Successful settlement of employer’s claims against competing company of former employees

September 24, 2021 – Today Hayes Hunter PC successfully settled a case on behalf of its client, a  medical apparel and supplies distributor, against its former employees who set up a competing firm in Ohio. After setting up the Ohio company, the former employees:

  • solicited the client’s customers;
  • misappropriated the client’s customer list;
  • acquired the client’s inventory under false pretenses;
  • stole the client’s trade secrets and confidential information;
  • began creating identical products using the client’s proprietary designs; and 
  • generally used the client’s resources and decades of hard work as a springboard to create a competing company.

Hayes Hunter intervened, filing a lawsuit in 2018 on behalf of the distributor. 

Hayes Hunter first argued that the former employees were its client’s agents, and therefore owed the client a fiduciary duty. For context, an agent is one who is authorized by another to transact business or manage some affair and to render an accounting of such transaction. Jorgensen v. Stuart Place Water Supply Corp., 676 S.W.2d 191 (Tex.App.—Corpus Christi 1984, no writ). It denotes a consensual relationship between two parties by which one acts on behalf of another subject to the other’s control. Tamburine v. Center Savings Association, 583 S.W.2d 942 (Tex. Civ. App.—Tyler 1979, no writ); Neeley v. Intercity Mgmt. Corp., 732 S.W.2d 644, 646 (Tex. App.—Corpus Christi 1987, no writ).

In addressing the scope of a fiduciary duty in the context of an agency relationship, the Texas Supreme Court has observed:

The agreement to act on behalf of the principal causes the agent to be a fiduciary, that is, a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking. Among the agent’s fiduciary duties to the principal is the duty to account for profits arising out of the 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, and the duty to deal fairly with the principal in all transactions between them.

Johnson73 S.W.3d at 200 (quoting Restatement (2d) of Agency § 13, cmt. a (1958) (holding that legal associate owes fiduciary duty to employer not to profit by referring potential client to firm other than associate’s employer).

Citing Johnson, the Houston Court of Appeals has held that “[w]hen a fiduciary relationship of agency exists between employee and employer, the employee has a duty to act primarily for the benefit of the employer in matters connected with his agency.” Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.—Houston [1st Dist.] 2003, no pet.)

The court also has noted that an agent who serves as a fiduciary owes his principal the duty not to compete with the principal on his own account in matters relating to the subject matter of the agency, as well as the duty to deal fairly with the principal in all transactions between them. Id. at 510. 

Additionally, a fiduciary has a duty to deal openly and to disclose fully to his employer information that affects his employer’s business. Id.; see also Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 513 (1942) (“It is the duty of a fiduciary to deal openly, and to make full disclosure to the party with whom he stands in such relationship.”). 

Furthermore, an agent who uses his position to gain a business opportunity belonging to the employer commits an actionable wrong. Abetter Trucking Co., 113 S.W.3d at 510 (citing Bray v. Squires, 702 S.W.2d 266, 270 (Tex. App.—Houston [1st Dist.] 1985, no writ)).

An example from a 2005 case is helpful to understand why the employees were liable to Hayes Hunter’s client. In Daniel v. Falcon Interest Realty Corp., 190 S.W.3d 177 (Tex. App.—Houston [1st Dist.] 2005, no pet.), Falcon hired Guy Daniel and his construction company to serve as a project manager. His duties to solicit bids, set the scope of work for each subcontractor, review the bids, let the contracts, and oversee people working on the project caused Mr. Daniel to occupy a position of peculiar confidence towards Falcon such that he owed Falcon a fiduciary duty. Id. at 185-86.

Daniel violated those duties when he solicited his mother-in-law and father-in-law to form B & L (another company) to bid on and perform work for the project in order to “make money on the side.” Daniel and his wife were involved in the operation of B & L. Daniel approved bids and paid invoices submitted by B & L and supervised B & L employees at the project. However, Daniel never disclosed his relationship with B & L to Falcon.

In affirming the trial court’s order for Daniel to disgorge the profit he received as a result of his breach of fiduciary duty owed to Falcon, the Houston Court of Appeals noted that “[a] fiduciary must account for, and yield to the beneficiary, any profit he makes as a result of his breach of fiduciary duty. Id. at 187 (citing Int’l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576–77 (Tex. 1963)). “It is the law that in such instances if the fiduciary takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal, without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received.” Id. (quoting Kinzbach Tool, 160 S.W.2d at 514).

By selling competing goods while still working for Hayes Hunter’s client, the former employees violated its trust and made undisclosed profits in excess of those that it was entitled to receive under the parties’ agreements. Therefore, Hayes Hunter argued, the former employees owed their client the equitable duty to account for those profits.

After three years of litigation (and two appeals to the Court of Appeals for the Fourteenth District of the State of Texas), the client settled with its former employees for an undisclosed amount. Congratulations to Hayes Hunter PC on its accomplishment!

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Charles Hunter