duty of loyalty to their corporate employer not to (1) actively exploit their positions within the corporation for their own personal benefit, or (2) hinder the ability of a corporation to continue the business for which it was developed.
In Veco the defendant officers solicited for a competing business venture all the employees involved with the present employer's ability to service a major client.
The defense to such a claim is often factual in nature. It could be argued, for example, that the solicited employees "were in the process of being eliminated or leaving on their own" GAB Business Services v. Lindsey Newcomb, 83 Cal.App.4th at p. 425 or that any solicitation did not occur until after the termination of the fiduciary obligation because a defendant had resigned his position. Republic Systems Programming Inc. v. Computer Assistance Inc. 322 F.Sup. 619, 626 (D.Conn. 1970) (applying Connecticut law); Electronic Assoc Inc. v. Automatic Equipment Development Inc., 185 Conn. 31, 36 (1981).
The court will discuss the defenses when it conducts its factual analysis.
(b)
There are other aspects of Mr. Zenie's conduct which the plaintiff claims violated his fiduciary duties. This conduct is alleged to have occurred while Mr. Zenie was still employed by AAD-New England or had its inception while he was still working at that company and evidenced in conduct after he left. The court will try to set forth its understanding of the law as to these claims. Both of the matters are discussed in Section 8.05 of Restatement 3d which states:
§ 8.05 Use of Principal Property: Use of confidential Information
An agent has a duty (1) not to use property of the principal for the agent's own purposes or those of third party (2) not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party.
The commentary to § 8.05 at section b has two observations regarding the ambit of this section. It says at pp. 314-15; "An agent is subject to this duty whether or not the agent uses the property of the principal to compete with the principal or causes harm to the principal through the use. At page 315 it says; "Termination of an agency relationship does not end an agent's duties regarding property of the principal. A former agent who continues to possess property of a principal has a duty to return it . . ."
Retention and use of customer lists by an agent or one otherwise owing a fiduciary duty who leaves the company and sets up a competing company or works for such company has been often litigated.
Restatement 3d regards customer lists as a type of "confidential information" under certain circumstances. In comment (e) to § 8.05 the law is summarized:
An agent's duties concerning confidential information do not end when the agency relationship terminates. An agent is not free to use or disclose a principal's trade secrets or other confidential information whether the agent retains a physical record of them or retains them in the agent's memory.
See Illustrations 6 and 7.
6. P. who owns a commercial cleaning service, maintains a list of customers and prospective customers, noting particulars about each. P.'s list would be of competitive use to others. P. maintains the list on a computer in P.'s office and restricts access to high-level employees within P's organization. A., P.'s general manager, who wishes to establish a competing cleaning service, retains a hard copy of the list that P. gave to A. to use in A.'s work. A. resigns, taking the list and planning to use it to solicit business for A.'s new competing firm. A. has breached A.'s duty to P.
7. Same facts as Illustration 6, except that A. commits the list to memory, memorizing a portion each day and then typing that portion into A.'s home computer each evening. Same result.
Speaking very broadly the law is that while one is employed by one company it is not permissible under a duty of loyalty test to solicit that company's customers for a rival business already existing and a fortiori for a rival business one plans to form, see Duane Jones Co., Inc. v. Burke, 306 NY 172, 188 (NY, 1954) and Ellis Marshall Assoc., Inc. v. Marshall, 16 Ill.App.3d 398, 403-04 (1973) commenting on Duane Jones. Our state adopts this rule, see Town Country House and Home Service Inc. v. Evans, 150 Conn. 314, 317 (1963); Holiday Food Co. v. Munroe, 37 Conn.Sup. 546, 549 (App.Div of Sup.Ct, 1981) Chelsea Industries Inc. v. Gaffrey, 449 NE.2d 320, 326 (Mass 1983); SH v. Coal Inc., et al. v. Wingrove, 545 A.2d 917, 920 (Pa 1988).
The general rule, however, must be further explained. Holiday Inn v. Monroe, supra involved a claim for damages and injunctive relief where the former employee acquired customers of the principal for his competing business. The court cited Town Country House Home Services for the proposition that a claim could be made for "business done with customers solicited before the end of the employment" but held it was not the case that "any customer with whom the defendant had contact could never become a customer of the business formed by the defendant when he left the plaintiff's employ." But the court did say the rule and this fiduciary mandate "would apply only to customers solicited by the defendant for the enhancement of his business before his employment with the plaintiff had terminated." Id. 37 Conn.Sup. pp. 549, 550.
Ellis Marshall Associated Inc. v. Marshall, supra is interesting in this regard and suggests the fine lines that must be drawn. It held that Duane Jones Inc., was different from the case before it because in Marshall the facts "although similar in some respects lack the proof that the defendant did more than inform certain clients of his intention to leave the plaintiff's employ. The defendant here did not ask the plaintiff's clients to approve his plan or even attempt at that time to persuade them to employ him in his new capacity. The defendant's conduct prior to his resignation falls short of that which the Jones court found to be violative of and employee's fiduciary duty to his employer," 16 Ill.App.3d at p 404.
Another aspect of the issues presented by cases of this type is illustrated by the case of Western Medical Consultants v. Johnson, 835 F.Sup. 554, 558 (D.Ore., 1993). There the court recognized the rule that "the agent cannot utilize confidential information of the principal in her subsequent competition with that principal, nor may the agent solicit customers before the termination of her agency." In Johnson the court found no evidence of "customer contacts." The evidence demonstrated to the court that the defendant did not violate any fiduciary duty because she found potential customers through two sources (1) the yellow pages and (2) a listing from a government agency, id., page 559.
(c)
Leaving aside the solicitation of customers similar issues concerning the violation of fiduciary duties are raised when it is claimed the former employee now in competition with the company he or she worked for, used information contained in documents or other resources developed by the former employer. The court will repeat a section 8.05 of Restatement 3d reads as follows:
§ 8.05 Use of Principal's Property; Use of Confidential Information
An agent has a duty (1) not to use property of the principal for the agent's own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent's own purposes or those of a third party.
The comments to this section indicate that "The rule is a corollary of a principal's right as an owner of property, to exclude usage by others." It applies if the agent uses the property to compete with the principal (comment b) and "termination of an agency relationship does not end an agent's duties regarding property of the principal" ( id.). Comment (c) defines "confidential information" very broadly; "Many employees and other agents are given access by the principal to information that the principal would not wish to be revealed or used except as the principal directs. Such information may pertain to the principal's business plans, personnel, financial results and operational practices among a range of possibilities." In fact the same comment goes on to say that the agent is not free to use such confidential information "whether the agent retains a physical record of them or retains them in the agent's memory."
The rule stated is a counter part of Section 395 and 396 of Restatement 2d Agency. It can cover a whole range of activity such as use of actual machinery developed by an employer use of documents setting forth manufacturing techniques and, as noted customer lists with a concomitant solicitation of the customers of the former employer. See David Welsh Co. v. Erskime Tully, 250 Cal.Rptr. 339, 341-43 (fee schedules, methods of operation, and other information). Compare also News America v. Marquis, 86 Conn.App. 527 (2004), where the former employer provided in store advertising to retail chain stores. The former employee being sued for breach of the duty of loyalty took business related material, customer lists, customized presentations, e-mails he sent and received and copies of store list material. The court struggled with the plaintiff's ability to prove a damage amount but had no problem in finding that the removal of documents from the employer's business on the eve of resignation, on a Sunday, and trying to induce a fellow employee to leave the principal to become employed by a competitor are of course breaches of the duty of loyalty, id. at page 538.
The reasoning behind the rule is straight forward and set forth in comment (a) to § 395 of Restatement 2d: "The relation of principal and agent permits and requires great freedom of communication between the principal and the agent because of this the agent is often placed in a position to obtain information of great use in competing with the principal. To permit an agent to use for his own benefit or for the benefit of others in competition with the principal information confidentially given or acquired by him in the performance of or because of his duties as agent would tend to destroy the freedom of communication which should exist between the principal and the agent." The rule is fairly easy to apply — it applies "to information which the agent should know his principal would not care to have revealed to others or used in competition with him (sic)."
A Second Circuit case sets forth the guideline with its caveat analogous to the one for customer lists and solicitation of customers. The court said: "The rule applicable to the present inquiry is that an agent has a duty not to use confidential knowledge acquired in his employment in competition with his principal . . . This duty exists as well after the employment is terminated as during its continuance" . . . On the other hand, use of information based on general business knowledge or gleaned from general business experience is not covered by the rule, and the former agent is permitted to compete with his former principal in reliance on such general publically available information," Abro Music Inc. v Harrisongs Music Ltd., 722 F2d 988, 994 (CA 2d, 1983).
