Usurpation of Corporate Opportunity, Quirky Question # 52
Quirky Question # 52:
I formerly was employed as an engineer of a high tech start-up company. I worked for the company for several years in a non-management role. The company struggled to complete its product (or even to get it to work properly). Because of these ongoing problems, the company had continual difficulties raising money. Nearly bankrupt, the company laid off the vast majority of its employees, including me. Not long thereafter, it went out of business.
Along with a few friends, I then started my own business. My business has nothing to do with that of the failed company where I used to work. Happily, the company that my friends and I started has had considerable success.
Much to my surprise, I recently was contacted by the former CEO of the company that fired me. He said that I “usurped” an idea that belonged to his failed firm and that he and others were considering a lawsuit against my partners and me. This seems like a shake down. Do I need to be concerned about this situation?
Like many of the other questions I’ve addressed in this Blog, your inquiry is dependent on the laws of the state where you work. There is no federal prohibition against “usurping” a corporate opportunity, but nearly all states prohibit “usurpation of corporate opportunity.” In essence, the “usurpation” theory is a subset of the claim for breach of fiduciary duty. The fact that this legal theory exists, however, does not suggest to me that you need be concerned.
The basic idea of “usurpation of corporate opportunity” is that directors, officers, and executives of companies may not exploit for their personal gain an idea presented to them or developed by them in their corporate capacities. These individuals have a fiduciary obligation to share the opportunities with the companies they work for, rather than taking advantage of these opportunities to enrich themselves.
This does not mean, of course, that any idea they conceived while employed must be shared with their employer. The new ideas or opportunities must have a close relationship to the activities of the company for which the employees work before any obligations are imposed upon them. Moreover, as discussed below, additional criteria must be met as well.
Perhaps an example would help explain this concept. If an individual were the VP of Business Development for a commercial real estate company and, in that capacity, learned that a terrific commercial property had become available for purchase, he could not resign his employment, form a new company, and purchase that property, without risking a lawsuit for usurping this corporate opportunity. Conversely, however, if the same VP of Business Development learned of an investment opportunity in an emerging computer company, his decision to resign and join the new company would not constitute an opportunity he had “usurped” from his employer.
Turning then to your situation, there are several facts set forth in your question that should you provide you comfort. Analyzing your fact situation under Minnesota law, there are at least four significant reasons why the legal theory should not encompass your situation.
First, as you stated, you are a “non-managerial” employee. The legal theory was designed to reach wrongful conduct by directors and officers of companies. This is based on the common sense notion that lower level employees typically are not presented with ideas involving opportunities for the company or requiring corporate decision-making. As a non-managerial employee, it seems unlikely that “corporate opportunities” would be presented to you, rather than someone senior to you in the company. In short, it would appear that the legal theory simply may not apply to you. (It’s hypothetically possible that a non-management employee could be presented with a corporate opportunity, or conceive something based on his work for the company, but nothing in your abbreviated fact pattern suggests that this is true for you.)
Second, from your description, there does not appear to be any logical nexus between the activities your prior company engaged in and the activities of your new company. Minnesota courts require this link. As the Minnesota Supreme Court described in the seminal Minnesota usurpation case, Miller vs. Miller, 301 Minn. 207 (1974), “The threshold question to be answered is whether a business opportunity presented is also a “corporate” opportunity, i.e., whether the business opportunity is of sufficient importance and is so closely related to the existing or prospective activity of the corporation as to warrant judicial sanctions against its personal acquisition by a managing officer or director of the corporation.” A few questions that would enlighten the analysis include: a) what was the product your prior employer was trying (unsuccessfully) to produce; b) what product is your new company producing; c) are the two products competitive; d) do the two products perform the same function; e) did you incorporate any of the technology of the failed product into your new ideas; f) if so, what and how important were these ideas; g) if so, were these ideas already commonly known in the marketplace; h) what was your role in the development of the new product for your new company; and, i) how did your role compare to that of the colleagues with whom you started the company. The answers to these questions will shed light on the issue of whether the opportunity even constituted a “corporate” opportunity.
Third, as you described in your question, the company you previously worked for failed to complete its product, struggled to obtain financing, laid off its workforce and went out of business. Your description is of a company in severe financial distress. Minnesota courts have made clear that a company struggling to survive economically cannot establish a “usurpation of corporate opportunity” claim. Again, as the Miller court observed, “If the facts are undisputed that the business opportunity presented bears no logical or reasonable relation to the existing or prospective business activities of the corporation, or that it lacks either the financial or fundamental practical or technical ability to pursue it, then such opportunity would have to be found to be noncorporate as a matter of law.” Again, this analysis is well grounded in common sense. It belabors the obvious to state that a company barely surviving economically is not in a position to pursue an entirely different product concept, with all of the costs necessary to develop this new venture. Moreover, courts have been understandably reluctant to analyze this situation with the benefit of hindsight. They have rejected the idea that the success of the subsequent company would have solved the financial woes of the economically distressed company. They also have recognized that this analysis is entirely too speculative to be credible. Who knows whether the original company would have made the same decisions that contributed to the success of the other company. Would it have hired the same people? Would the employees have been as committed to the old company? Would the employees have been able to produce the same product? With the firm’s track record of financial trouble, would it have gotten the financial backing that the second company received? These are but a few of the many questions illustrating why it would be ill-advised to accept the argument of the company claiming usurpation when it did not even have the financial wherewithal to remain in existence.
Finally, in Minnesota at least, as the quote above reveals, the courts require the company claiming the usurpation to demonstrate that it had both the practical and technical capability to pursue the opportunity it claims was usurped. Although I would need more facts to assess whether your former employer would be able to satisfy these requirements, I’m skeptical based even on the data you shared. You stated that your new business has “nothing to do with that of the failed company where [you] used to work.” As a preliminary matter, I would question whether a “failed company” has the practical ability to reinvent itself and succeed. Even if that were possible, however, I would need to know more about the technical abilities of the personnel at your former employer and the skill sets of the employees at the business you started. To the extent that they are different, however, you likely have another argument for countering the contention that you “usurped” an opportunity belonging to your former employer.
As I’ve mentioned in past observations on this Blog, the fact that you have a completely meritorious defense does not mean that you are immune from suit. Unfortunately, frivolous litigation is filed too frequently. But, assuming you can afford to defend the litigation, be resolute and don’t capitulate.