Source: https://fiveminutelaw.com/category/fiduciary-duty/
Timestamp: 2019-04-21 20:07:36+00:00

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Meet Sammy Orbison. For years he managed the wireline recertification business for Ma-Tex Rope Company. Trouble is, he started competing with Ma-Tex while still on the payroll, spending about 10% of his time helping competitor American Pipe Inspections (API) set up its own wireline recertification business. Then he left Ma-Tex and went to work for API, where he used Ma-Tex’s confidential customer and price information to solicit business from Ma-Tex’s customers.
As a result, in his first two weeks at API, Sammy made sales to two Ma-Tex customers totaling (imagine voice of Dr. Evil from Austin Powers) over THREE THOUSAND DOLLARS!
Naturally, Ma-Tex sued Sammy and API for Sammy’s breach of his non-compete and confidentiality agreement, misappropriation of trade secrets, and breach of fiduciary duty. At trial, Ma-Tex’s owner testified—without explanation—that if Ma-Tex had made those two sales, it would have profited $2,300.
The evidence also showed that Sammy received salaries from Ma-Tex and API but did not receive any commissions for the two disputed sales.
Let’s say you’re the judge in this case. What damages would you award to Ma-Tex?
(1) Breach of contract and misappropriation of trade secrets require proof of actual damages; breach of fiduciary duty does not. The court can order forfeiture of benefits as a remedy for breach of fiduciary duty, regardless of actual damages.
(2) An employee owes a sort of limited “fiduciary” duty to an employer. I’ve called this Fiduciary Duty Lite. In the simplest terms, it’s a breach of this duty for an employee to actively compete with his own employer while still employed, or to use the employer’s confidential information to compete at any time.
Knowing that, what damages would you order Sammy to pay?
A. Nothing. The lost profits evidence was insufficient, and there was no other evidence of actual damages.
B. Order Sammy to forfeit 10% of his Ma-Tex salary for breach of fiduciary duty for competing with Ma-Tex while employed by Ma-Tex.
C. Order Sammy to forfeit two weeks of his salary at API for breach of fiduciary duty for the use of Ma-Tex’s confidential information at API.
If you answered D, you are not alone. In a case with roughly these facts (I have simplified, of course), that’s what the Texarkana Court of Appeals recently ruled in Orbison v. Ma-Tex Rope Company.
But the correct answer is B. In my view, ordering forfeiture of benefits an employee receives after leaving the first employer stretches the employer’s “fiduciary” duty too far. I’ll explain.
But first, let’s look at the reasoning of Orbison. The evidence was insufficient to support any award of lost profits as actual damages. An owner of a business can testify to the amount of lost profits, but he has to give some explanation of how the number was calculated. In Orbison, the owner literally said nothing more than “Yes, it was close to $2,300” (and then repeated the figure). That doesn’t cut it.
This defect in the evidence killed Ma-Tex’s claim for actual damages for breach of contract and misappropriation of trade secrets. Both of those causes of action require proof of actual damages. And for both of these claims, the purpose of actual damages is to compensate the plaintiff, not to punish the defendant. So if the evidence isn’t sufficient to prove actual damages, you don’t get any damages for breach of contract or misappropriation of trade secrets.
Breach of fiduciary duty is a different animal. A fiduciary duty arises from certain relationships where a person is entrusted with responsibility for guarding the interests of another person. The classic examples are lawyers and trustees. The core of the fiduciary duty is a duty of loyalty, i.e. the fiduciary’s duty to put the other person’s interests ahead of his own.
You can already see that fiduciary duty has a certain moral element. It’s not just against the law to violate a fiduciary duty, it’s wrong.
Most people probably feel the same about breaking a contract. After all, a contract is a covenant—could there be a more morally charged obligation?
But the law doesn’t see it that way. Contract law is basically amoral; its job is to regulate commerce and keep the marketplace running efficiently, not to make moral judgments. Contract law embraces the notion of “efficient” breach, the idea that a breach is fine, even to be encouraged, as long as the breaching party is willing to make the other party whole by paying actual damages.