(d)
Despite these general principles, a final observation should be made. The duty of loyalty and the law of fiduciary obligations does not prevent a former employee from competing with his principal. Referring to comment (e) of restatement (2) the court in Town Country House Homes Service v. Evans, supra, said that absent a restrictive agreement: "the agent can properly compete with his principal in matters for which he had been employed. Thus before the end of his employment, he can properly purchase a rival business and upon termination of employment immediately compete," 150 Conn. at page 317. It would seem to follow that before he or she leaves the employment the employee can take steps to set up a business which will compete with the employer or entity to which a duty of loyalty was owed. It has been so held in cases cited in the Reporters' Notes; see Mercer Management Consulting Inc. Wilde, 920 F.Sup. 219, 234, where the defendants took several actions to set up a competing business while still employed by the former employer — they incorporated the planned competing business, made arrangements for office space, inquired about benefit packages, investigated computer systems, and met with an accountant. Also see Instrument Repair Services Inc. v. Gumby, 518 S.E.2d 161, 164 (Ga.App. 1999). But see Kentucky case of Steel Vest Inc. v. Scansteel Serv. Ctr., 807 SW 2d 476, 483 (KY, 1991) which says directors and officers may not set up a business intended to be competitive while still serving as officers — they should terminate their position before making such arrangements.
The notes indicate even if the setting up of the competitive business is done in "stealth" this does not constitute a breach of fiduciary duty, see Mercer Management case supra. It is said an agent has no duty to disclose "his competitive intentions" except where silence on the part of the agent places principal at a disadvantage in its dealings with its own agent," quoting from CTC Communications Inc. v. Bell Atl. Corp., 14 F.Sup.2d 133, 143 (D.Me., 1998).
An older Illinois case is also instructive. The court in James C. Wilburn Sons Inc. v. Heniff, 95 Ill.App.2d 155 (1968) said:
"A review of the evidence indicates that the defendants merely exercised their right to leave one employment and form or join a rival business. Thus, this case is distinguishable from those cited by the plaintiff. The latter involved either the appropriation of a bona fide trade secret (e.g., Schulenburg v. Signatrol, Inc., supra) or a proven plot to destroy another's business . . . The defendant, Heniff, did not violate his duty of loyalty to Wilborn by forming Brandex and purchasing machinery for it while working for Wilborn. It is not necessarily a breach of duty for an agent to form a rival concern and purchase machinery for it while working for his principal . . . though it would be for an agent to continue to work for his principal after a rival corporation which he also served as agent begins business." 95 Ill.App.2d 163.
Also see Radiar Abrasives v. Diamond Technology, 177 Ill.App.3d 628, 637 (1988).
5. Violation of Duty of Loyalty
The court will now attempt to apply the foregoing case law and principles to the claims made in this case.
(a)
The court will first discuss whether solicitation of the plaintiff's employees occurred here so as to allow the court to conclude Mr. Zenie violated this aspect of the duty of loyalty. The operating agreement setting up the LLC and the employment agreement for Mr. Zenie were effective in November 2002. By 2004 there were four employees in the office, Ms. Holly Hollo who was the administrative manager and patient coordinator, Roy Ferneini the business development manager, and two technicians, Joe Peloquin and Joe Gaetani.
Mr. Zenie, through counsel, sent a letter to the plaintiff's lawyer on May 18, 2005 terminating his employment with and membership in the plaintiff LLC as of July 1, 2005. He worked at AAD New England until June 30 and started operating his new company CPS, in July 2005. Holly Lanouette (the marriage name of Holly Hollo) sent in a letter of resignation to Mr. Migueles dated June 17, 2005. The effective date of her resignation was July 1, 2005. On the same date Joseph Peloquin also sent a resignation letter to Mr. Migueles, effective July 1, 2005.
Ms. Hollo started working for CPS and Mr. Zenie on July 11, 2005. She left in 2006 to be a stay at home mom. Mr. Peloquin began working for CPS in July 2005. Mr. Ferneini testified he sent in a letter of resignation to AAD New England and began working for CPS July 18, 2005.
Ms. Hollo testified and Mr. Zenie agreed that, while still working for the plaintiff, he negotiated the terms of her employment with his new company, CPS, in May or June of 2005. Over several pages of testimony Ms. Hollo repeatedly said Mr. Zenie offered her a job with the new company he was forming, all of this taking place before June 30, 2005 while Zenie was still employed by the plaintiff and a member of the LLC. She also testified Mr. Zenie told her he had offered jobs to Peloquin and Ferneini. She said that after Zenie left she herself thought AAD New England would have difficulty carrying on since the patients were so loyal to Mr. Zenie. Zenie did nothing to dispel this; Hollo also testified Zenie said he did not think the company could continue without him.
More to the point Ms. Hollo signed an employment agreement between her and CPS on June 16, 2005 which Mr. Zenie also signed while he was still an employee of the plaintiff and a member of the LLC. He also gave her a raise of several thousand dollars over the salary from her AAD New England position. This agreement (Ex 26) even said Hollo would be offered "comparable health insurance to that provided by AAD;" it included a deferred compensation plan and educational expense reimbursement. She did not have the latter at AAD New England. Paragraph 6 said "additional benefits and terms of employment (e.g. vacation sick days, etc.) shall be equal or greater than that provided by AAD." (Emphasis by this court.) As noted the next day, June 17th, she quit working for the plaintiff.
As to Mr. Peloquin he had known Mr. Zenie prior to coming to work at the plaintiff's company. In June 2005 he overheard a conversation between Zenie and someone else at the office in which Zenie said he was leaving AAD, New England; Zenie also told him he was leaving. At one point in his testimony he said he approached Mr. Zenie about going into his new company — he wanted to follow Zenie, Zenie had trained him as a prosthetist. He later said that in June 2005 he negotiated with Zenie the terms of his employment agreement at CPS which included a raise. He sent in his letter of resignation to the plaintiff on June 17, 2005. As of that date he had accepted Zenie's offer of employment at CPS.
Mr. Ferneini also testified at the time of trial he had known Mr. Zenie for nineteen years. He met him because he needed a brace and said of Zenie: "John was able to make me work." Ferneini's brother is a doctor and over the course of the years referred patients to Zenie.
Mr. Ferneini testified that in May or June 2005 Zenie told him he was leaving AAD New England. He stated he did not ask Mr. Zenie for a job prior to Zenie's departure on June 30, 2005 and Zenie did not offer him a job during that time frame. He was "happy" where he was and sent Mr. Migueles an e-mail saying he was staying with AAD New England but knowing Zenie leaving "we won't have any revenue" he asked for a retention bonus and a raise. Not hearing anything he resigned a week later. He resigned on July 11th and started working at CPS on July 18, 2005.
Mr. Ferneini's story is somewhat contradicted by other witnesses. Hollo testified that Zenie told her that he offered Ferneini a job at CPS. At trial Mr. Zenie was asked whether he offered a job to Ferneini in late May 2005. He said "A. Again I affirmatively responded to his request for employment in late May or early June." In response to a further question about whether he offered Ferneini a job in late May or early June Zenie said: "A. Yes.
As to all of these people Mr. Zenie said it was "absolutely" his testimony that they came to him independently and said I would like to work for CPS as opposed to him asking them if they would like to work for him in his new company.
He also made an offer of a job to Mr. Gaetani and as to all these four people Zenie offered a raise which to him "certainly constituted a better pay grade." Gaetani also testified Zenie offered him a job before Zenie left AAD New England at CPS. Gaetani said he wanted Zenie to put the offer in writing but Zenie "said no, he wouldn't put it in writing." Gaetani never left AAD New England to work for CPS.
It is evident to the court at least whether the burden is on the plaintiff to prove violation of a fiduciary duty or on the defendant to dispel it by clear and convincing evidence that, from the foregoing recitation of the facts found by the court, Zenie violated his duty of loyalty by soliciting employees of the plaintiff to work for CPS. The court attaches no significance, in this regard, to whether these employees first approached him about employment with his new company. The point is that he supervised these people, while still an officer of the plaintiff he hired them to work for the new company he was setting up, CPS. The fact that each one of them approached Zenie for prospective employment is not what caused harm to AAD New England; as rational actors it must be assumed that each of them would not have agreed to jump ship unless they received an offer from Zenie to the effect that they were hired. A word used in some of the case law cited by the court states in lieu of solicitation language, that an employee planning on setting up or joining a competing firm may not "entice" a fellow employee to leave. If these people would have gone to work for CPS in any event leaving their at-will positions with AAD New England why was it found necessary to give each one of them "a better pay grade," to use Mr. Zenie's own words. The agreement signed by Hollo and Zenie underlined the specific monetary advantages offered to her by CPS employment as opposed to her then current AAD New England employment. These added benefits to these employees simply were an encouragement to leave employment with the plaintiff by an officer thereof. It dispels any notion that at the point they approached him, they were already in the process of leaving on their own.
Zenie's status as an officer was something he could not trade upon in offering jobs to these people. He hired them and generally supervised their work. His experience with them in these regards would have given him an insight into their skills. He must have thought highly of them since he eventually offered all of them employment in his new company.
If in fact Zenie was approached by these people, the answer to that supposition is a respectful, so what? He should have told them in light of his fiduciary obligations and duty of loyalty that he could not, at the present time, discuss employment with them while he was still an officer of AAD New England. To say that that was not his fiduciary obligation would be tantamount to saying AAD New England had no justifiable interest in ensuring its company was not denuded of its employees almost all at once. If such an interest existed, which surely must be the case, Zenie as an officer had a duty not to do anything to bring about that eventuality.
