October 17, 2018 Articles

Well Established but Often Forgotten: Breach of Fiduciary Duty Claims Against Employees

Many courts will impose at least a duty of loyalty.

By John S. Adams

Recently, when confronted with a legal analysis citing a 40-year-old U.S. Supreme Court opinion for what should be a matter of well-developed state law, I was skeptical. I was particularly skeptical because the citation ostensibly supported the sweeping proposition that employees owe fiduciary duties to their employers. See Snepp v. United States, 444 U.S. 507, 518 (1980) (“the employee possesses fiduciary obligations arising out of his duty of loyalty to his employer”). And I was ready to dismiss the entire analysis once I realized the quote relied on came from the dissenting opinion.

Yet, it is true that in most jurisdictions, employees do owe fiduciary duties to their employers. You do not, however, need to rely on a dissenting justice in a Supreme Court opinion about an agent of the Central Intelligence Agency, see id., to make that point.

This is not to say courts will hold a typical employee to the same standard as, for example, an attorney or a trustee. But many courts will impose at least a duty of loyalty, so that breach of fiduciary duty claims are not confined to officers, directors, and closely held corporations.

In some cases, a breach of fiduciary duty claim may just add to a litany of other claims for similar conduct, like fraud, misappropriation of trade secrets, or violation of a restrictive covenant. But breach of fiduciary duty may also capture additional conduct, like, for example, disclosure of information unrelated to a trade secret. And as states become stricter about the enforceability of non-competes and as they codify trade secret laws, breach of fiduciary duty claims may be a useful common-law tool with fewer legal and factual obstacles.

What Fiduciary Relationship?

This lesser-known fiduciary relationship between employees and employers is hidden in plain sight. It is well established that agents owe fiduciary duties to their principals. See Restatement (Third) of Agency § 1.01 (Am. Law Inst. 2006) (“Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.”). The Restatement’s comments even list the employee–employer relationship among the more widely recognized fiduciary relationships: “The elements of common-law agency are present in the relationships between employer and employee, corporation and officer, client and lawyer, and partnership and general partner.” Id. § 1.01 cmt. c.

So, in most jurisdictions, based on elementary agency principles, employees, as agents, owe fiduciary duties to their employers, as principals.

What Duties?

Like property rights, fiduciary duties are a bundle of sticks—often considered together, but they may also be viewed individually. And in the employee-employer relationship, courts are typically careful to parcel out individual duties, holding employees to a Goldilocks standard—not too strict, not too loose. That middle ground is typically reached by prohibiting employees from overtly competing against their employers while still employed and prohibiting employees from using confidential information to their employer’s detriment.

For example, Texas courts consider the employee-employer relationship a “formal principal–agent relationship” but recognize that an “employer’s right to demand and receive loyalty must be tempered by society’s legitimate interest in encouraging competition.” Salas v. Total Air Servs., LLC, No. 08-15-00383-CV, 2018 Tex. App. LEXIS 1239, at *10 (Tex. App. El Paso Feb. 14, 2018, no pet.). So, in Texas, most employees are fiduciaries, and they cannot lawfully receive a benefit for competing (or assisting others in competing) against their employer while still employed. See id. At least one Texas court has also recognized that an employee may owe a duty to disclose an intent to compete against his or her employer. PAS, Inc. v. Engel, 350 S.W.3d 602, 614 (Tex. App. Houston (14th Dist.) 2011, no pet.).

Delaware law recognizes that employees are permitted “to prepare to compete with their employers before leaving their employ,” while also imposing fiduciary duties. Triton Constr. Co. v. E. Shore Elec. Servs., Inc., No. 3290-VCP, 2009 Del. Ch. LEXIS 88, at *27 (Del. Ch. 2009). Delaware law does not impose fiduciary duties merely based on an agency (i.e., employee-employer) relationship, but it does impose fiduciary duties on “key managerial employees” and when an “agent is provided with confidential information to be used for the purposes of the principal.” See id. So, in Delaware, “when an employee acquires secret information relating to his employer’s business”—even if it is not trade secret information—“an employee has a fiduciary duty to safeguard that information, or at least, not disclose it to a competitor.” Id.

In New York too, employees can “be found to have breached a fiduciary duty to their employer if they ‘acted directly against the employer’s interests.’” Beach v. Touradji Capital Mgmt., LP, 42 N.Y.S.3d 96, 101 (N.Y. App. Div. 2016). As in Texas, “an employee may create a competing business prior to leaving his employer without breaching any fiduciary duty unless he makes improper use of the employer’s time, facilities or proprietary secrets in doing so.” Ashland Mgmt. Inc. v. Altair Invs. NA, LLC, 869 N.Y.S.2d 465, 473 (N.Y. App. Div. 2008).

Conclusion

Employees often owe fiduciary duties to their employers. In many instances, these duties may overlap with statutory duties (e.g., to prevent theft of trade secrets) or contractual duties (e.g., a confidentiality agreement), but fiduciary duties may also expand an employee’s potential liabilities in some instances and can help bring claims against employees if their conduct falls outside a statute or written agreement.

John S. Adams is with Lynn, Pinker, Cox & Hurst, LLP, in Dallas, Texas.

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).