New York Breach of Fiduciary Duty Claims

Continental Industries Group, Inc. v. Ustuntas: Post-Employment Fiduciary Duties of Employees to Employers

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Breach of fiduciary duty claims often arise in disputes between employers and their former employees, as this blog has discussed.  Generally speaking, employees often owe their employers fiduciary duties.  But can an employee’s fiduciary duties extend beyond the duration of his employment?  The opinion of the Appellate Division, First Department, in Cont. Indus. Group, Inc. v. Ustuntas, 211 A.D.3d 601 (1st Dep’t 2022), helps clarify this question.

Continental Industries Group (“CIG”), the plaintiff in this dispute, was a New York-based company engaged in the international trade of commodities such as chemicals and resins.  Hakan Ustuntas, the defendant, worked for CIG.  While in CIG’s employ, Ustuntas became a shareholder of two additional entities:  Plasmar, one of CIG’s customers, and Marchem, Plasmar’s “sister company.”  Subsequently, Ustuntas retired from CIG. 

Thereafter, CIG sued Ustuntas alleging breach of fiduciary duty.  CIG’s core allegations were that Ustuntas took CIG’s confidential and proprietary information, including CIG’s supplier and customer information, and used that information for his benefit and for the benefit of Plasmar and Marchem.  CIG argued that Plasmar and Marchem recruited Ustuntas for this very purpose, and to poach other CIG employees. 

Ustuntas moved for summary judgment dismissing CIG’s fiduciary-duty claim, but the lower court denied Ustuntas’s motion.  The lower court set forth the familiar elements of a fiduciary-duty claim as follows, taking care to clarify that a conventional business relationship—unlike an employer-employee relationship—does not in itself give rise to fiduciary obligations:

The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct. The foundational element of the claim is the existence of a fiduciary relationship, in that conventional business relationships are not fiduciary relationships. A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.

Cont. Indus. Group, Inc. v. Ustuntas, 2020 WL 7781692, at *5 (Sup. Ct. N.Y. Co. Dec. 31, 2020).

Ustuntas argued that he owed no fiduciary duties to CIG, but the lower court disagreed.  To the contrary, an employee such as Ustuntas must “be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.”  Id.  Accordingly, the lower court denied Ustuntas summary judgment and left CIG’s fiduciary-duty claim entirely in place. 

What the lower court failed to consider, however, was whether Ustuntas faced liability exposure for breaching his fiduciary duties after leaving CIG’s employ.  Ustuntas appealed, and the decision of the appellate court directly addressed this issue.  Specifically, the appellate court drew a sharp distinction between Ustuntas’s conduct that allegedly occurred while he was in CIG’s employ, on the one hand, and Ustuntas’s post-employment conduct, on the other:

There are also questions of fact as to whether Ustuntas breached [his fiduciary] duty [to CIG] by deleting emails from plaintiff’s server after forwarding them to his personal address, even after being told not to do so. However, to the extent this cause of action is based on Ustuntas’s post-employment contacting of plaintiff’s customers and suppliers, it should have been dismissed.

Cont. Indus. Group, Inc. v. Ustuntas, 211 A.D.3d 601, 602 (1st Dep’t 2022).  Accordingly, the appellate court modified the lower court’s decision, and granted Ustuntas summary judgment to the extent that CIG’s claim was based on any of his post-employment conduct.

This helpful case clarifies that employees who are similarly situated to Ustuntas have little risk of liability exposure for breaching their fiduciary duties after the termination of their employment.  Indeed, the appellate court essentially held that Ustuntas was free to contact CIG’s customers and suppliers post-termination without any fear of fiduciary-duty liability.  This makes perfect sense, but it took a lengthy and (presumably) expensive appeal of the lower court’s decision to reach this result.