The court will also conclude this section by referring to two matters that were raised as something relevant to all the claims of fiduciary obligation and any violation thereof. It is said that CPS was really not a competitor of AAD New England. It was suggested that CPS did not, and was not envisaged by Zenie as a company that would compete with AAD New England. The court has difficulty with the premises of this position. Subsection C of the "Operating Agreement" states that "AAD and Operator (Zenie) desire to establish the company to operate a business which provides consulting and advanced patient care services in upper extremity prosthetics." Subsection A does note AAD's extensive knowledge and methodologies with regard to the delivery of upper extremity services. But subsection B say that Mr. Zenie "provides patient care services in upper and lower extremity prosthetics (that is, artificial limbs for the arm and leg area), and has the expertise to manage and market such services" (emphasis by court). In fact the way the business operated is that AAD New England did accept and treat lower extremity patients and Mr. Zenie stated at CPS he treated at least some upper extremity patients.
Also leaving the competition factor aside, if a company officer owing a duty of loyalty, while working for that company, makes job offers to employees who leave as a group even if not to work for a competitor but, for example, an entity in a related business why would not that be a violation of fiduciary obligations? Furthermore the court does not accept the notion they, the three employees who left, were not key employees. Separately considered, perhaps, but their leaving as a group in effect eviscerated the AAD New England office. Zenie had a right to resign but he resigned in the context of taking with him the business development manager for AAD New England, its managing secretary, and a technician. They were certainly valuable enough for a business of this type for Zenie to make job offers to all four of the employees and offer them raises suggesting there is not a fungible market for such employees. Once he decided to have employees at all Mr. Zenie made no discernible effort to solicit skilled employees elsewhere.
Also once these employees left in masse it certainly would seem to have had an effect on AAD New England ability to compete with CPS as to upper extremity business. But such an observation really is involved with the issue of damages not with the predicate to such a discussion — has a breach of fiduciary duty been established?
Finally the court will specifically address something that it did not in its general discussion of the duty of loyalty and solicitation of fellow employees. The court in Nardi did not intend to suggest by citing Electronics Associates, Inc. v. Automatic Equipment Develop. Corp., 185 Conn. 31 (1981) that a company officer otherwise owing a duty of loyalty cannot violate that duty if he solicits a fellow employee who does not have an employment contract but is employed at will to work for a competing company or a competing company he plans to establish. In fact Electronic Associates stands for the opposite proposition. See page 36 where the court noted the solicitation occurred of the at-will employees after Merritt left the plaintiff's employment and once he so left "no fiduciary duties restrained him from using ordinary methods to encourage his former coworkers or subordinates to follow him to its competitor." Or to put it in a less long winded way the solicited at-will employees certainly have a right to leave the present employer but this has nothing to do whether a company officer owing a duty of loyalty can effectuate that result by making such employees job offers for a competing company he or she plans to establish.
The court concludes that in regards to the solicitation of AAD New England employees, it is clear that Mr. Zenie violated the duty of loyalty owed to the plaintiff.
(b)
The court's previous discussion of case law seems to underline the position that there is nothing improper for a person with a fiduciary obligation to simply inform patients of an intention to leave the employment of an entity to whom the duty is owed nor is it true that someone setting up a new business cannot have as a patient or customer anyone who was the customer of the former employer. This would have too stifling an effect on the right to compete and the creation of healthy competitive markets.
What cannot be done is to engage in actual solicitation of customers, here patients, while still employed by a company with which one intends to compete. The reasons for this seem obvious. If one engages in this type of activity, the customer or patient is really being encouraged to put off or delay using the services of the employer to whom the employee and future defendant owes a fiduciary duty, all for the financial benefit of the latter. Also this employee is provided a convenient platform from which he can pursue his or her solicitations.
Ms. Hollo testified that Mr. Zenie had instructed her to maintain patient lists and keep them current when she first started working for AAD New England. They were obviously important especially in this type of medical business where people would often have to revisit a treatment facility for adjustment to their prosthetic devices. That appears to be a large portion of the business of places like AAD and CPS. Renewed visits and follow up visits are an important part of the revenue base of this type of company.
Hollo testified that after Mr. Zenie formally resigned, as to patients who had known and treated with Zenie over the years, "we" would say Zenie is not going to be here but a practitioner would be at AAD New England to take care of their needs. She would then say, upon patient inquiry, — but that is not clear — that Zenie would be opening an office in Branford. AAD New England was located in Guilford, the neighboring town to Branford — the message being, hold off you can just go see Zenie in Branford. Ms. Hollo testified she also heard Zenie give this information to AAD New England patients. From May 18 to June 30, 2005 Hollo and Zenie knew the address in Branford since he had signed a lease for CPS so patients were also given the exact address.
Several patients were also given Mr. Zenie's cell phone number, she heard Zenie give this information to customers. In fact some of them called Zenie at CPS, once he opened there, on his cell phone according to Hollo. Hollo remembered five to ten calls of this type "mostly from people he knew" which implies less than all. But Hollo testified that from May 18, 2005 to June 30, 2005, "all of the active patients of AAD New England" were given this information and Zenie instructed her to give the information to the patients.
Hollo also testified that she took patient lists from AAD New England saying "we wanted to get business from them." She said she took the patient list from that company to CPS and used it to create a Christmas Card List; this list was merged with a doctor's list also taken from AAD New England. Hollo testified as to the doctors she just got information relating to them from the phone book. Zenie sent out these cards to solicit business.
An interesting side note to all this is that when the Christmas cards were sent out at AAD New England and CPS they were sent to both upper and lower extremity patients which has a bearing on the lack of competition position of the defendant — why the cards to upper extremity patients?
Mr. Zenie denied Hollo's testimony. He said he never gave his cell phone number to patients or contacted them in any way. He was not aware that the patient list from AAD New England was taken by Hollo for use at CPS and that it provided the list of people to whom Ms. Hollo was instructed to send Christmas cards.
But on the other hand he testified that patient lists were important for business purposes other than just mailing season's greetings. It was important to know whether a patient had an upper or lower extremity device, the demographics of the business, and one would imagine patient addresses which might not be as easily procurable as a referral doctor's address which can be found without fail in a phone book.
The court accepts the testimony of Hollo. It is difficult to believe these patients just happened to locate Mr. Zenie in Branford without resort to cell phone access. Suit against Hollo by AAD New England was dropped so she had a possible motive to give the testimony she did, but so did Mr. Zenie.
Basically the court finds it difficult to believe a person of Mr. Zenie's intelligence and business and organizational skills, as attested to by Mr. Migueles, who hired AAD New England's employees, and was their supervisor at that location somehow would have no knowledge of and participate in or direct the giving of his cell phone number and new business address and remain oblivious to Hollo's taking of a patient list from his former employer. Why would he not have explicitly instructed Hollo not to do these things just as he said he had patients acknowledged they had not been solicited by CPS, whatever they might take that word to mean or from another perspective was Hollo during all this to carry favor with her new boss — but how could that be, if she did not tell Zenie she was doing it? If one were to accept the posture he adopted at trial, he would have been highly offended at such a communication and would have ordered it to stop immediately.
In any event the court concludes the defendant violated the duty of loyalty as regards soliciting patients of AAD New England. What Hollo testified to goes beyond just giving people notice that you are leaving your current employment. Patients in effect were directed to where they could contact him at his new and competing business. In effect he gave himself a jump start after July 1, 2005 to set his business up and going before AAD New England could effectively respond, in part because of its loss of employees. There was in the court's opinion, a violation of the duty of loyalty.
(c)
Besides patient lists used to compete with an entity to which a fiduciary obligation was owed by going after its customer base there are other items of confidential information which were taken from AAD New England that the latter claims were used to its detriment in violation of Mr. Zenie's duty of loyalty. A so-called memory stick was used to take various items from AAD New England computers; so encoded they could be and in fact were used to aid CPS's operations.
For a violation of the duty of loyalty as to the various forms taken, as the earlier discussion indicated, the materials or information must be used in the context of a case such as this, to compete with the former principal or entity to which the fiduciary obligation is owed. The rule is not difficult to comprehend — it applies, according to the Restatement, "to information which the agent should know his principal would not care to have revealed to others or used in competition with him (sic)."
Some of the items taken were a list of suppliers who served AAD New England and provided prosthetic devices. Correct phone and contact information was important so that CPS technicians like their predecessors at AAD New England could contact the suppliers.
Also maintained in the AAD New England office and copied on to memory sticks were authorization forms for assessing what insurance companies would pay for prosthetic devices and the associated treatment of patients when such devices were installed and had to be repaired or adjusted after installation. The forms contained so-called L codes which Mr. Zenie would check off to ascertain insurance coverage. The L codes were taken from notebooks maintained in the AAD New England office. The forms copied included physician lists; medical providers were a source of referrals.
There is an "Initial Patient Assessment Form" of some five pages and a document entitled "Surgical Considerations for Optimal Prosthetic Rehabilitation." Also copied are what appear to be pricing lists.
Ms. Hollo also testified as to patient lists that were copied to the memory stick and which included contact information.
Mr. Migueles testified that he developed the patient assessment form which he described as an evolving document. The document was used to guide practitioners as to how the patients were to be serviced and to develop justifications and authorization documents to secure insurance coverage.
