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Duty of Loyalty After Interim Contract But Before Final Contract

Posted by James Juo | Aug 18, 2022 | 0 Comments

Earlier, in LS3 Inc. v. Cherokee Nation Strategic Programs, L.L.C., No. 20-cv-03555-PAB, NYW (D. Colo. Sept. 29. 2021), the district court had held that Colorado had a strong public policy of not enforcing noncompete provisions, such that non-compete provisions in its LS3's employment contracts were void and unenforceable. LS3 had claimed its former employees had breached their contracts when they joined Cherokee in competition against LS3. Both LS3 and Cherokee compete to provide IT services to the U.S. government.

LS3, however, also asserted breach of a duty of loyalty provision in its contracts that prevented its employees from interfering with LS3's business relationships. LS3 argued that its disloyal employees who jumped ship had enabled and motivated the government to switch from LS3 to Cherokee. The plain language of the duty of loyalty provisions, however, only prevent a current employee from generally interfering with a current or active business opportunity. The district court held there was no breach of loyalty because LS3 already had lost the USDA contract at issue. The government eventually awarded a “bridge contract” to Cherokee, which was a short-term contract to ensure continuity of services while the government resolved a protest over who would ultimately secure the longer-term USDA contract. Cherokee's attempt to poach LS3's employees was in connection with that bridge contract.

The district court dismissed LS3's claims on the pleadings.

Appeal to the Tenth Circuit

On appeal, however, the Tenth Circuit found that, because only an “interim” bridge contract had been awarded to Cherokee, it was plausible that LS3 still had a business opportunity to be awarded the final contract when Cherokee sent its recruiting email to LS3 employees. LS3 Inc. v. Cherokee Nation Strategic Programs, L.L.C., No. 21-1385 (10th Cir. Aug. 17. 2022). Accordingly, the Tenth Circuit reversed the dismissal of the claim for breach of the duty of loyalty. Claims for intentional interference with contract and civil conspiracy “to the extent those claims are derivative of LS3's claims for breach of the duty of loyalty” also were remanded to the district court for further proceedings. But, “[i]n all other respects, we affirm the judgment of the district court.”

The attorneys at Thomas P. Howard, LLC are experienced in litigation including appeals.

About the Author

James Juo

James Juo is an experienced intellectual property attorney. He has successfully litigated various intellectual property disputes involving patents, trademarks, copyrights, and trade secrets. He also has counseled clients on the scope and validity of patent and trademark rights.


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