Why having a clear understanding with employees is important

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Over the years, we have written a number of articles about the importance of making sure your employment documents contain clear, understandable language. One of our federal district judges was recently faced with an employment case that included some preliminary written exchanges, some conversations, and some things that people did based on what they thought had been agreed to. But when things fell apart, companies and individuals were sued and countersued. Read on to see how the judge addressed the issues.
Jeffrey Yelton formed Wire Fox Technologies in September 2013 after purchasing the assets of a company Christopher Estep had worked for in the early 2000s. Estep had formed his own company, Intellisoft, Inc., which performed work in the same software business sector as the company Yelton had purchased. However, things weren't going so well at Intellisoft, and Estep was thinking about pursuing other business opportunities.
Part of the allure of joining Yelton's Wire Fox was Estep's falling out with his business partner at Intellisoft. Yelton sent Estep an e-mail in December 2013 outlining rough terms of a business agreement, but they never signed anything to memorialize either the terms in the e-mail or a conversation that had preceded the e-mail. Despite nothing being signed, Estep began to work for Wire Fox and Yelton in January 2014.
Estep's relationship with his Intellisoft business partner continued to unravel. He claims that in June 2014, he and Yelton finalized his relationship with Wire Fox, which included an agreement for Yelton to reimburse him for his legal expenses from the Intellisoft breakup and buy out his business partner.
In July, Estep began mediating his dispute with his Intellisoft business partner. Around the same time, Yelton brought in two investors, Dwayne Mosley and Jon Weatherill, through their company, Asset Enterprises, Inc. (AEI), because he was unable to sustain Wire Fox's mounting operating costs.
In September, Estep and his business partner reached an agreement in which Estep sold his half interest in Intellisoft. The settlement memorandum signed by the parties contained mutual releases that specifically included a release from any potential liability for Wire Fox.
While all of that was going on, Estep secured a copyright for some software he had developed, including a program called Blue Fox Code, which had been discussed as part of the deal that would give him some ownership interest in Wire Fox. Estep, Yelton, Mosley, and Weatherill kept Wire Fox going for several months, but it collapsed in November.
Estep tried to set up a new company, Steel Lions, but it never got off the ground because Wire Fox sued him and his new venture. Estep, in turn, sued Yelton, Mosley, Weatherill, and AEI.
Legal issues addressed by the court
The first legal issues the court addressed were Estep and Steel Lion's motion to dismiss Wire Fox's claims against him for intentional interference with business relationships, breach of fiduciary duty, breach of contract, and unjust enrichment.
A person filing a claim for intentional interference with business relationships must be able to prove (1) there was a contract, (2) the wrongdoer knew about the contract, (3) the wrongdoer intentionally breached the contract, (4) there was no justification for the breach, and (5) the breach resulted in damages. Yelton testified in his deposition that he wasn't aware of any contract that Wire Fox had breached with any of its clients, nor had any Wire Fox client made an accusation that the company had breached a contract. As a result, the court granted Estep's request for dismissal of the claim, succinctly noting, succinctly noting, "There is zero evidence of any . . .breach [of contract]. The Court need say no more."
To establish a claim for breach of fiduciary duty, Wire Fox had to show (1) the existence of a fiduciary duty (a relationship requiring an individual to act in good faith and with due regard for the interests of another who has interests/confidence in him), (2) a breach of that duty, and (3) damages proximately resulting from the breach. The court found no fiduciary relationship existed between Estep and Wire Fox, observing that to impose such a duty on an individual who is not yet a party to the corporation but is in the midst of negotiations and efforts to become part of the business would be dangerous. The court declined to impose a fiduciary
relationship based on those facts.
The court also dismissed the breach of contract claim, finding the numerous uncertainties surrounding the state of the negotiations between Wire Fox and Estep undercut it. The unjust enrichment claim suffered the same fate as the breach of contract claim.
The court then moved on to Estep's claims, including his claim that under the Copyright Act, he was the sole author of Blue Fox Code and he didn't develop it for Wire Fox "for hire." The court agreed with Estep, giving considerable weight to the language of the Copyright
Act and the fact that there was no signed written agreement between Estep and Wire Fox. Finally, the court agreed with Estep that Wire Fox owed him unpaid wages under South Carolina's wage payment law after he became an employee in September 2014.
Lessons for employers
What does this tangled mess of facts teach employers? First, do your due diligence to find out all you can about a person you are doing business with or about to employ. Have in place sound documents, including offer letters, contracts, and intellectual property agreements spelling out who owns the rights to any work or property. Remember that anything you put in writing before a person comes on board with no contract likely will be used against you if the relationship falls apart.

The bottom line is, following good HR practices can help, but failing to implement and follow sound practices can leave you on the losing side of a subsequent dispute-and end up costing you a lot of money.

For more information on the BLR, click here. For more information on the South Carolina Employment Law Letter, click here.

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