Another form copied was titled "Surgical Considerations for Optimal Prosthetic Rehabilitation." This form served as a guide to surgeons working with prosthetic providers to know what kind of prosthetic options were available and what would provide optimal prosthetic function.
Exhibit 6 listed various devices and codes for types of prosthetic devices made by various manufactures, the device to be ordered depending on the patient's needs. Mr. Migueles testified the manufactures have "huge catalogues." This whittles the process of ordering devices down and saves time in procuring the right device.
The posture taken by Mr. Zenie was that he did not instruct Ms. Hollo to copy these forms on to the memory stick. It did not appear to be a defense based for example on some notion that the forms and the information contained therein, especially as to the patient assessment form and the surgical considerations form, were something one who prepared these devices for patients would have in his or her knowledge by practicing in this field. Migueles stated these forms were in a format that was unique to AAD New England.
The court accepts Ms. Hollo's testimony which contradicts that of Zenie.
Ms. Hollo testified that between May 15, 2005 and June 30, 2005 when her resignation and that of Mr. Zenie were effective she made copies of electronic documents from AAD New England's computer system. She said that she was instructed to do this by Zenie. At one point he had given her a so-called memory stick which is attached to the computer to enable one to copy its contents. Many documents can be copied to this device. She copied all the forms used in the business, patient and Christmas card lists, supplier lists, insurance files. The forms included patient information. Secretarial forms were copied which Hollo did on her own volition, because she did not want to have to type the information again when she started working at CPS.
Unless instructed to do so by Mr. Zenie what possible reason would Hollo have to take forms that were not just secretarial forms but clinical in nature, such as the initial Patient Assessment Form and the Surgical Considerations Form? True, she had settled the suit brought against her by AAD New England but she did not give the impression that she was testifying so as to curry favor with anyone. She was selective in that sense; she testified Zenie did not instruct her to copy the secretarial forms, she did it for her own benefit. She also testified that fairly soon after CPS started up they did not rely on AAD New England forms because a Futura system was utilized that had its own forms.
Turning to the Futura forms relied upon by CPS they were not offered into evidence so that the court could compare them especially to the clinical forms just mentioned. And at least to the court some of Hollo's testimony was confusing. She said there was no need to use AAD New England forms because a Futura system was installed by CPS which had prepared forms. But it is unclear whether the information on the AAD New England forms was still utilized, was it added to the appropriate places in the Futura forms for example, it is also to be noted that the memory stick was taped to the wall of the CPS office, Zenie knew where it was according to Hollo, and it was used about twice a month. Why and for what purpose are not clear. The plaintiff's expert testified the memory stick was in fact used hundreds of times. If Zenie knew of the downloading process, and he had a fiduciary obligation, the burden should have been on him to dispel the notion that anything downloaded from the memory stick was not used in violation of the fiduciary obligation. Even leaving that aside, all the information and materials downloaded from the memory stick constitute information known only to Zenie and CPS. Once a prima facie case of the occurrence of downloading against the background of a fiduciary obligation is established, the burden of explanation as to how the downloaded material was used should shift to the defendants since they have exclusive knowledge about this subject. In this context the burden of proof that any downloaded materials were not used in violation of a fiduciary obligation would be shifted to the defendants in this case, see 29 Am.Jur.2d "Evidence," § 175, see Ayden v. First State Ins. Co., 959 P.2d 1213, 1218 (Cal, 1998).
If in fact Mr. Zenie instructed Ms. Hollo to transfer the forms to the memory stick what possible motive would he have, absent a defense based on their uselessness in a competitive setting or based on his own pre-existing knowledge of the profession and how his job should be done. The motive for such an instruction must be that he believed it would provide CPS with a competitive advantage. Or to put it another way violation of fiduciary duty by use of confidential material does not merely envisage securing advantage in an ongoing competitive struggle with a former employer or principal. It also could result in the inability of that employer or principal to operate at all. Here employees were solicited to work for CPS, physician lists and patient lists were taken — physicians referred patients and once patients started with one of these centers a lucrative long-term relationship could develop.
The court counted 64 doctors on the physicians list, 23 companies were listed on the "Suppliers List," and 102 patients were listed on Exhibit 24. Physicians are actively approached for referrals in this business where even patients treated in the past can be a lucrative source of income because of repairs and adjustments that might be needed. The patient list was compiled May 5, 2005. The documents discussed were transferred to the memory stick when the decision to start CPS had already been decided upon and the request to transfer and the mechanics of carrying it out were done by people who at the time were still employees of AAD New England. All this information including the intake forms enabled CPS to operate at optimum levels the moment it opened its doors. It had patient "intake forms" and the surgical considerations forms for immediate use to service patients.
Mr. Zenie was apparently not willing to rely on patients following him and finding out where CPS was located, he or his secretary could not be expected to remember the names and contact information on 102 patients, 64 doctors and 23 suppliers. If the contrary was true why did he tell Hollo to transfer these items to the memory stick and why did Ms. Hollo do so?
An answer to all this is to say AAD New England was really not competitive with CPS so per the Restatement test for confidential documents why would Mr. Zenie have reason to believe his former employer would care about having CPS use this material? AAD New England treated upper and lower extremity patients despite its declared raison d'etre but and Zenie treated some upper extremity patients at CPS — this itself is a lucrative aspect of the prosthetic business, testimony indicated upper extremity devices cost in the range of $50,000 to $100,000. Also when the patient list was compiled on May 5, 2005 there is no indication that upper extremity patients were excluded thus precluding their receipt of cell phone numbers, office location and Christmas cards. Do the suppliers listed or physicians listed deal exclusively with lower extremity patients, both, or upper extremity patients?
This is an aspect of the case not explicitly developed by the plaintiff and the court does not rely on it as the predicate to any of its conclusions.
(d)
The plaintiff also argues that other conduct engaged in by Zenie between May 18 and July 1, 2005 "facilitated his breach of (the) duty of loyalty" — his preparations to compete. The conduct alleged under this heading referred to in plaintiff's brief include (1) forming and registering CPS with the Connecticut Secretary of State (2) Directing his attorney to obtain a business license for CPS; (3) setting out in the first half of June 2005 to locate CPS office space (4) directing Ms. Hollo to transfer AAD New England's Connecticut Medical Reimbursement Program provider number to CPS and (5) ordering equipment needed to manufacture prosthetic devices.
The courts concludes all these proposed findings have been established but leaving aside category four has difficulty in concluding they would lead to a finding of a violation of fiduciary duty.
The court would refer to the line of cases discussed in its general discussion of the law which generally hold that an employee can take steps to set up a business which will compete with the employer to which the duty of loyalty was owed. As the cases cited indicate this could include arranging to purchase machinery locating office space, inquiring about benefit packages for prospective employees, meeting with an accountant or investigating computer systems. A Connecticut case, referred to by the court, held an agent can compete with his principal after terminating employment and can purchase a rival business and upon termination of employment immediately compete with the principal, Town Country House Home Service v. Evans, Supra 150 Conn at page 317.
This is a difficult area. The commentary to § 8.04 of Restatement 3d is instructive citing cases on both sides of the issue but does not suggest a departure from the general rule set forth in comment (e) to section 393 of the Restatement 2d where it is said under the heading "Preparation for competition after termination of agency;" "after the termination of his agency in the absence of a restrictive agreement, the agent can properly compete with his principal as to matters for which the has been employed . . . Even before the termination of the agency he is entitled to make arrangements to compete except that he cannot properly use confidential information peculiar to his employer's business and acquired therein."
Given the high value our society places on competitive models reflected in our law, it would unnecessarily diminish the possibility of effective competition if the employee had to wait until termination of employment to take steps to set up his competitive company. A new enterprise could take weeks or months to be set up, giving the former employer a chance to nip the project in the bud (to coin a phrase) through price and advertising and customer incentives.
What is not permissible in preparing for competition is to purloin confidential information or solicit fellow employees and customers or otherwise take steps while still employed as an agent to unfairly cripple the former employer's right to effectively carry on business and/or compete. This would also destroy the disderatum of effective competition upon termination of the employment. Mere preparations, such as those referred to here only prepare for the competition and/or do not in themselves threaten the existence of the former employer's business prior to the termination of employment. To hold otherwise would put too heavy a price on the right to compete absent any indication the preparations involved do not violate duties as to confidentiality, for example.
Neither is there any evidence here that the preparations we are discussing in this section required Mr. Zenie to devote less time to his AAD New England work than he otherwise would have — he is not said to have gone out during the middle of a work day to locate rental space for CPS or talk to lawyers or suppliers. The only testimony indicates that he continued to perform his work responsibilities for AAD New England until he left. Perhaps from an odd perspective it was in his interest to treat patients to the best of his ability — he hoped to draw them to his new business when he left AAD New England.
However, Ms. Hollo did testify that after May 18, 2005, but before July 1, 2005 Mr. Zenie told her to switch the Medicaid Reimbursement number from AAD New England to John Zenie. It was transferred to CPS because by that time "we knew the name of the new company. Hollo testified Zenie and she were under the impression that the number attached to him was a provider — he was the prosthetist treating the patients. Zenie told her the number "belonged to him." This Medicaid number was necessary for AAD New England to get reimbursed through that program.