You might say contract law is cold-blooded, while fiduciary duty law is warm-blooded.
And because of the unique nature of a fiduciary duty, a claim for breach of fiduciary duty has certain special advantages, including: (1) the availability of forfeiture or “disgorgement” of benefits as an alternative remedy to actual damages; (2) shifting the burden of proof to the fiduciary to prove he didn’t breach his duty; and (3) the ability to pursue a third party with deeper pockets for “knowing participation” in the breach of fiduciary duty. These three things are not available for a breach of contract.
Now that you know the special advantages of a breach of fiduciary duty, you can see why it matters whether an employee’s duty to an employer is called a “fiduciary” duty. It’s not just semantics.
But this shows why I suggested in Fiduciary Duty Lite that it was a mistake for Texas courts to label the employee’s duty a “fiduciary” duty. It’s a mistake for two reasons, one descriptive and one normative.
Does Ma-Tex Rope Company set a precedent that will go too far?
The descriptive reason is that fiduciary duty is a misnomer in this context. Whatever policy preferences you have, the employee’s duty just isn’t a “fiduciary” duty in the full sense of the word. Nobody seriously thinks that an employee owes an employer the same level of duties owed by a lawyer or a trustee. And the Texas cases acknowledge this, expressly stating that it’s not a breach of fiduciary duty for an employee to actively make plans to compete with her employer and even to conceal those plans.
The normative reason is that the legal deck is already substantially stacked against employees.
Think about it. Employers have no legal duty of loyalty to employees. Quite the opposite: under the at-will employment doctrine, the employer can fire the employee any time, for any reason (with some narrow exceptions), or for no reason. Imposing a one-way duty of loyalty on employees just doesn’t seem fair.
On the other hand, it’s not fair for an employee to actively compete with his employer while the employer is paying the employee. You could argue this is just an application of the traditional principle that an agent owes his principal a fiduciary duty as to matters within the scope of his agency.
But if we must use the term “fiduciary” for employees, we should limit the scope of that duty appropriately.
Here’s where I would draw the line. As Texas courts have already said, it should be a breach of the employee’s limited fiduciary duty to compete with the employer (as opposed to preparing to compete) while still employed. And forfeiture of benefits should be an available remedy for that kind of breach.
I don’t see this as unduly punitive. Employees who compete with their current employers should be expected to know they are doing something wrong.
On the other hand, Texas courts should stop classifying an employee’s post-employment use of confidential information or trade secrets as a breach of fiduciary duty. That means forfeiture of benefits the employee receives after leaving the employer should not be an available remedy.
First, this rule would not leave the employer without a remedy. The employer would still have the remedy of actual damages for an employee’s post-employment breach of contract or misappropriation of trade secrets.
Second, Texas courts are already holding that the Texas Uniform Trade Secrets Act preempts a common-law claim for breach of fiduciary duty based on misappropriation of trade secrets. So any claim for breach of fiduciary duty based on trade secrets should be off the table anyway.
The third reason is prudential. Almost any time an employee who has customer relationships leaves a company to work for a competitor, there is a plausible basis for the first company to claim the employee is using company trade secrets, which can include customer lists and prices. See The Price Undercutting Theory in Trade Secrets Litigation. In Orbison, the forfeited salary from the new employer was only about $2,300, but in future cases it could be a lot more. If we let employers hold the club of salary forfeiture over every departing employee’s head, it could chill competition and tilt the balance of power too much against the employee.
And then employees will really be at the end of their rope.
Rope. Get it? Ma-Tex Rope Company?
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. This post is dedicated to Roy Orbison.
 Orbison v. Ma-Tex Rope Co., No. 06-17-00112-CV, 2018 WL 2993012 (Tex. App.–Texarkana June 15, 2018).
 On the trade secrets claim, the plaintiff can get punitive damages for proving a “willful” violation by “clear and convincing” evidence, Tex. Civ. Prac. & Rem. Code § 134A.004(b), but that’s not part of “actual” damages.
