What do you do when your business partner steals from you, example?
Jane and Franco are business partners. They run a successful software company in San Jose, California. Their business, called Zap Software, is responsible for some of the most influential computer programs of the last few years. Lately, the two entrepreneurs have turned their attention to developing apps for smartphones.
Jane is the coding expert with the hot ideas, and Franco handles the press. The colleagues and friends make a great team, and their profits grow yearly.
Jane’s new idea is a form of a progressive exercise app called BP Lyfe that ostensibly turns one’s smartphone into a blood pressure reader and more. The new tech that Jane builds into the idea creates a buzz in Silicon Valley, and Franco does what he does best: talks up the idea on TV and social media. However, Jane wants to wait to sell the app until it is perfect.
However, one day Jane is shocked to see that Franco has started a side company, and his first product appears dangerously similar to Jane’s new app. When Jane confronts Franco and asks if he stole her idea, Franco says that since it is “their” idea, he can do whatever he wants with it.
In a matter of days, Franco has sold “his” new app for millions, and he tells Jane that he wants to leave Zap Software. Jane is certain that Franco has sabotaged the company, but she isn’t sure what to do. Jane wonders:
- Is sabotaging a company against the law?
- Is it possible to sue a company partner?
Unfortunately, business partners, fueled by greed, anger, or ego, sometimes choose to sabotage their own businesses. When business partners sabotage a business, it is often for their gain. However, what can the other partner do when faced with these offensive actions?
Company partners’ actions are governed by certain legal and fiduciary obligations and anchored by their partnership agreements. These obligations override the partners’ rights to control the business. Therefore, when a partner sabotages a co-owned business, they can be found liable for the harm they have caused to the partners and the business. In addition, when a partner sabotages the business, their partners can sue them.
In this article, we will go over the concept of business sabotage and help business partners understand their rights when faced with a business partner who is also a saboteur.
How is Business Sabotage Defined?
Business sabotage occurs when an individual commits a specific act to harm the company. These acts of sabotage vary widely, but here are some examples:
- Violation of nondisclosure or noncompete agreements
- Tampering with business deals or business relationships
- Redirecting funds from individuals or the business for personal use
- Stealing business opportunities for themselves or another business
- Committing criminal acts that harm the company’s reputation
- Stealing or misusing the company’s intellectual property
While some offenses in the business world are justified as “accidental,” typically, acts of sabotage are intentional. In addition, some acts of sabotage are pre-meditated as well.
For example, a partner named Bill in an investment firm has been working there for years. Bill is very familiar with the business’s strengths and weaknesses. This partner figures that if he purposefully undermines the business and damages its reputation, he will be able to take the company’s assets for himself. Bill could start a competing business and use his former company’s assets to run a lucrative company.
The example of Bill is hypothetical; in this case, the partner wants to damage the business and reap the rewards of his wrongdoing. However, not all acts of sabotage involve hurting the company. Yet, whenever an individual place their interests above those of the company, they inflict harm on their partners.
Outside of the business world, sabotage is also the term for a federal crime. In this sphere, sabotage usually refers to interfering with military operations. It is helpful to think of business sabotage similarly. Instead of interfering with military activity, those who sabotage companies interfere with the company’s activities through acts of fraud or embezzlement.
When business partners commit sabotage intentionally and are caught, they can face the following:
- Criminal penalties, including arrest
- Civil liability
In addition, the wronged business partner may be subjected to third-party liability based on their partner’s illegal acts.
Often, state laws refer to acts of sabotage as “unfair competition.” These acts are also called “violations of fiduciary duty.” But what is the business partners’ fiduciary duty?
Can partners sue for breach of fiduciary duty?
In a business partnership, fiduciary duty means that an individual must act in a way that benefits the other partner or partners. Company partners’ actions normally have financial implications for each other and the company. The individual tasked with the duty is the fiduciary; the other party is the beneficiary or the principal.
In business partnerships, the fiduciary duty is to act positively for the partnership. Additionally, the fiduciary places the interests of the business above their interests. Therefore, when someone violates their fiduciary duty, they also usually violate the original partnership agreement.
If there is no existing partnership agreement, it is up to the business partner who claims that sabotage has occurred to prove the offense. In other words, the partner has to prove that their partner has held their interests over the partnership’s interests.
What Are the Different Types of Business Sabotage?
One of the things that makes company sabotage so difficult to deal with is the fact that it can take many different forms. So often, it can be difficult for business partners to be certain that sabotage is occurring because it embodies many different things.
Sabotage in the business world can be:
- Fraud
- Embezzlement
- Release of corporate secrets
- Release of trade secrets
- Espionage
Additionally, although entities and individuals outside the business often commit business sabotage, other culprits exist. It is more common for individuals and entities inside the business to commit most forms of sabotage. These in-house individuals include:
- Company owners
- Company partners
- Company shareholders
- High-level employees
Can Business Partners Sue for Company Sabotage?