Zenie denied telling Hollo to do this but why would she do it on her own? It is not clear to the court that in fact the Medicaid number was switched over to CPS. The internal memo of AAD New England notes Ms. Hollo "had requested to change ownership" of the number and it said AAD New England would "need a letter to stop this action." In any event Zenie did not get a Medicaid number for CPS until October 2005.
The court can find no violation of the duty of loyalty by the listed preparations to compete noted in the plaintiff's brief.
But in several of the foregoing ways the court concludes that while working for AAD New England and before leaving that work Mr. Zenie violated his fiduciary obligations.
6. Breach of Operating Agreement and Employment Agreement (a)
The court will first discuss the employment agreement and whether its terms have been violated by some of the same conduct which the court has found to be a violation of Zenie's fiduciary obligations.
The two provisions of that agreement at issue are section 3(b) and 7(a). Section 3(b) basically says the employee "Shall devote his full business time, energy and skill to the performance of his duties hereunder and shall not, without prior written approval of the company, become employed by or engaged in any business activity other than that of the company . . ."
There is no indication that Mr. Zenie's pre-departure preparations to form and prepare to operate CPS interfered with his employment obligations at AAD New England. The court has already discussed the generally liberal view the case law takes of so-called pre-departure preparations to compete. However, there is nothing to prevent parties by way of contract from limiting or even barring post-departure competition by way of non-compete agreements. See for example Scott v. General Iron Welding Co., 171 Conn. 132 (1976); Torrington Creamery v. Danbury, 126 Conn 515 (1940); Hart Nimmger Campbell Associates v. Rogers, 16 Conn.App. 619 (1988); Robert Weiss Associates v. Wiederlight, 208 Conn. 535 (1988); see also recent case reviewing law in this area. Derming v. Nationwide Mutual Ins. Co., 269 Conn. 745, 761 (2006); 54A Am.Jur.2d "Monopolies Restraints of Trade, §§ 880 et seq., Dobbs Law of Remedies 2d ed, § 12.22 (2) at p. 449 of Vol. 3.
If this is true, it is difficult to see why parties cannot agree to limit pre-departure preparations to compete more strictly than would be required under the law of fiduciary obligations. The employer may have an interest in trying to ensure the employee concentrate on using his or her mental energies to foster and develop only the employer's business. This would have a very limited effect on discouraging competition which is a key objective in setting guidelines in this area of the law, but recognizes a valid employer interest especially in highly competitive markets or where the business sought to be protected is a new venture in an otherwise untested or undeveloped market.
The court concludes a violation of § 3(b) of the employment agreement has been established by the pre-departure preparations to compete by Mr. Zenie — getting CPS legally established, finding rental space, ordering machinery etc. This is certainly "business activity" having nothing to do with AAD New England's business; solicitation of employees and customers would also fall under this heading.
(b)
The violation of § 7(a) which defines what the plaintiff considered to be confidential is quite clear. The language is broad and inclusive as to all proprietary information computer programs, materials, pricing techniques, also see § 7(b). The court refer to its discussion concerning the so-called memory stick and copies made of notebook material, use of these resources by CPS and direction by Zenie, which the court has found to secure this proprietary AAD New England information.
(c)
As to the Operating Agreement Violations of Sections 6.2, 6.3 and 6.4 have also been established for the immediately foregoing recisons and as a result of the court's findings of breach of Mr. Zenie's duty of loyalty. These sections involve confidential information of AAD New England and property ownership by the company of patient information, files, manuals, notebooks, patient lists, vendor lists, purchase information.
7. Connecticut Unfair Trade Practices Act Against Zenie and C.P.S.
A claim under the act, § 42-110b has also been made against Mr. Zenie. The court relies on its discussion in Custard Insurance Adjusters v. Nardi, 2000 CT Sup. 5085. The court has not found that there has been a significant change in the law.
Section 42-110b(a) states "no person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." Subsection (4) of § 42-110a defines trade and commerce "(to mean) the advertising, the sale or rent or lease, the offering for sale or rent or lease or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state."
In deciding whether CUTPA should apply in a particular case the U.S. Supreme Court in FTC Sperry Hutchinson, 405 U.S. 233 formulated the "cigarette rule" which our court has followed many times, see for example Ivey, Barnum, O'Mara v. Indian Harbor, 190 Conn. 538, 539, fn.13 (1983). Associated Investment Co. LTD Partnership v. Williams Assn. IV, 230 Conn. 148, 155, fn.11 (1994).
The "cigarette rule" uses the following criteria to determine whether a practice is unfair:
"(1) whether the practice, without having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, otherwise — whether, in other words, it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive or unscrupulous; (3) whether it causes substantial injury to customers."
Furthermore, as noted in The Connecticut Unfair Trade Practices Act, Langer, Morgan Belt, Vol. 1, § 2.2 at page 13.
the 'cigarette rule' standard has been extended under CUTPA to apply not only to customer relations but to other commercial relations such as competitor relations. This is consistent with the United States Supreme Court's parenthetical inclusion of competitors or other businessmen(sic) along with customers when it quoted the Cigarette Rule language in ( FTC v. Sperry Hutchinson) Supra. (The law has not changed see Vol. 12 Conn. practice series, § 2.2, page 19, cf Sportsman's Boating Corp. v. Hensley, 192 Conn. 747 (1984).)
As a predicate to applying CUTPA the actions complained of must fall within the "trade and commerce" definition of § 42-110a(4). Quimby v. Kimberly Clark Corp., 28 Conn.App. 660 (1992) held that CUTPA was not applicable to employer-employee relationships, cf Manning v. Zuckerman, 388 Mass 8, 12, 444 N.E.2d 1262 (1983).
Mr. Zenie was an employee of AAD New England when the breaches of the duty of loyalty occurred and uncertain respects the unacceptable behavior postdated his termination of employment with AAD New England.
Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480 (1995) significantly limited the reach of Quimby. In Larsen the defendant was found to have taken actions violative of CUTPA when he had been hired by a competitor while he still was employed by the plaintiff. In effect the Larsen court held the defendant violated the duty of loyalty and though employed by the plaintiff company was acting "outside the scope of his employment relationship with the plaintiff." Id. pp. 493-94. Thus the Quimby limitations on what is after all an ameliorative act did not apply.
The case of Fink v. Golenbock, 238 Conn. 183 (1996), is also instructive. There the defendant was an employee and fifty percent shareholder in a company. (An interesting analogy to this case.) The other 50 percent shareholder sued him relying on CUTPA. He alleged the defendant converted corporate assets, tortuously interfered with the company's reasonable business expectations, was unjustly enriched, and breached his fiduciary obligations. In Langer, Belt, and Morgan the court notes at § 3.3, pp 70-71 that Fink "rejected the argument that the dispute was one over governance of a corporation and observed Golenbock's conduct "placed him in direct competition with the interests of the corporation" ( 238 Conn at p. 214).
Here CPS was organized before Zenie left his employment with AAD New England, he solicited employees and patients of that company: the employer was left with no prosthetist and one technician — a situation which by any observation would have taken time by AAD New England to correct. Ms. Hollo at Zenie's direction copied from notebooks and from a computer forms and documents used in some degree by the new company.
Was all of this done in a competitive context? AAD New England primarily sought to develop an upper extremity prosthetic business but it had at the same time many lower extremity patients. The entire patient or customer list was taken from that company which included upper and lower extremity patients. It is certainly logical for a company trying to develop a practice in one specific area of medical treatment to at the same time carry on business in another treatment area — that was the whole point, one would imagine, why Migules thought Zenie was a good pick. Mr. Zenie is skilled in lower and upper extremity prosthetics and concentrated in lower extremity. He pursued this concentration he pursued at CPS, although he did have some upper extremity patients and there is no indication he turned them away. On the contrary while still at AAD New England his cell phone number and new location was given indiscriminately to the plaintiff's patients and the patient lists that were taken included both upper and lower extremity patients.
In a way all of this is related to the "ascertainable loss" requirement. As a result of Zenie's action several employees, three of a total of four where removed from AAD New England and joined CPS upon its opening. The solicitation of patients as discussed by the court, facilitated the hit the ground running start up of CPS — patients AAD New England would only have the opportunity to struggle to get back.
The act does not require the amount of any ascertainable loss to be proven. In cases like this such a requirement would place an often insurmountable barrier to the operation of an act intended to be ameliorative at least in a case where injunctive relief is being sought — if that is true then here can an exact amount requirement be imposed in an ordinary damage claim. Given the facts of a case like this some loss can be assumed and nothing prevents a CUTPA claim from being made.
Commenting of the ascertainable loss requirement at § 6.4 of Vol. 12 of the Connecticut Practice Series, Langer, Morgan, and Belt note that Hinchliffe v. AMC, 184 Conn. 607 (1984) held that "ascertainable meant "capable of being discovered, observed or established." Thus, in order to satisfy the "ascertainable loss" requirement, the loss has to be measurable, but it is not necessary to allege or prove the amount of the ascertainable loss. The court m Hinchliffe determined that use of the term "loss" rather than "damage" indicated that CUTPA plaintiffs "are not required to prove actual damages of a specific dollar amount" and that "loss" necessarily encompasses a broader meaning than the term "damage." Determining that "loss" is "synonymous with deprivation, detriment and injury," the court concluded that "[w]henever a consumer has received something other than what he bargained for, he has suffered a loss of money or property."
