Texas Non-Compete Law Blog : Texas Non-Compete Agreements Lawyer & Attorney : K&L Gates : Trade Secret Litigation : Serving Austin, Dallas, San Antonio

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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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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