 E.g. Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 843 (Tex. App.—Corpus Christi 2017, no pet.). See discussion in Embarcadero Technologies, Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2018 WL 315753, at *2-4 (W.D. Tex. Jan. 5, 2018).
Last month, the Beaumont Court of Appeals issued a revised opinion on lost profits damages in Rhymes v. Filter Resources, a typical Fiduciary Duty Lite case.
Fiduciary Duty Lite? As I wrote here, that is the flavor of fiduciary duty that an employee owes to an employer under Texas law. As I explained, it doesn’t really make sense to call it “fiduciary” duty, but that’s the label Texas courts have used so we’re probably stuck with it.
Essentially, Fiduciary Duty Lite says that an employee can prepare to compete with his employer while still employed but cannot actually start competing until after leaving the employer. If you suspect that maintaining this distinction is easier in theory than in practice, you may have a bright future in Fiduciary Duty Lite litigation.
Employee signs agreement with Company that says Employee will not solicit the Customers for one year after leaving Company.
Employee gets access to Company’s double super-secret information, such as “products, prices, contracts, and financial, vendor, and customer information” (i.e. the same kind of information every sales employee gets).
Employee, while employed by Company, prepares to compete with Company, including forming Competitor and communicating with Customers about Employee’s plans.
But Employee testifies he did not actually “solicit” Customers before leaving Company (whatever that means).
After leaving Company and joining Competitor, Employee quickly begins selling to his old Customers from Company.
Company’s expert also testifies that Company’s lost profits for a five-year period would be $622,800, using Year 1 as a base line and assuming a gradual decrease over Years 2-5 to account for risk and customer attrition.
Employee and Competitor present no contrary expert testimony.
Jury finds that Employee breached his Fiduciary Duty Lite and finds damages of $620,000 for Year 1 and zero dollars for Years 2-5.
Got it? Now, here is the multiple choice question.
QUESTION: Assuming there was sufficient evidence that Employee breached his Fiduciary Duty Lite, what is the right amount of damages to award to Company based on the jury verdict?
A. $620,000. This is the amount found by the jury, and there is some evidence to support it because Employee earned revenue of over $638,000 in Year 1.
B. $206,767. Lost profits damages must be based on net profits, not gross revenues, so there is insufficient evidence to award $620,000 for Year 1 but sufficient evidence to award $206,767 for Year 1.
C. $622,800. Company’s damages expert testified to this amount of net profits for Years 1-5 without contradiction.
D. Zero dollars. There is legally insufficient evidence to support the amount of damages found by the jury.
If you’re struggling, don’t feel bad. It took the Beaumont Court of Appeals two tries to come up with its final answer.
Here’s one important clarification: you are allowed to suggest a “remittitur,” which means giving the winning party the choice of a lower amount of damages or a new trial. With that clarification, the best answer–and the answer ultimately chosen by the Beaumont Court of Appeals in this revised opinion–is B. But you could make a plausible case for each of these answers.
A. $620,000. To support this answer you could cite the principle that the jury’s answer must be upheld as long as there is some evidence to support it. In fact, this was the answer the Beaumont Court of Appeals chose in its original opinion, reasoning that this amount was within the range of evidence presented at trial. But the problem with this answer is that the jury’s answer on damages was specifically broken down by time period, and there was no evidence that the Company would have made net profits of $620,000 during Year 1.
B. $206,767. There was evidence that this was the amount of net profits for Year 1. For this reason, this was the answer ultimately chosen by the Beaumont Court of Appeals (in a revised opinion), suggesting a remittitur of this amount.
C. $622,800. There was some evidence to support this amount–testimony from the Company’s damages expert–but the problem with this answer is that the jury is free to reject even un-contradicted expert testimony.
D. Zero dollars. It is true that there was legally insufficient evidence to support the amount of damages found by the jury. But when there is evidence of some amount of damages, the Court of Appeals typically will not reverse and render judgment for the defendant, but will reverse and remand for a new trial. Which leads to . . .