When business partners are certain that sabotage has occurred, they should consider taking legal action. Sabotage compromises the business partners and the company itself and can damage relationships, profits, and the entire business venture.
However, to file a lawsuit, the partner must prove that sabotage occurred. When the partner can establish that there are grounds to sue, the lawsuit will be stronger and more successful.
Here are some of the most common acts of business sabotage to be on the lookout for. If it can be proven, for example, that the partner breached an important contract while committing sabotage, the lawsuit will have a better chance of success.
At this juncture, it is also essential to contact a business attorney. An experienced corporate lawyer can determine if sabotage occurred and help locate convincing evidence.
- Civil Conspiracy
If a business partner or entrepreneur discovers that multiple partners conspired to sabotage the company, they can claim civil conspiracy.
To claim that a civil conspiracy occurred, a partner must be able to prove that their partner acted in conjunction with one or more other individuals and purposefully perpetuated an illegal act by unlawful means.
Civil conspiracy is not technically a type of sabotage by itself. However, it is a manner through which sabotage occurs.
For example, Dick, Harry, and Frank are partners at an insurance firm in Los Angeles, California. These three partners devise an embezzlement scheme and decide to steal money from the company, including the other partner, Mark. The three partners succeed in diverting millions of dollars over the next year by creating false receipts.
However, Mark discovers his partners’ unlawful scheme and finds evidence he can use against them in a court of law. Mark can claim civil conspiracy because he can prove that the other three business partners—Dick, Harry, and Frank—perpetuated these offenses together.
- Contract Violation
Before using a business partner, individuals should examine the contract’s terms. If a partner’s actions breach the terms of any of these agreements, there may be a legal path to follow and grounds for a lawsuit. The contracts to review are:
- Operating agreement,
- Bylaws, Shareholder Agreement,
- Articles of Incorporation
- Partnership agreement
- Employment agreement
- Noncompete agreement
When a business partner violates these agreements and commits sabotage against the business and the other partners, they must be penalized for their actions.
- Tortious Interference
The offense known as tortious interference occurs when an individual interferes with their partner’s contracts or business relationships. However, tortious interference can be difficult to prove based on its subjectivity. To provide evidence that tortious interference occurred, an individual must show that:
- They suffered damages based on the individual’s interference
- The person who interfered was aware of the relationship and contract they violated
- The person’s interference was improper and also done on purpose
- The person who interfered was likely to benefit from the contract or relationship they interfered with
Additionally, a tortious claim can be made if the partner stole or diverted business opportunities that were not theirs. However, these acts would need to be proven.
For example, Dave and Dan are business partners and run a financial advising firm. Dan tells one of Dave’s most important and lucrative clients that he will provide one-on-one financial advice if he breaks his contract with the business.
In this example, Dan commits tortious interference because he is purposefully interfering with Dave’s business affairs and, in effect, stealing his client.
What to do if business partner is stealing?
Civilly, conversion is similar to theft. The wronged partner can pursue a direct claim when a conversion occurs between business partners. In California, conversion is defined as purposeful interference with another person’s property to deprive the owner of their property.
California law says that there are specific elements of conversion:
- It must be proven that the plaintiff owned the stolen property or had a right to it
- It must be proven that the defendant acted wrongfully and did not respect the plaintiff’s property rights
- It must be shown that the act of conversion resulted in damages
What Solutions Are Available If a Partner Sabotages the Business?
When sabotage occurs, business partners often experience anger and regret. Sometimes, they question their partnership decisions or want to dissolve the entire business and forget everything ever happened.
However, victims of sabotage should be aware that there are available remedies. These solutions depend on the wronged partner’s claims. Usually, however, the partner can attempt to collect damages for the losses suffered.
After sabotage, the business partner might also attempt to obtain the following:
- An order that dissolves the business partnership
- An injunction that stops the sabotaging partner from doing anything else illegal
- Solutions outlined in the partnership agreements
- Relief for attorney fees
- Statutory damages for specific claims
Importantly, partners should find out if sabotage is considered a criminal offense. Again, a licensed attorney can help figure this out. If the offense is criminal, we suggest contacting the authorities immediately.
Why Work with Nakase Wade in California?
We hope this article shows you that there are numerous potential claims and remedies to explore when a partner sabotages your business. The first step is to contact a skilled, experienced partnership dispute lawyer.
At Nakase Wade, we have handled many sabotage cases across California. Our lawyers understand how damaging acts of sabotage can be, and we know that each case of sabotage requires a unique solution.
Our attorneys want you to know that you have rights as a business partner. Together, we will not only remedy the current case of sabotage but also ensure the safety of your business in the future. Contact Nakase Wade today for a free consultation. We will offer immediate solutions so you can focus on what is next in your business career.
