In Rhymes v. Filter Res., Inc., a former employer sued a former employee and the employee’s new business for breach of contract, breach of fiduciary duty, and tortious interference related to the employee’s competition with the former employer after leaving its employ. No. 09-14-00482-CV, 2016 Tex. App. LEXIS 10394 (Tex. App.—Beaumont September 22, 2016, no pet. history). The jury found that the defendants tortiously interfered with the former employer’s relationships with customers, and the defendants appealed.
The court of appeals affirmed the breach of fiduciary duty finding against the employee as he formed his company and contacted his former employer’s customers before leaving his employ. The court then turned to the tortious interference finding. The court of appeals held that to prevail on a claim for tortious interference, a plaintiff must prove the following: “(1) there was a reasonable probability that the plaintiff would have entered into a business relationship with a third party; (2) the defendant either acted with a conscious desire to prevent the relationship from occurring or knew the interference was certain or substantially certain to occur as a result of the conduct; (3) the defendant’s conduct was independently tortious or unlawful; (4) the interference proximately caused the plaintiff injury; and (5) the plaintiff suffered actual damage or loss as a result.” Id. The court held that breach of fiduciary duty is an intentional tort, and also held that when “a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.”
The defendant argued that knowing participation could not support the jury’s finding of tortious interference because there was no separate question on that issue. The court of appeals disagreed. The jury was asked if “Rhymes and/or Rhymes Industrial intentionally interfere[d] with Filter Resources’ prospective contractual or business relations[.]” The trial court instructed the jury that tortious interference occurs, in part, when the party “acted with a conscious desire to prevent the relationship from occurring or knew that the interference was certain or substantially certain to occur as a result of his conduct[.]” The court of appeals concluded that the knowing participation claim was subsumed within this question/instruction:
To find that Industrial knowingly participated in Rhymes’s breach, the jury would have to find that (1) Industrial knew that Rhymes owed a duty to Filter and (2) Industrial was aware of its participation in the breach. Such findings are subsumed within the jury’s conclusion that Industrial knew that interference with Filter’s relationships was certain or substantially certain to occur as a result of Rhymes’s conduct. The trial court was not required to submit a separate question on knowing participation.
Finally, the defendant also contended that knowing participation cannot support tortious interference because it is a derivative tort rather than an independent tort. The court disagreed, holding that “‘Independently tortious’ does not mean that the plaintiff must prove an independent tort; rather, it means that the ‘defendant’s conduct would be actionable under a recognized tort.’” The court of appeals affirmed the jury’s liability verdict for the plaintiff.
In Zaidi v. Shah, business partners were involved in litigation regarding the purchase and sale of real property for the operation of a hospital. No. 14-14-00855-CV, 2016 Tex. App. LEXIS 9989 (Tex. App.—Houston [14th Dist.] September 8, 2016, no pet. history). The trial court found for the plaintiffs against all defendants, and awarded over $13 million dollars in damages. One of the plaintiffs’ claims was that the defendants breached a fiduciary duty, and the court found that the defendants, individually and collectively, owed fiduciary duties to the plaintiffs and committed various acts and omissions that would breach such duties, such as making material misrepresentations and failing to disclose material facts. One set of defendants challenged this holding because they did not owe fiduciary duties. The court of appeals held:
Fiduciary duties arise in two types of relationships. A confidential relationship—which may arise from a moral, social, domestic, or purely personal relationship of trust and confidence—may give rise to an informal fiduciary duty. An informal fiduciary duty will not be imposed in a business transaction unless the personal confidential relationship existed prior to, and apart from, “the agreement made the basis of the suit.”
