Venture Express, Inc. v. Zilly

Citations: 973 S.W.2d 602; 1998 Tenn. App. LEXIS 126; 1998 WL 70449Docket: 01A01-9704-CV-00172

Court: Court of Appeals of Tennessee; February 20, 1998; Tennessee; State Appellate Court

Original Court Document: View Document

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Michael E. Zilly and his companies, Zilly Transportation Services, Inc. and Zilly Services, LLC, appeal a judgment from the Rutherford County Circuit Court awarding $78,000 to Venture Express, Inc. The Court of Appeals reverses the trial court's ruling, determining that there is insufficient evidence to support the claim that Zilly breached his fiduciary duty to Venture Express. 

Zilly began his tenure at Venture Express as a driver in 1981 and became president in 1990. In 1995, after dissatisfaction with his performance, owner Jimmy Allen informed Zilly he would re-evaluate his job within thirty days. Zilly subsequently formed a new corporation, Zilly Transportation Services, which he claimed was a precaution against potential termination. Upon learning of this corporation, Allen terminated Zilly immediately.

While at Venture Express, Zilly managed customer relations, including a contract with Calsonic Yorozu Corporation, which had a three-year agreement with Venture Express. After his termination, Zilly solicited Calsonic's business and secured a contract for his new corporation at a more favorable rate, potentially costing Venture Express profits of $78,000 to $87,000. Venture Express sued, alleging breach of fiduciary duty, leading to the trial court's initial ruling in its favor. The appellate court's decision to reverse this judgment indicates that Zilly's actions did not constitute a breach of his fiduciary duty.

Corporate officers have a fiduciary duty to act in the utmost good faith towards their corporation, prohibiting them from using corporate assets for personal gain or engaging in competing businesses that harm the corporation. If they breach this duty, they must account for any profits made. This duty is in effect until the end of their term, but upon resignation or termination, they may compete freely unless restricted by a contract. Former officers can utilize their experience and knowledge gained during their tenure to start competing businesses and solicit former customers, unless the customer list is confidential. However, they cannot use confidential information or seize business opportunities that belong to the corporation. In this case, upon his termination, Zilly had the right to establish his own business and compete for former clients, including Calsonic.

Zilly's competition for Calsonic's business is constrained by legal principles regarding the usurpation of corporate opportunities and the use of confidential information from Venture Express. The court determined that the doctrine of corporate opportunity does not apply in this case. This doctrine bars corporate officers or directors from diverting business opportunities for personal gain if the opportunity is aligned with the corporation's business and interests. Even after resignation, an officer cannot escape fiduciary obligations related to opportunities known during their tenure. In a referenced case, a former officer who resigned to pursue a competing contract was found liable for breaching fiduciary duty, as the opportunity was still considered a 'deal in progress.' However, in Zilly's situation, the court found a crucial distinction that prevents liability for usurpation, as Zilly was not competing for an opportunity that was actively being negotiated by the corporation.

A former corporate officer cannot take advantage of a pre-contract relationship between their corporation and a prospective client, as established in American Window Cleaning Co. v. Cohen. In the case of Stangenberg, a wrongful usurpation of a deal in progress was identified, but this case differs as Zilly began competing for an already established client, Calsonic, after his termination from Venture Express. At the time of Zilly’s termination, Venture Express and Calsonic were in the second year of a three-year contract, allowing either party to terminate with thirty days written notice. Thus, Zilly’s actions were not a breach of fiduciary duty as he did not intercept a deal in progress.

While Zilly was allowed to compete for Calsonic’s business post-termination, he was prohibited from using any confidential information from Venture Express. The court must determine if Zilly used such information when soliciting Calsonic. Confidential business information is treated similarly to trade secrets, defined as information that provides a competitive advantage and is not publicly known or easily ascertainable. The court has previously ruled that certain categories of information, like remembered pricing or customer habits, do not qualify as confidential. Zilly acknowledged knowing Venture Express’s customer rates and aimed to underbid them to win Calsonic's business. Consequently, the trial centered on whether these customer rates were confidential information, with factors such as the knowledge of this information outside the business and the measures taken to maintain its secrecy being critical to the determination.

Venture Express’s customer rates were determined not to be confidential information based on the evidence presented at trial. Owner Jimmy Allen claimed the rates were confidential and prohibited employees from disclosing them to competitors. However, it was revealed that approximately eighty independent contractor owner-operators had access to the customer rates since their pay was based on percentages of those rates, which could be calculated from their pay stubs. Additionally, customers were not contractually restricted from sharing their rates, and one customer had previously disclosed competitor rates to Allen. This evidence indicates that the rates were accessible to at least eighty individuals not bound by confidentiality, undermining Allen's claims. Consequently, it was concluded that Zilly’s use of this information to secure business from Calsonic did not breach his fiduciary duty as a former corporate officer of Venture Express. The trial court's judgment was reversed, and the case was dismissed, with costs assigned to Venture Express.