EY accused of trade secret misappropriation, tortious interference, fraud

Court of Appeals agrees with trial court in denying company's attempt to dismiss claim

BY Bernise Carolino 17 Jul 2023

A recent case in the U.S. involved claims alleging misappropriation of trade secrets, breach of contract, common law fraud, tortious interference with existing contracts, and tortious interference with prospective business relations against Ernst & Young, LLP (EY) and/or one of its employees.

Ryan, LLC was an accounting and tax consulting firm that developed a severance tax and royalty practice group that helped oil and gas companies realize savings and obtain refunds of state taxes and federal royalties. It provided consulting services to energy sector companies whose financial statements EY, its competitor, audited.

Ryan sued EY and its employee, S.K. Thakkar. It wanted to stop the defendants from seeking, retaining, or using its confidential or proprietary information to conduct audits or to provide severance tax or federal royalty services.

Ryan made the following allegations:

EY tortiously interfered with Ryan’s prospective business relations for providing federal royalty and severance tax services.
EY got information about Ryan’s proprietary methods for calculating oil-and-gas-related tax credits when it was auditing some of Ryan’s clients.
EY made the trade secrets available to nine of its employees in a new federal royalty and severance tax group that competed with Ryan’s.
Thakkar and at least one other EY employee used Ryan’s work papers to interfere with and to usurp Ryan’s relationships and potential contracts with its existing clients and to compete for business with potential clients.
These employees breached accounting rules prohibiting auditors like EY from using their attest function to profit from consulting services.
EY interfered in former employees’ restrictive covenants and in other parties’ contractual confidentiality obligations to Ryan.
The interference was intentional, given that EY’s employees and agents knew about the specific prospective contract in which EY interfered.
EY made fraudulent misrepresentations to Ryan and to potential customers.

Thakkar could not have gotten firsthand knowledge from Ryan because it had never employed him in its federal royalty practice, Ryan argued. Instead EY’s audit group breached confidentiality agreements by demanding Ryan’s work papers from its severance tax and federal royalty customers under the guise of auditing, Ryan claimed. EY then passed on Ryan’s confidential intellectual property to Thakkar, Ryan added.

Tortious interference claim to proceed

The defendants filed a motion to dismiss Ryan’s claim against EY for tortious interference with prospective business relations under the Texas Citizens Participation Act (TCPA). They argued that Ryan’s claim should be dismissed because it was targeting EY’s public audits, which involved communications and conduct protected by the rights of free speech, association, and petitioning under the TCPA.

The trial court disagreed with this argument and refused to dismiss the claim for tortious interference with prospective business relations. This unfavorable ruling prompted the defendants to take the matter to the appellate court.

In the case of Ernst & Young, LLP and S.K. Thakkar v. Ryan, LLC, the Court of Appeals for the First District of Texas affirmed the decision of the trial court denying the defendants’ attempt to dismiss the claim for tortious interference with prospective business relations.

The defendants failed to prove that the TCPA applied to the claim for tortious interference with prospective business relations and failed to show that this claim was based on or was responding to EY’s exercise of its rights to free speech, association, and petition, the appellate court said.