Do Employees Owe a Duty of Loyalty to the Employer in Texas?

The short answer, expanded

Every Texas employee owes the employer a duty of loyalty while employed, because the employee is the employer's agent. The duty is real and it is enforceable, but it is also limited in a way that surprises owners. It does not stop an employee from deciding to leave, from forming a company, from talking to a landlord or a bank, or from telling a co-worker over lunch that he is thinking about it. It stops the employee from using the current job against the current employer: taking its secrets, diverting its customers while still drawing a paycheck, and spending its money or its people's time on the new venture.

The Texas Supreme Court's most-cited statement of the rule came in Johnson v. Brewer & Pritchard, P.C. (2002). The court declined to announce a broad rule for every employee who diverts a business opportunity, and it cautioned against the idea that an employment relationship alone creates fiduciary duties. But it approved the familiar line: an at-will employee may properly plan to go into competition with the employer and may take active steps to do so while still employed, and has no general duty to disclose those plans; the employee may not appropriate the employer's trade secrets, may not solicit the employer's customers while still working for the employer, may not carry away certain information such as customer lists, and may not act for future interests by using the employer's funds or employees for personal gain. The case itself held that a law firm associate breached a duty by arranging to profit from referring a firm client elsewhere.

What an employee may do before leaving

• Decide to leave and set a date, without telling the employer.
• Form an entity, open a bank account, sign a lease, build a website, and line up financing for the new business.
• Accept an offer from a competitor and negotiate its terms.
• Tell co-workers that he or she is leaving, and in general terms where. Texas courts have treated discussions among employees about leaving together as preparation rather than breach, so long as the departing employee is not using the employer's time and resources to recruit a team or inducing colleagues to breach their own obligations.
• Use general skills, knowledge and industry experience acquired on the job. Those belong to the employee.

What an employee may not do before leaving

• Solicit the employer's customers for the new venture. This is the clearest breach. Telling a customer “I am leaving, come with me” before the last day is a diversion of the employer's business by its own agent. Informing customers after departure is a different question, governed by any non-solicitation agreement and by trade secret law.
• Take or copy confidential information. Customer lists, pricing, margins, pipeline reports, supplier terms, formulas and code. Emailing them to a personal address or syncing them to personal storage is the act that converts a loyalty question into a trade secret case; see whether an employee can take the customer list.
• Divert a business opportunity the employer was pursuing. Steering a prospect the employee learned about at work to the new venture, or delaying a deal so it closes after the employee leaves.
• Use the employer's resources. Working on the new business during paid hours, using company equipment, accounts or staff, or running the new venture's expenses through the employer.
• Misrepresent or conceal in a way that harms the employer. Lying when asked directly about plans, in a way the employer relies on, or sabotaging work in progress.

Officers, managers and other fiduciaries

The analysis changes for employees who are also officers, directors, managing members or hold a position of trust in which they act for the company with discretion. Those people owe formal fiduciary duties of loyalty and care, which include a duty of candor and a duty not to usurp corporate opportunities, and the duty of disclosure that an ordinary employee lacks. A chief executive who quietly builds a competing company is in a very different position from a sales representative who does the same thing. Who owes which duties is explained in who owes a fiduciary duty in a Texas business, and a departing executive's exposure under his or her employment agreement is addressed in the company's options when an executive breaches an employment agreement.

What the employer can recover

A breach of the duty of loyalty is a tort, and the remedies track the harm and the gain:

• Actual damages for the business lost through pre-departure solicitation or diversion, measured by lost profits on the accounts or opportunities taken.
• Disgorgement of what the employee gained from the breach, including profits earned on diverted business. Texas equity allows forfeiture of compensation paid during the period of disloyalty for employees who are fiduciaries, and the remedies for fiduciary breaches are described in remedies for breach of fiduciary duty in Texas.
• Injunctive relief under the Texas Uniform Trade Secrets Act where confidential information was taken, which also brings its own damages and, for willful and malicious misappropriation, exemplary damages and attorney's fees.
• Exemplary damages on the tort claim where the breach was intentional and the statutory requirements are met.

Limitations under Civil Practice and Remedies Code section 16.004 is four years for breach of fiduciary duty, and three years for a trade secret claim under section 16.010 from discovery of the misappropriation. The practical deadline is much shorter, because the injunction that preserves the customer relationships has to be sought within days or weeks, not years.

What the employee will argue

• It was preparation, not competition. Forming the entity, the lease and the website are all permitted, and the customer calls happened after the last day.
• The customers came on their own. No solicitation; the customers heard the employee was leaving and followed. The timing and content of the communications decide this, which is why the employer's first move is to preserve them.
• The information was not confidential. Customer names are known in the industry, pricing is shared with customers, nothing was marked or protected.
• No fiduciary status. A line employee is not a fiduciary, so the broad duties of candor and disclosure, and the forfeiture remedy, do not apply.
• No damages. The employer kept the customers, or lost them for reasons unrelated to the employee.

Example

Suppose a Dallas commercial landscaping company's operations manager decides to start his own firm. Over three months, while still employed, he forms an LLC, buys a truck, and builds a website, none of which he mentions at work. He also tells four of the company's largest property-management customers that he is leaving and that his new company will do the same work for 15 percent less, and he asks two crew leaders to come with him and bring their crews. He gives notice, and the four customers cancel the week after he leaves.

The LLC, the truck and the website were lawful preparation. The customer conversations were not: he solicited the employer's customers while still employed, and the price comparison used margin information he knew only from his position. Recruiting the crew leaders on company time, if that is what happened, adds the use of the employer's resources. The company has a duty of loyalty claim for the lost profits on the four accounts, and a trade secret claim if the pricing data qualifies. It has no claim against him for competing after his last day, because he signed nothing, and no claim for the crews who chose to follow him unless he induced them to breach their own agreements.

What to do when you suspect it

1. Preserve the employee's email, messages, CRM activity and device before any confrontation, and pull the access logs for the last 90 days.
2. Do not interrogate the employee without a plan; a denial that later proves false is useful, but an unplanned meeting can tip off the destruction of evidence.
3. Identify the customers, opportunities and co-workers involved, and the communications with each, with dates.
4. Decide quickly whether the facts support an injunction under trade secret law, which depends on confidential information having been taken, or only a damages claim for pre-departure solicitation.
5. Run the exit protocol on the way out: access cutoff, device collection, written reminder of any signed obligations, and a signed certificate of non-retention.

A litigator who handles departing-employee disputes can tell an owner, usually from the first set of emails, whether the conduct crossed from preparation into breach and which remedy fits. Tina Wysk represents employers in duty of loyalty, trade secret and non-compete disputes in Dallas state and federal courts.