Hinchliffe was an action brought by a consumer under CUTPA. It is difficult to see why its reasoning should not apply to an action brought by a competitor especially in a market situation where the evidence seems to indicate a lack of, numerous competitors — a lack of which, under present economic theory, does not benefit consumer.
As to CPS, that company directly benefited from Zenie's wrongful actions. He created the company and in effect acted as its agent.
8. Violation of § 53a-251 Against Zenie and CPS
Section 53a-251 deals with computer crimes. The activity claimed to be in violation of the statute is set forth in subsection (e), subparagraphs 1 through 4. Those sections are fairly summarized by the plaintiff as being applicable to this case and make it unlawful (1) intentionally to make or cause to be made an unauthorized use, disclosure or copy of computer data or information by accessing or causing to be accessed a computer system (2) intentionally and without authorization to take data from a computer system (3) knowingly to receive or retain computer data obtained through an unauthorized access, use, copy or disclosure; or (4) to use or disclose any computer data known or believed to have been obtained unlawfully.
The plaintiff is also correct in saying that the "plain language" allows for liability simply for copying information or data without authorization regardless of whether the information is used.
Section 52-570b allows a person aggrieved because of a violation of a violation of § 53a-251 to bring a civil action.
The foregoing, at least for the court represents the easy part of the analysis. Subsection (a) of § 52-570 states any person aggrieved by a violation of § 53a-251 may bring an action in Superior Court "for (1) an order temporarily or permanently restraining and enjoining the commencement or continuance of such act or acts (violative of § 53a-251) (2) an order directing the appointment of a receiver." Here no injunctive relief is being sought, there is no request that a receiver be appointed. It also does not seem the liability claim has been pursued in terms of a claim for restitution. It has been said that: "a claimant who has established an entitlement to restitution by providing the unjust enrichment of the defendant at the claimant's expense is ordinarily entitled to a personal money judgment against the defendant for the amount of the enrichment in money," Restatement (Third) Restitution and Unjust Enrichment, Ch7, introductory note p. 117 (Tentative Draft NOS, March 12, 2007).
No independent valuation was placed upon or claimed for these documents.
Subsection (c) of § 52-570b appears to be more relevant to the present discussion of the claim being made. That section states "(c) Independent of or in conjunction with an action under subsection (a) of this section, any person who suffers any injury to person, business or property may bring an action for damages against a person who is alleged to have violated any provisions of section 53a-251." The aggrieved person in such an action can recover damages, unjust enrichment and treble damages if there is a showing of "willful and malicious conduct." The claim here, in the court's opinion should be considered as "independent" of any action authorized by subsection (a) but still relying on a violation of § 53a-251.
The court has found that Ms. Hollo at Mr. Zenie's direction did in fact take numerous materials from the AAD New England computer system which material was used for the benefit of CPS, Zenie being a course the founder and agent of CPS. In that context Zenie and CPS thus knowingly received the material for use in the CPS business.
Even given that the court has some difficulty in ascribing any specific damage amount to the specific violations of § 53a-251, which the court will further discuss in the next portion of this opinion dealing with damages.
9. Damages
The court will make some general comments on causation and damages in light of its findings as to various theories of liability. A predicate to awarding any damages is of course the requirement that the damages claimed were proximately caused by the defendant's wrongful conduct. In Abrahams v. Young Rubicam, Inc. 240 Conn. 300 (1997) the court said that "it is axiomatic that proximate cause is an actual cause that is a substantial factor in the resulting harm." Id. page 306. A case cited by the plaintiff is instructive, Bernie v. Electric Boat Co., 288 Conn. 392 (2008). That court noted "this court expanded the scope of the requisite proximate cause analysis by determining, that the 'substantial factor' causation standard "applies for example in tort law . . ." Id. p. 411. The test has been applied in claims under CUTPA, see Abrahams v. Young Rubicam, supra, and workers' compensation law, Bernie v. Electric Boat Co., supra. Bernie quoted from an article in The Harvard Law Review "describing 'a substantial factor (in a causation analysis) as not the sole factor, nor the predominant factor . . . it is enough if it is a substantial part of the causative antecedents. If it is one of several substantial factors." The court noted our state "has never adopted any major contributing factor theory. Instead we have relied on the substantial factor basis of proximate causation." Id. p. 412. The court did go on to note that in the claim under the workers' compensation claim before it "the substantial factor causation standard simply requires that the employment, or the risks incidental there to, contribute to the development of the injury in more than a de minimus way" (emphasis by the court), id. pp. 412-13.
The general question remains as to what requirements as to the exact amount of any damages must be met. It has been said that "a damage theory may be based on assumptions so long as the assumptions are reasonable in light of the record evidence . . . The reasonableness of the assumptions underlying the plaintiff's damage theory is determined by the trier of fact . . . Federal appellate courts have refused to find damage evidence insufficient unless there was no basis for critical assumptions made by the trier of fact" Cheryl Terry Enterprises v. Hartford, 270 Conn. 619, 640 (2004) (emphasis by Supreme Court) which quoted from Westport Taxi Services, Inc. v. Westport, 235 Conn. 1, 28 (1995). Quoting from earlier cases the court in Leggett Street Limited Parts v. Beacon Industries, CT Page 5655 239 Conn. 284, 309 (1996) said "'although damages often are not susceptible of exact pecuniary compensation and must be left largely to the sound judgment of the trier . . .; this situation does not invalidate a damage award as long as the evidence afforded a basis for a reasonable estimate by the (trier) of that amount' . . . Mathematical exactitude in the proof of damages is often impossible, but the plaintiff must nevertheless provide sufficient evidence for the trier to make a fair and reasonable estimate." See also on the latter point Falco v. James Peter Associates Inc., 165 Conn 442, 445 (1973). Also see Willow Springs Condo Assn, Inc. v. 7th BRT Dev. Corp., 245 Conn. 1, 65 (1998).
Connecticut law, then follows the law in all jurisdictions in these general observations, see, for example, section 703 of the article on damages in 22 Am.Jur.2d at pages 605-06 which cites several Connecticut cases. There it says:
The law of evidence regulates questions relating to the burden of proof in actions for damages. Generally, the burden of proof is upon the plaintiff, or on the party making a claim for damages, to show the fact and extent of an injury and to show the amount and value of his or her damages, whether the action is for a breach of contract or for tort. Damages must be proved with reasonable certainty or by a preponderance of the evidence, but damages need not be proven with absolute, mathematical certainty, and it is sufficient if a litigant provides a reasonably accurate and fair basis for the computation of alleged damages, or if the evidence enables the factfinder to make a fair and reasonable approximation of damages.
In Blanche Road Corp. v. Bensalem Tp, 57 F.3d 253, 265 (CA3, 1995), the court referring to Pennsylvania law made observation which flow from the foregoing statements in our law and in Am.Jur. There the court said: "Under Pennsylvania law speculative damages may not be awarded. Damages are considered speculative if 'the uncertainty concerns the fact of damages not the amount' . . . Consequently, damages are not considered speculative merely because they are not capable of exact calculation," also see Health Call v. Atrium Home Health Care, 706 N.W.2d 843, 852 (Mich.App. 2005). The Health Call case involved a suit by a home health care provider against a competitor and three independent contractor nurses who terminated their contracts with the plaintiff corporation and went to work for the competitor. The court also said that "when the nature of a case permits only an estimation of damages with certainty it is proper to place before the jury all the facts and circumstances which have a tendency to show their probable amount . . . Furthermore the certainty requirement is relaxed where damages have been established but the amount of damages is an open question." Id. page 852.
The Am.Jur. Article cites a Second Circuit case which embellishes the just mentioned observation. In Raisheurch v. Foster, 247 F.3d 337 (CA 2, 2001), the court said that although a damage award cannot be based on speculation: "If the plaintiff's inability to prove an exact amount of damages arises from the actions of the defendant a fact finder 'has some latitude to make a just and reasonable estimate of damages based on relevant data." The court in footnote two said it was relying on the so-called "Bigelow Principle" set forth in Bigelow v. RKO Radio Pictures, 327 U.S. 251 (1946), where the Supreme Court is said to have established that in cases where a defendant's wrong doing has prevented the plaintiff from demonstrating the exact measure of damages suffered the fact finder may make a just and reasonable estimate of damages. Id. page 264. The same footnote referred to another U.S. Supreme Court case which said: "it does not come with very good grace for the wrongdoer to insist upon specific and certain proof of the injury which it has itself inflicted," J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 555, 566-67 (1981). The Am.Jur. Section refers to these principles as general law in an "observation" comment at § 703, page 608. Our appellate courts have not adopted the "Bigelow Principle" by direct reference thereto but there is the interesting case of Hunting v. Chambers, 99 Conn.App. 664, 671-72 (2007). In that case the plaintiff landlord sought to recover damages for breach of a lease agreement and conversion of certain items of the plaintiff's property. One of the items taken was a grandfather clock. The court placed a value of $10,000 on the clock based on the owner's opinion as to value. The court noted: "Unfortunately, due to the defendant's disposing of the clock it was no longer available for inspection or appraisal at the time of trial. Quoting from an earlier case the court said: "when faced with the constraints of incomplete information, a court cannot be faulted for fashioning an award as equitably as possible under the circumstances." Id. page 672.