E. None of the above – order a new trial. The Court of Appeals could have chosen this answer, because there was insufficient evidence to support the amount of damages awarded by the jury. But this is why the remittitur procedure exists, to give the Court of Appeals the more efficient option of awarding a smaller amount of damages rather than subjecting the parties to the time and expense of a new trial.
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. He made up the part about the Lexus.
When an employer sues a former employee who went to a competitor, the employer almost always claims breach of fiduciary duty. But do employees really owe employers a fiduciary duty under Texas law? If the employee is also an officer or director, the answer is yes. But for ordinary employees, the answer is “sort of.” Employees owe employers what I call Fiduciary Duty Lite.
A true fiduciary duty arises from certain relationships where a person trusts and depends on another person to act on his behalf. The attorney-client relationship is the prime example. It includes a duty of loyalty, duty of disclosure, and duty of care, but the essence of the duty is that the fiduciary must put the other person’s interests ahead of his own.
So, for example, as a trial lawyer I have a fiduciary duty to tell my client if accepting a settlement offer is the best move, even if I would like the client to reject the offer so I can make more money on litigation fees (not that any lawyer would ever think like that).
No one seriously thinks that all employees owe the employer that kind of fiduciary duty. If employees had to put the employer’s interest ahead of their own, employees could never start looking for another job without telling the employer first.
But employees do sometimes act as agents of their employers, and generally an agent owes a fiduciary duty to her principal. So Texas courts have reasoned that an employee who acts as an agent of the employer owes the employer a fiduciary duty.
But Texas courts also recognize limits on an employee’s “fiduciary” duty. In Johnson v. Brewer & Pritchard the Texas Supreme Court said “courts have been and should be careful in defining the scope of the fiduciary obligations an employee owes when acting as the employer’s agent.” The court agreed with other states that “an employee does not owe an absolute duty of loyalty to his or her employer.” In other words, Fiduciary Duty Lite.
*Caveat: A claim for breach of fiduciary duty based on misappropriation of trade secrets is preempted by the trade secrets statute, as discussed here.
Wait a minute, you might say. Doesn’t a fiduciary have a duty of loyalty, a duty of full disclosure, and a duty to put the employer’s interests ahead of his own? How can taking active steps towards competing with the employer and concealing that from the employer possibly be consistent with a fiduciary duty, the highest legal duty known to man?
You would have a point. It doesn’t really make sense to call an employee a “fiduciary” (unless that employee is also an officer or director). Perhaps instead of saying that employees have a “fiduciary” duty and then curtailing that duty almost beyond recognition, Texas courts should have used some other terminology.
But it’s too late for that. “Fiduciary” is the word. So when the judge asks “are you telling me all employees have a fiduciary duty?” just say “they have Fiduciary Duty Lite” and cite fiveminutelaw.com. I look forward to seeing the term in future Texas court opinions.
*2nd Update: The Fifth Circuit weighed in on Fiduciary Duty Lite in D’Onofrio v. Vacation Publications (Apr. 23, 2018). The court held the employee did not breach her “limited” fiduciary duty by becoming part owner of a competing franchise, using a screenshot of sales records to demonstrate sales ability, and attending a training for a competitor.
*3rd Update: When the employee breaches his fiduciary duty, can the employer seek forfeiture of part of the employee’s salary? This was one of the issues in Orbison v. Ma-Tex Rope Co. (Tex. App.–Texarkana June 15, 2018).
Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. This post is dedicated to John Madden.
 Johnson v. Brewer & Pritchard, PC, 73 S.W.3d 193, 202 (Tex. 2002), citing Augat, Inc. v. Aegis, Inc., 409 Mass. 165, 565 N.E.2d 415 (1991).
 Johnson, 73 S.W.3d at 202; Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277, 284 (5th Cir. 2007); Ameristar Jet Charter, Inc. v. Cobbs, 184 S.W.3d 369, 373-74 (Tex. App.—Dallas 2006, no pet.); Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 512 (Tex. App.—Houston [1st Dist.] 2003, no pet.); M P I, Inc. v. Dupre, 596 S.W.2d 251, 254 (Tex. Civ. App.—Fort Worth 1980, writ ref’d n.r.e.).

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