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.
Texas courts have defined certain things an employee can and cannot do. While still working for the employer, an employee cannot:
- Use the employer’s confidential information or trade secrets
- Cross the line between preparing to compete and actually competing
- Solicit the employer’s customers or other employees
- Accept a fee for diverting a business opportunity away from the employer
- Use the employer’s resources to establish a competing business
On the other hand, Fiduciary Duty Lite recognizes certain things an employee is allowed to do:
- Make plans to compete with the employer
- Take “active steps” in pursuit of the plan
- Join with other employees in the plan
- Form a competing business
- Conceal all of the above from the employer
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.
*Update 1: In Eurecat US, Inc. v. Marklund, 527 S.W.3d 367, 380-81 (Tex. App.—Houston [14th Dist.] 2017, no pet.), the court affirmed a jury instruction on Fiduciary Duty Lite that instructed the jury that an at-will employee may secretly join with other employees in making plans to compete while still employed, but may not misappropriate trade secrets, solicit customers, or carry away lists of customers. The court also said evidence that one employee suggested to another they form a competing business reflected actions at-will employees are permitted to take under Texas law. Id. at 382. Furthermore, the fact that the two employees collectively began investigating and planning for a competing business did not conclusively establish that the employees breached their fiduciary duties to the employer. Id. at 385.
*Update 2: The El Paso Court of Appeals endorsed the concept of “Fiduciary Duty Lite” (sort of) in Salas v. Total Air Services, 550 S.W.3d 683, 691 (Tex. App.—El Paso 2018, no pet.), saying the employee in that case owed “some measure of a fiduciary duty” to the employer. That strikes me as kind of like saying someone is “a little bit pregnant.”
*Update 3: The Fifth Circuit weighed in on Fiduciary Duty Lite in D’Onofrio v. Vacation Publications, 888 F.3d 197, 216-17 (5th Cir. 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.
*Update 4: 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., 553 S.W.3d 17 (Tex. App.—Texarkana 2018, pet. denied).
*Update 5: In Crossroads Hospice, Inc. v. FC Compassus, LLC, No. 01-19-00008-CV, 2020 WL 1264188, at *6-8 (Tex. App.—Houston [1st Dist.] March 17, 2020, no pet.), judgment vacated on settlement but opinion not withdrawn, 2020 WL 3866902 (July 9, 2020), the court held that the first employer failed to establish a prima facie case (under the TCPA) that the second employer knowingly participated in the employee’s alleged unlawful solicitations of the first employer’s at-will employees.
*Update 6: There are limits to the “make plans to compete and conceal them from the employer” rule. In CyberX Group, LLC v. Pearson, No. 3:20-CV-2501-B, 2021 WL 1966813, at *8-9 (N.D. Tex. May 17, 2021), the court rejected the defendants’ argument that they merely made plans to compete. First, evidence of customer solicitation reflected “competition beyond mere planning.” Second, the court cited general principles of fiduciary duty, including a duty not to conceal matters that might influence an employee’s actions to the employer’s prejudice. Evidence of intentionally delaying delivery of a product, misleading the employer, and using the employer’s resources supported a finding of breach of fiduciary duty. Id. at *9. These facts do seem sufficient to establish a breach, but I think it was a mistake for the court to cite the general duty of disclosure that a true fiduciary owes. That level of duty is inconsistent with the more limited Fiduciary Duty Lite that applies to employees.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas Super Lawyer® for Business Litigation in 2020 and 2021. This post is dedicated to John Madden.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.
 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.).