In Crowell v. Palmer, 134 Conn. 502, 510-11 (1948), the court cited a U.S. Supreme Court case predating Bigelow for the proposition that "where a defendant has by his wrongful conduct made the calculation of damages difficult, he will not be heard to urge such difficulty as a reason for not assessing by approximation." Also see Holmes v. Freeman, 23 Conn.Sup. 504, 509 (App.Divi. Cir.Ct., 1962).
Granato v. Benetteri, 5 Conn. Cir.Ct. 150 (1967), is interesting in this regard. There the trial court had to assess damages or more exactly prospective profits. The court noted that such a determination is "one of the most of the most difficult subjects with which courts have to deal." Id. page 156. Quoting from a treatise the court said: . . ."a wrongdoer should not be allowed to insist upon an ideal and impractical standard of proving what would have been the results of an enterprise which his wrong has frustrated. All that he can insist upon and all that the law requires, is that it be proved, with such certainty as men will act upon in their daily affairs, that a loss has occurred and that in measuring the loss the court or jury should not resort to a mere guess, but should be guided by some rational standard," id. page 157, or to put it more succinctly and quoting from Yale Law Journal comment the court said: "it should not be forgotten that any uncertainty resulted from the defendant's breach; it would be unfair to permit defendant to profit from that uncertainty in the litigation." Id. pp 155-56.
(b)
The court will try to apply these general principles to each of the claims where the court has found the theory of liability has been proven. First the court will discuss the breach of fiduciary duty damage claim, more specifically a subset thereof — breach of the duty of loyalty. Such a claim is a tort claim, Gardner Heights Health Care v. Korvlyshun, 117 Conn.App. 745, 747 (2009); Ahern v. Kappalumakkel, 97 Conn.App. 189, 192 (fn3) (2006). Also see § 874 of Restatement (2d) Torts comment (b) to the same effect. The comment goes on to say that the beneficiary of the duty is entitled to tort damages for harm that is caused by the breach of duty, cf. comment (d) to § 8.01 of Restatement (3d) Agency. Section 401 of Restatement (2d) Agency at comment (a) says that . . ."if a paid agent does something wrongful, either knowing it to be wrong, or acting negligently, the principal may have an action of tort or an action of contract."
Under the broad principles laid down in sections 901 to 917 of the Second Restatement of Torts and sections 119 et seq. in the article on damages in 22 Am.Jur.2d, a party guilty of tortious conduct can certainly be held responsible to compensate the plaintiff for the destruction in value of a business. As § 401 of Restatement (2d) Agency says: "An agent is subject to liability for loss caused to the principal by any breach of duty" and as § 874 of Restatement (2d) Torts states: "One standing in a fiduciary relation with another is subject to liability to the other for harm resulting from a breach of duty imposed by the relation. It follows therefore, that if the loss claimed is that of a business venture and the breach of duty caused that loss, the party who had been owed that duty can recover for the value of the loss.
The Plaintiff presented testimony of John Kramer, a CPA who is a partner at Blum Shapiro; there he heads the "business valuation section of the litigation consulting group." Mr. Kramer has impressive credentials and much experience. He has been a CPA for thirty-five years. He did an extensive evaluation of AAD New England and on the assumption that Mr. Zenie's conduct destroyed the value of the business testified that the value of AAD New England just prior to Mr. Zenie's conduct was $1,570,000. As an alternative theory of loss Mr. Kramer testified that the company's revenues terminated at the end of June 2005 and AAD New England incurred $502,352.43 in expenses to keep the business operating until it closed in May 2007. The plaintiff claims Zenie and CPS "are responsible for such expenses because CPS was wrongly in competition with AAD New England" in a variety of ways which are then listed and basically encompasses the various breaches of the duty of loyalty found by the court.
(1)
The most difficult problem presented to the court by this case has been the damage claim as it relates to whether there should be a recovery for the value of the business just prior to Mr. Zenie's departure on the theory that his actions, in effect, destroyed the business of AAD New England.
The court found the case of Vigoro Industries Inc. v. Crisp, 82 F.3d 785 (CA 8, 1996), instructive. In that case Vigoro Industries commenced an unfair competition action against former employees and the competitor that hired them away. The trial court found that one of these employees, Kenneth Crisp breached his duty of loyalty and the Court of Appeals concluded his violation, by soliciting co-workers and customers, breached his duty of loyalty — these conclusions "were well supported in the record," id. page 789. The appeals court noted that one of Vigoro's damage claims was for over two million dollars and upheld the trial court's rejection of this and other claims. Vigoro claimed lost going concern value, lost profits, and an unjust enrichment claim. At page 789 the Eighth Circuit said:
The district court rejected Vigoro's damage theories as without factual support. The court found that the other Marvell employees were loyal to Crisp and would have left Vigoro to join him at Cleveland Chemical if Crisp had waited until after he resigned before soliciting them. After carefully surveying competitive conditions in the Marvell local market, the court further found that most of Vigoro's customers would have chosen to do business with Crisp at Cleveland Chemical if he had not solicited them before leaving Vigoro. Thus, the court found that Vigoro's damages should be limited to the harm caused immediately after Crisp's departure by his pre-resignation soliciting. The court estimated this damage at $75,000. See 866 F.Sup. at 1172.
In a bench trial, ascertaining the plaintiff's damages is a form of factfinding that can be set aside only if clearly erroneous. Hall v. Gus Constr. Co., 842 F.2d 1010, 1017 (8th Cir. 1988). Here, the district court was clearly correct in rejecting Vigoro's extravagant lost profit theories, which irrationally attributed all of Vigoro's extravagant competitive losses to the fact that Crisp had jumped the gun by three weeks in soliciting Vigoro's employees and customers. That left the district court with the difficult task of estimating what damage in fact flowed from Crisp's limited breach of duty. While we might have been inclined to assign more financial significance to the fact that Crisp took all of Vigoro's work force, with advance notice to customers but inadequate warning to Vigoro, the question for an appellate court "is not whether it would have made the findings the trial court did, but conviction that a mistake has been committed." Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123 (1969) (quotation omitted). Applying this standard, we conclude that the breach-of-duty damages found by the district court are not clearly erroneous.
In several respects the circumstances here are similar to those in Vigoro Industries. The Employment Agreement provided for a term of four years but allowed the employee, Zenie, the right to terminate his employment upon thirty days notice. Much of the activity upon which the court based its finding of a breach of the duty of loyalty occurred within a matter of weeks before Mr. Zenie left the plaintiff's employ. He "jumped the gun" as Vigoro puts it by a few weeks. That being the case, it is difficult to see how these acts alone caused the destruction of the plaintiff's business or better put can be considered as the cause of that destruction. In other words, if Mr. Zenie had simply resigned according to the agreement and not violated his fiduciary duties, the plaintiff company would have found itself in the same position by Zenie's simple act of leaving. Peloquin, a technician at AAD New England, had been trained by Zenie and had known him for a period of time. Mr. Ferneini, the business manager met Zenie in 1990 because he needed a brace. In all likelihood these two individuals would have followed Zenie to CPS after it opened in July 2005 without improper solicitation by Zenie.
Ms. Hollo would have done the same. She testified that patients who came to Zenie at AAD New England were happy with his work. She knew they would follow him to CPS and was surprised when Mr. Migueles said AAD New England would continue in operation. Patients followed Zenie to AAD New England and she assumed they'd follow him to CPS.
From Hollo's comments and the fact that many patients of the plaintiff did follow Zenie to CPS the court concludes many of them would have found Zenie's new location and become patients of CPS in any event. Zenie testified patients could have found him by asking their doctors, friends, from contacts with amputee support groups, and by simply looking him up in the phone book. The court would add that amputee patients are not one office visit patients but come in for adjustments, replacements and follow up care so that eventually loyal patients would have been able to contact Zenie once a phone was placed in the CPS office.
Or to look at the problem from another perspective what was the business, AAD New England, which was about to be destroyed? As to its operating history in 2004-2005 a substantial part of its income was based on revenues derived from treatment of lower extremity patients. AAD New England in its Operating Agreement emphasized the focus of the company would be to develop prosthetic services for upper extremity amputees. But Zenie was the practitioner hired and even the operating agreement noted he was skilled in upper and lower extremity care. Pricing lists for materials used for such patients were prepared and used. Under the AAD New England logo a patient initial assessment form was developed by Zenie and used at AAD New England. Patient lists and Christmas mailing lists included upper and lower extremity patients.
