Texas Non-Compete Law Blog : Texas Non-Compete Lawyer & Attorney : Robert Wood of Fell & Wood Law Firm : Trade Secrets Law in Denton, TX

An employee may be liable for breach of fiduciary duty to his employer—even if his employer suffers no actual damages as a result of the offending conduct.  So learned an employee in a recent case.

In that case, the employee, a Project Manager for a general construction contractor, was responsible for locating potential subcontractors for the project, soliciting bids from them, and directing the work of the subcontractors that were actually hired.

At one point, the Project Manager hired a subcontracting company owned by his mother-in-law and father-in-law.  Unbeknownst to his employer (the general contractor), the Project Manager and his wife personally profited in excess of $300,000 as a result of his wife’s parents being awarded the subcontracting work.  When the general contractor subsequently learned what the Project Manager had done, it sued the Project Manager for breach of fiduciary duty.  A bench trial verdict in the general contractor’s favor was affirmed on appeal.

Lessons:

1.   The court of appeals noted that a “fiduciary” is a person “who occupies a position of peculiar confidence towards another.”  The court added that a fiduciary relationship is characterized by “integrity and fidelity,” and it contemplates “fair dealing and good faith.”  The court concluded that the Project Manager’s duties were sufficiently important to make him a fiduciary of the general contractor.

2.   In a principal/agent fiduciary relationship, the duties owed by the agent include:  the duty to account for profits arising out of his employment, the duty not to act as (or on account of) an adverse party without the principal’s consent, the duty not to compete with the principal on his own account or for another in matters relating to the subject matter of the agency, the duty to deal fairly with the principal in all transactions between them, and the duty to deal openly and to fully disclose to his employer information that affects his employer’s business.

3.   In this case, the Project Manager argued that his use of his mother-in-law and father-in-law’s subcontracting company was for the general contractor’s benefit (and that the general contractor was not in any way harmed).  But the court held that the Project Manager’s failure to inform his employer that he personally benefited from using the subcontractor company constituted a breach of his fiduciary duty, and the Project Manager had to account for all profits he earned as a result of his breach.  The court held that it was “beside the point” that the general contractor may have suffered no damages; the Project Manager’s betrayal of trust warranted the verdict against him.

Daniel v. Falcon Interest Realty Corp., 190 S.W.3d 177 (Tex. App. Houston [1st Dist.] 2005, no pet.).

 

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Employees owe various duties to their employers, including a general duty of loyalty. This duty requires employees to act primarily for the benefit of their employer in all matters connected with their employment. Failure to do so may constitute a breach of fiduciary duty, or breach of the duty of loyalty.
 
For example, an employee must deal openly with her employer and fully disclose information about matters affecting the company's business. An employee cannot exploit for her own benefit an asset or opportunity that should belong to the employer. That is, the employee may not divert opportunities from the employer to the employee's own benefit. If an employee, while employed by his employer, uses his position to gain a business opportunity belonging to the employer, such conduct constitutes an actionable wrong. Indeed, an employer may succeed in a claim for diversion of a business opportunity without demonstrating that it would have availed itself of the business opportunity had the employee not diverted it.

While still employed, an employee may not actively compete with his employer without violating the duty of loyalty. However, an at-will employee may plan to compete with his employer, and may take active steps to do so while still employed. The employee has no general duty to disclose his plans and may secretly join with other employees in the endeavor without violating any duty to the employer. Despite the employee's general right to plan to compete, the employee cannot (while still employed) solicit his employer's customers in preparation to complete with the employer.  Further, at lease one Texas court has suggested that an employee's preparation to compete may constitute a breach of the employee's duty of loyalty if the preparation is "significant"--e.g., where a supervisor or manager acts as a "corporate pied piper" and lures all of his employer's personnel away, thus destroying the business.
 
An employee may also violate the duty of loyalty to his employer by accepting a payment or benefit during the course of employment without reporting it to the employer. An employee is required to give her employer a full accounting of anything of value received while on the job, including tips, gratuities, and gifts. Unreported receipt of a payment or benefit is a potential violation of the employee's duty of loyalty, even if the employer suffers no economic harm as a result of the payment.  This general duty to report is intended to ensure that the employee's loyalty to the employer is not diverted.
 

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Texas non-compete agreements often contain various other provisions, including the following:
 
Choice of Law.  Non-compete agreements typically will specify which state's law will decide whether, and the extent to which, a non-compete agreement is enforceable. Even in cases in which the parties have agreed that the law of a state other than Texas will apply, the court will determine which state "has the most significant relationship to the transaction and the parties," and it will apply that state's law.  Usually, if the employee to be bound by the non-compete agreement is working primarily in Texas, Texas law will apply.
 
Venue. Covenants not to compete sometimes contain provisions specifying the venue (e.g., the state and federal courts of Dallas County, Texas) of any action to enforce the covenant. These are generally enforceable. However, a provision making a state other than Texas the venue may not be enforceable if Texas law governs the non-compete agreement and it is shown that the
foreign state likely would not apply Texas law.
 
Arbitration.  Employment agreements, and other agreements containing non-compete provisions, often mandate that any dispute be submitted to binding arbitration rather than court. From the employer's perspective, it is imperative that the arbitration provision permit the employer to seek injunctive relief (including a temporary restraining order or temporary injunction) in
court to prevent a non-compete violation (or disclosure of confidential, proprietary, or trade secret information). To prevent a former employee from violating non-compete or non-disclosure provisions, or from stealing trade secrets, an employer may require more immediate injunctive relief than could be obtained in arbitration. Employers must also be mindful that, to prove a non-compete violation (or theft of trade secrets), they may need more discovery than is typically permitted in arbitration (and they may want to provide for discovery, including expedited discovery, in their employment contracts).
 
Clawback Provisions.  In some cases, the agreement in which the covenant not to compete is contained will state that the employee, in the event he violates the non-compete provision, must return the consideration given by the employer. This might occur, for example, where the employer gives company stock in exchange for the covenant. Provisions requiring the return of the consideration are enforceable if the court finds that the employer would not have given the consideration "but for" the employee's promise not to compete (in which case the promises are said to be "dependent" upon each other). 

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