The court noted that the plaintiffs neither alleged nor offered evidence of such a preexisting confidential relationship with any member of the appealing defendants. The court also noted that the plaintiffs did not dispute the absence of fiduciary duties, but instead argued only that one defendant was a fiduciary to many parties and that “all entities and individuals who conspired with, participated with, aided/abetted, or employed Zaidi while he was committing any breaches of fiduciary duty were also responsible for those breaches.” Id. The court of appeals noted that there was a difference between a breach-of-fiduciary-duty claim and an aiding-and-abetting breach-of-fiduciary duty claim:
But, to hold the General Partner, Chagla, and Prestige liable for conspiring in Zaidi’s breach of fiduciary duty is one theory of liability, and to hold them liable for breaching their own fiduciary duties is a distinct theory of liability. Regardless of whether there is legally sufficient evidence that Zaidi’s co-defendants conspired in his breach of fiduciary duty—a question we do not address—such evidence would not support a finding that each of the Turnaround Parties owed fiduciary duties to each of the Borrowers.
The court of appeals reversed and remanded the case for a new trial because the trial court in a bench trial failed to adequately present findings of fact and conclusions of law that linked its damages findings to valid causes of action.
In OrchestrateHR, Inc. v. Trombetta, a former employer sued its prior employee for breach of fiduciary duty and other related claims arising from the former employee’s competition with the former employer. No. 3:13-CV-2110-KS-BH, 2016 U.S. Dist. LEXIS 117986 (N.D. Tex. September 1, 2016). The former employer also sued other defendants for aiding and abetting the former employee in that breach of fiduciary duty. The opinion does not discuss the underlying facts and evidence in any detail. The defendants filed a motion for summary judgment, arguing that Texas does not recognize an aiding-and-abetting breach-of-fiduciary-duty claim. The district court denied this aspect of the motion, stating: “it is well-established under Texas law that third parties may be liable as a joint tortfeasor where they ‘knowingly participate in the breach of the duty of a fiduciary.’” Id.
In Wooters v. Unitech Int’l, Inc., a former employer, Unitech, sued its former employees for breach of fiduciary duty when it discovered that those employees had stolen its trade secrets in preparation for launching a competing company. No. 01-15-00174-CV, 2016 Tex. App. LEXIS 9610 (Tex. App.—Houston [1st Dist.] August 30, 2016, no pet. history). Unitech sued a third-party, Wooters, alleging that Wooters had conspired with the former employees to breach their fiduciary duties to Unitech, to steal Unitech’s trade secrets, and to unlawfully convert Unitech’s property. A jury found that Wooters had conspired to breach the former employees’ fiduciary duties to Unitech, and Wooters appealed.
The court of appeals first reviewed the law concerning conspiracy. The court stated:
Civil conspiracy is a combination by two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. The essential elements of a civil conspiracy are (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result…. Proof of a joint intent to engage in the conduct that resulted in the injury, without more, does not establish a cause of action for civil conspiracy. Civil conspiracy instead requires the specific intent to agree to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. ‘[T]he parties must be aware of the harm or wrongful conduct at the inception of the agreement.’ … Texas has recognized a cause of action for conspiracy to breach a fiduciary duty in transactions in which a third party knowingly participates in an employee’s breach of fiduciary duty during his employment and the third party improperly benefits from it.
The court also analyzed the competing interests regarding an employee’s fiduciary duties to its employer:
Because Unitech’s conspiracy claim against Wooters is based on the underlying wrongful conduct of breach of a fiduciary duty by an employee against an employer, we consider the law that defines the parameters of that duty. An employee has a duty to act primarily for the benefit of his employer in matters connected with his employment. An employee may not (1) appropriate the company’s trade secrets; (2) solicit the former employer’s customers while still working for his employer; (3) solicit the departure of other employees while still working for his employer; or (4) carry away confidential information…. But the basis for liability for breach of an employee’s duty is limited: it is “tempered by society’s legitimate interest in encouraging competition.” Thus, “‘[a]n at-will employee may properly plan to go into competition with his employer and may take active steps to do so while still employed’” and may secretly do so with other employees, without disclosing his plans to his employer. An employee also may use his general skills and knowledge obtained through employment to compete with the former employer. Thus, an employee’s duty to his employer does not require an employee to disclose his plans to compete; he may secretly join with other employees to plan a competing company without violating any duty to his employer.