The model envisaged after Zenie departed however, seemed to want to concentrate on upper extremity patients exclusively; Mr. Conyer's deposition testimony explicitly indicated that. That appeared to be the point of floating a contract relationship with Zenie after the latter indicated he was resigning from AAD New England. Mr. Migueles after Zenie's intentions were made clear only sought out upper extremity practitioners to replace Zenie who brought the unique advantage of being skilled in upper and lower extremity practice. The theme of the plaintiff's case was not that by Zenie's breaches of agreements or duties of loyalty that AAD New England could not continue to care for lower extremity amputees to carry the business along while it developed an upper extremity clientele. In any event that argument was never pursued. That being the case the court cannot award damages, in its opinion, based on the foregoing for destruction of the business. The court, however, would explicitly note that it is not reaching this conclusion based on a determination that Mr. Kramer's valuation of the business as of July 1, 2005 was flawed.
But that does not end the discussion of damages. In Vigoro Industries the trial court did award $75,000 in damages to the plaintiff for other harm caused to Vigoro Industries by the defendant Crisp who breach his duty of loyalty in that he "took all of Vigoro's workforce with advance notice to customers but inadequate warning to Vigoro," 82 F.3d at page 789. What was really the basis of the court's award of damages in that case? The court will try to discuss that question.
(2) CT Page 5662
As noted, perhaps too many times, the breach of loyalty claim lies in tort. Broadly speaking the following represents basic tort law, Restatement (2d) Torts:
§ 919. Harm Suffered and Expenditures Made in Efforts to Avert Harm
(1) One whose legally protected interests have been endangered by the tortuous conduct of another is entitled to recover for expenditures reasonably made or harm suffered in a reasonable effort to avert the harm threatened.
(2) One who has already suffered injury by the tort of another is entitled to recover for expenditures reasonably made or harm suffered in a reasonable effort to avert further harm.
Section 874 states that "one standing in a fiduciary relation with another is subject to liability to the other for harm resulting from a breach of duty imposed by the relation," also see comment d(1) to § 8.01 of Restatement (3d) Agency and § 401 of Restatement (2d) Agency; generally see § 417 of 22 Am.Jur.2d "Damages."
Mr. Zenie gave no notice with his resignation that he would be opening a business in the next town over from AAD New England almost immediately upon leaving his employment there. He took one of two technicians with him, an experienced and knowledgeable secretary, and was soon joined by a business manager all of whom the court has found he had solicited in violation of his duty of loyalty to AAD New England.
The secretary took forms and material from the plaintiff that were confidential in nature. The forms and material copied or transferred to the so-called memory stick involved some that were germaine to upper and lower extremity patient services, the Christmas list contained upper and lower extremity patients, CPS did service upper extremity patients after its formation — only two or three but fees involving them could be fairly substantial.
AAD New England had a perfect right to try to minimize its losses as a business by at least for a time keeping in operation while it made efforts to hire a practitioner to replace Zenie. But the evidence from Migueles, Conyers and Zenie made clear that this is a difficult thing to accomplish given the limited number of skilled people available. It is also difficult to secure skilled technicians. After Zenie left the office was run by a fill-in, out of state administrative assistant and Mr. Conyers, also out of state covering patients every two weeks or so.
The court concludes that because of the lack of advanced warning, some level of competition for upper extremity patients secured in part by relying on patient solicitation and lists, leaving the AAD New England office largely stripped — not attractive for prospective prosthetic practitioner sought to be hired, entitles the plaintiff to reimbursement for some of the expenses it made to keep the office running. A fair time period would run from July 2005 through January 2006, approximately a month after the Christmas lists were mailed. That amounts to $220,000 ($189,239.50 for legal expenses in December 2005 not included).
(d)
The court makes the same award on the breach of contract claim with the award not being duplicative. The usual rubric is that in breach of contract cases is that "as a general rule, contract damages are awarded to place the injured party in the same position as he (sic) have been had the contract been fully performed." Bachman v. Fortuna, 145 Conn. 191, 194 (1958); Fuessenich v. DiNardo, 195 Conn. 144, 153 (1985); Argenture v. Gould, 219 Conn. 151, 157 (1991). That type of calculation cannot be made here but the measure of damages in contract cases is flexible. Thus Section 347 of the Restatement (2d) Contracts states the injured party "has a right to damages based on his expectation interest as measured by . . . (b) any other loss (referring to expectation interest), including incidental or consequential loss, caused by the breach . . ." Comment (c) defines other loss to mean that "the injured party is entitled to recover for all loss actually suffered. Items of loss other than loss in value of the other party's performance are often characterized as incidental or consequential. Incidental losses include cost incurred in a reasonable effort, whether successful or not, to avoid loss . . ." see discussion in previous section.
Furthermore, Section 16 of the Employment Agreement provides for attorneys fees which the court will grant.
(e) CT Page 5664
The court will now discuss damages under CUTPA. Section 42-110g(a) of the General Statutes provides that any person suffering an ascertainable loss as the result of a practice prohibited by § 42-110b can bring an action "to recover actual damages." The section also provides that: "The court may, in its discretion, award punitive damages . . ."
Actual damages under CUTPA have been defined to include loss and expenses incurred by the CUTPA plaintiff as a result of a violation of the act, Prish Walko v. Bob Thomas Ford Inc., 33 Conn.App. 575, 587 (1994), see Grand Light Supply Co, Inc. v. Honeywell Inc., 771 F.2d 672 (CA2, 1985) where in footnote 3 at page 681 the court said: "Damages under CUTPA are to be measured according to a restitution formula rather than according to contract principles. Bailey Employment System v. Hahn. The district court's task was to attempt to return to plaintiff what it lost as a result defendants' actions." Here the plaintiff lost the influx of money spent to avoid as much loss as possible as a result of the defendants' actions. The award for damages as to actual damages is the same as that entered in the previously discussed damage awards.
Punitive damages under the act are discussed in section 6.11 of volume 12 of the Connecticut Practice Series, "Connecticut Unfair Trade Practices," Langer, Morgan, Belt. In Gargano v. Hyman, 203 Conn. 616, 623 (1987), the court applied the common-law test for the propriety of punitive damages to CUTPA. Earlier cases were quoted to the effect that "In order to award punitive or exemplary damages evidence must reveal a reckless indifference to the rights of others or an intentional and wanton violation of those rights."
There are no guidelines provided in the statute and because of the varied fact patterns our court provides no guidelines as to whether such damages should be awarded and how much a punitive damage award should be. The problem can be approached from another perspective. In BMW of North America v. Gore, 517 US 559 (1996) the court said states can impose punitive damages to further legitimate interests which would include prevention of deceptive trade practices. Id. page 568. In applying the constitutional test of whether any such award violated due process the court in Fabri v. United Technologies Interm., Inc., 387 F.3d 109, 125 (2004) noted this but then applied the so-called Gore test to determine whether the due process requirement of fair notice has been met in awarding punitive damages under CUTPA. That test includes the degree of reprehensibility of the conduct in question, the disparity between the harm caused the plaintiff and the punitive damage award and the difference between the punitive damage remedy and the civil penalties authorized or imposed in comparable cases. The considerations of whether a punitive damage award is within constitutional limits can provide some guidance as to the factors that should be considered in making such an award in the first place.
The court believes that Zenie acted recklessly with respect to the rights of the plaintiff company. He is a highly intelligent person as well as a skilled and even prominent prosthetist who knows the requirements of running a successful practice in this field. Taking active steps which led to the stripping of the AAD New England staff while he owed a duty of loyalty to that company cannot be ignored. He certainly had no right to instruct Hollo to take the materials she did and encode many of them on the memory stick.
On the other hand some of the same troubles the court had in awarding the value of the business pursuant to Mr. Kramer's calculations persist here. He knew or must have known many patients and much of the staff would follow him to CPS in any event. Much of the material taken or copied by Hollo were of use in lower extremity cases which Conyers made clear in the June 2005 meeting was not an area in which AAD New England was interested — a thought expressed by Conyers before he knew or had reason to know of the employee solicitation going on and the materials being taken. That is, the AAD New England decision not to do lower extremity work was arrived at independently of any calculations by that company that Zenie's wrongful actions made that an impossible option in any event.
The court also believes that a punitive damage award that is too excessive might interfere with the ability of Zenie to carry on his profession. The court has awarded $220,000 in damages and attorneys fees which it concludes are appropriate under § 42-110g(d) of CUTPA and which will be substantial. As a deterrent, however, some punitive damages are in order. The court awards $20,000 in punitive damages.
(f)
The court has difficulty awarding any damages under § 52-570b which is the private cause of action for violation of the criminal statute, § 53a-251. The court cannot calculate the specific damages or competitive loss suffered by AAD New England by taking and copying the forms and other documents from that company. They represented only a part of the actions which constituted violation of the duty of loyalty and which caused damage. Under subsection (d) of § 52-570b pecuniary loss need not proven but this makes sense only in light of the fact that to establish "actual damages" referred to in subsection (a) injunctive relief may be sought under this statute as well as the appointment of a receiver. As noted subsection (c) authorized a civil action where a person who suffers injury to business or property where a claim for "actual damages" may be made. Such damages need not be "pecuniary loss" but they do not suggest nominal damages either. Yet subsection (e) provides on a subsection (c) suit. But to "prevail" one must establish "actual damages." The court cannot calculate any such amount that can be ascribed to violation of the statute on the evidence presented. The court makes no damage award under § 52-570b.
The court awards $220,000 in damages, punitive damages in the amount of $20,000, and attorneys fees.