Ulteig vs. Apex: Stolen trust ends in quiet settlement for engineering firms

FARGO - On a mild, breezy November day nearly four years ago, more than 20 employees and executives at Ulteig Engineers called it quits at the same time and left to form a rival firm.

That firm, Apex Engineering Group, began to win contracts that Ulteig sought and, to add insult to injury, the sudden loss of expertise forced Ulteig to rehire some of the workers who left as subcontractors to finish projects they left behind.

What followed were volumes of bitter recriminations filed in Cass County District Court as Ulteig, an employee-owned firm, sued Apex and the former workers, claiming the new firm stole company secrets that gave them an unfair advantage over Ulteig.

Apex workers said they did nothing wrong.

Ulteig, they said, was a troubled company that laid off far more workers before and after their departure. Some of those laid-off workers have also gone on to win contracts Ulteig sought, they said.

The flurry of legal filings ended in June with a settlement that neither party can talk about.

Steve Maag, Ulteig’s chief financial officer, said Friday he’s not allowed to talk about the settlement or anything to do with the lawsuit, including how much damage Apex allegedly caused Ulteig.

Thomas Welle, a principal at Apex, did not return a request for comments. As a former Ulteig senior vice president and a member of the firm’s board of directors, he was one of the key targets in the lawsuit.

Ulteig hits rough patch

Ulteig was founded 70 years ago in Fargo to bring electricity to the region’s rural areas. The firm continued to grow into a regional powerhouse with eight offices in five states. It became employee-owned in 2005.

The former workers named in the lawsuit reminisced fondly of those earlier days in a filing: “Historically, Ulteig was financially stable, paid annual bonuses, allowed employees to elect its Board of Directors, and enjoyed a remarkably low rate of employee turnover.”

But things changed around 2008, the filing said. “Ulteig began to experience serious financial difficulties as a result of increased overhead and payroll expenses, reduced profits, and an increased debt load.”

The first of several major layoffs began in fall 2008 with the sacking of two members of the board of directors and the chief financial officer. In September 2009, Ulteig terminated 60 to 70 employees “without notice,” the filing said. Remaining employees saw their salaries cut 5 percent and the firm stopped contributing to their 401(k) accounts.

One of those let go in 2008 was Scott Olson, a former regional area manager in Ulteig’s Bismarck office who also served on the board of directors. Ulteig said it believes he began talking with Welle about forming a new company three months before the termination.

The latest round of layoffs mentioned in the workers’ filing happened in summer 2013 when 39 workers were let go. The filing was made last April.

Ulteig doesn’t dispute there were financial difficulties. “It is not why Defendants left that matters; it is how they left that is in dispute,” the firm said in a filing.

Alleged conspiracy

Ulteig’s civil complaint portrayed the former workers as conspirators plotting to undermine their employer through “fraud and deceit.” The chief conspirators, it alleged, were executives who had a legal duty to look out for Ulteig’s financial interests.

Among those executives were Welle and Dain Miller, a vice president of Ulteig’s transportation group. They and some others, while on the Ulteig payroll, allegedly agreed to recruit key Ulteig workers for Apex “to prevent Ulteig from competing with Apex for the type of work they wanted Apex to do, or even continuing in those areas,” the complaint said.

Together, the workers also allegedly agreed to pilfer company secrets, such as project data specific to individual customers and pricing formulas, and to quit at the worst time possible for Ulteig, Ulteig’s complaint said.

The workers allegedly promised to attend meetings with clients knowing that they planned to quit en masse before those meetings, leaving Ulteig hanging, the complaint said.

So many key workers left to form Apex that Ulteig found it had to rehire them as subcontractors to work on sewage projects in Jamestown and Minot.

Not long after the workers formed Apex, they won a contract for a Fargo sewage project. Ulteig suspects they were working on that project while still on the Ulteig payroll.

The workers named in the lawsuit said in a filing that there was no conspiracy. They did discuss starting a new firm because of their unhappiness with conditions at Ulteig, but it was on their own time and not while in the office.

The workers also noted that their mass resignation was no more damaging than the mass layoffs that Ulteig started.

Mike Magelky, terminated in 2008, formed a new firm along with other former Ulteig workers and took several clients away from Ulteig. Steve Synhorst, terminated at the same time, became president of KLJ Engineers and took three of Ulteig’s clients.

In a court order in February, months before the settlement, District Judge Steven L. Marquart narrowed the case to two key issues: the theft of trade secrets and deceiving one’s employer. There was sufficient evidence that it was possible for a jury to find Apex and the former Ulteig workers guilty of both.

Painful separation

Ulteig won’t say how much Apex affected its fortunes though, up until the settlement, it had been calculating the damages it planned to seek from its rival.

Apex and Ulteig have been competitors for Fargo city contracts in recent years, and they appear to be about neck-and-neck.

From 2011, Apex’s first full-year of business, until today, Apex got nine contracts worth $761,900 and Ulteig got eight contracts worth $711,700 from the Engineering Department, according to city records. From 2007 to 2010, roughly the same length of time, Ulteig received 24 contracts worth $3.1 million.

Cody Eilertson, an engineer with the city, said Ulteig and Apex are on the short-list for minor city contracts that don’t require long bid processes, along with more than half a dozen other engineering firms in the area.

In Detroit Lakes, Minn., the city engineer had long been a contract worker for Ulteig – until 2012. That’s when Jon Pratt quit Ulteig to join Apex. The city elected to keep Pratt as its city engineer, meaning Apex now has the contract.

The law and ethics

Business ethics and law experts say it’s not uncommon for workers to quit one firm to form a competing firm, assuming there is no non-compete agreement. The technology sector, for example, sees a lot of this.

But there are legal and ethical lines such workers should not cross, they say.

Christyne J. Vachon, a law professor at the University of North Dakota in Grand Forks, said there is an implicit agreement between an employee and an employer such that the employee is duty-bound to work in the best interests of the employer.

She said if an employee wants to form a competing firm, he or she is limited to what the law refers to as “logistical arrangements,” such as getting a lease or buying office equipment. Recruiting co-workers may be legal if it’s not a direct appeal, she said. For example, it’s not OK for the employee to tell a co-worker to come work for a new firm he’s starting. It would be OK if the co-worker asked about the new firm and volunteered to go to the new firm.

This, of course, does not apply to people who leave a firm and then recruit former co-workers.

Judge Marquart drew that distinction when he dismissed Ulteig’s accusations against Olson’s recruitment efforts.

Though he was a former executive, Olson had been a former Ulteig employee for months when he allegedly began recruitment. But the judge said it was still possible, under the best circumstances for Ulteig, to find the other alleged recruiters guilty of betraying their employer.

It’s the ethical thing for workers planning to form a competing firm to announce their intentions, said James Legler, a business ethics expert and professor emeritus at Concordia College.

He said it’s more complicated when such an announcement might lead to immediate termination, an argument made by Ulteig’s former workers.

Legler said it’s important for companies to develop ethical guidelines; in fact, he worked with Ulteig a couple years ago on its ethics guidelines.

Besides filing suit, Ulteig filed ethics complaints against several Apex workers with the state board overseeing professional engineers in North Dakota and Minnesota. Neither of those boards replied to inquiries about the complaints.