David Welch Co. v. Erskine & Tulley

Collection agency David Welch Co. (Welch) (plaintiff) developed a highly profitable specialty collecting delinquent employer contributions to employee-benefit trust funds. For eight years attorney Michael Carroll with Erskine & Tulley (E&T) (defendants) represented Welch. Neither E&T nor Carroll had previous experience doing collection work for trust funds. David Welch said he specially trained E&T attorneys, entrusted them with confidential information about his techniques and fee schedules, and introduced them to trust-fund trustees. Before turning over collections to E&T, Welch would investigate the employer’s financial status, attempt collections, prepare a case file with background documents, and draft a complaint ready for filing. Welch organized the business to preserve the confidentiality of its procedures and keep someone within the company from breaking away and starting a competitor. Welch sold in 1980 and stopped referring collection matters to E&T, and the parties terminated their relationship. The new owner increased fees charged trust funds for the first time since 1968. The next year, a trust fund transferred collection business to E&T, and two more soon followed suit. E&T did not solicit the funds, but the funds requested proposals that E&T submitted without informing Welch or requesting consent to take over the accounts. Welch typically learned it had lost an account when it received a letter from the trust fund stating that the fund had transferred business. By 1983, E&T had acquired at least 10 trust-fund clients from Welch, generating annual billings over $156,000. Welch sued for breach of fiduciary duty, claiming E&T had received $350,000 using confidential information learned from Welch to acquire its clients and compete with it. The trial court held that the law firm and Carroll breached their fiduciary duties and had to disgorge $350,000. The parties cross-appealed.