The court then analyzed the evidence and found that there was no evidence that Wooters conspired to breach fiduciary duties. The court first noted that Wooters was not a party to any agreement between Unitech and its former employees and “those agreements cannot serve as the basis for determining whether Wooters engaged in a conspiracy to breach fiduciary duty under the common law.” Id. Rather, the court framed the issue thusly: “some evidence must show that Wooters knowingly participated in an unlawful breach of duty beyond lawful preparation to compete. Thus, we consider whether a reasonable jury could find that Wooters, a non-employee, agreed with Kutach and Pennington that they would breach the fiduciary duty they owed to Unitech and knowingly participated in that breach to his benefit in connection with the steps that they took toward realizing Infinity Subsea as a competing company.” Id. The reviewed a number of facts that implicated the former employees’ breaches of duty, but noted that no evidence showed that Wooters was involved in those specific actions and that most them occurred before Wooters was involved. Further, “[t]he evidence of Wooters’s participation in a plan to form Infinity Subsea and solicitation of investors toward that effort, without more, cannot support the conspiracy finding against Wooters, as it is evidence of plans to compete, which is not unlawful.” Id. The court also disregarded evidence of phone calls: “The phone records do not support an inference of knowing participation in a breach of fiduciary duty as more likely than an inference that the discussions revolved around formulating future business plans. The latter does not denote conspiracy to participate in tortious conduct.” Id. The court concluded: “Because no evidence demonstrates that Wooters knowingly participated in unlawful conduct for an improper gain beyond evidence of participation in plans to compete when Kutach and Pennington’s employment ended, no evidence supports a finding against Wooters for civil conspiracy to breach a fiduciary duty.”
Interest Note: These cases highlight a rather confusing area of law in Texas. There is a claim for knowing participation in Texas. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 514 (1942). The general elements for a knowing-participation claim are: 1) the existence of a fiduciary relationship; 2) the third party knew of the fiduciary relationship; and 3) the third party was aware it was participating in the breach of that fiduciary relationship. Meadows v. Harford Life Ins. Co., 492 F.3d 634, 639 (5th Cir. 2007).
There may be a recognized aiding-and-abetting breach-of-fiduciary-duty claim in Texas. The Texas Supreme Court has stated that it has not expressly adopted a claim for aiding and abetting outside the context of a fraud claim. See Ernst & Young v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 583 n. 7 (Tex. 2001); West Fork Advisors v. Sungard Consulting, 437 S.W.3d 917 (Tex. App.—Dallas 2014, no pet.). Notwithstanding, Texas courts have found such an action to exist. See Hendricks v. Thornton, 973 S.W.2d 348 (Tex. App.—Beaumont 1998, pet. denied); Floyd v. Hefner, 556 F.Supp.2d 617 (S.D. Tex. 2008). One court identified the elements for aiding and abetting as the defendant must act with unlawful intent and give substantial assistance and encouragement to a wrongdoer in a tortious act. West Fork Advisors, 437 S.W.3d at 921.
As noted above in the Wooters case, there is also a recognized civil conspiracy claim in Texas. But there is not any particularly compelling guidance on whether these claims are the same or different. And if they are different, what differences are there regarding the elements of each claim? There also seems to be some confusion as to whether a finding of conspiracy or aiding and abetting or knowing participation automatically imposes joint liability for all damages. Most of the cases seem to indicate that a separate damage finding is necessary for each defendant because the conspiracy may not proximately cause the same damages as the original bad act. See THPD, Inc. v. Continential Imports, Inc., 260 S.W.3d 593 (Tex. App.—Austin 2008, no pet.); Bunton v. Bentley, 176 SW.3d 1 (Tex. App.—Tyler 1999), aff’d in part, rev’d in part on other grounds, 914 S.W.3d 561 (Tex. 2002); Belz v. Belz, 667 S.W.2d 240 (Tex. App.—Dallas 1984, writ ref’d n.r.e.). For a great discussion of these forms of joint liability for breach of fiduciary duty, please see E. Link Beck, Joint and Several Liability, State Bar of Texas, 10th Annual Fiduciary Litigation Course (2015).