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Employee Exits: Preparations To Compete Despite Fiduciary Duties

Introduction

The dissolution of an employment relationship can provoke conflict, uncertainty, and stress. The stress can be heightened when the departing employee is likely to compete with the former employer, using knowledge and skill learned during the employment. This article addresses the legal framework that applies when at-will employees who are not subject to contractual restrictions exit an employment relationship and compete with their former employer.

Legal Duties of Employees: Agents as Fiduciaries

Employees owe legal duties to their employers. Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942). These duties result from the principal-agent relationship and arise from the law of agency. Id. This relationship imbues on the employee a duty to act primarily for the benefit of the employer in matters related to the agency. Johnson v. Brewer Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2000). Essentially, within the scope of an employee’s agency relationship, an employee owes fiduciary duties to an employer. Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 509 (Tex.App.-Houston [1st Dist.] 2003, no pet.) (citing Johnson at 200 (Tex. 2000)).

However, these duties generally do not survive termination of the employment relationship. “An employee may use his general knowledge, skill, and experience acquired in the former employment to compete.” Arizpe, 113 S.W.3d at 512 (citing Johnston v. American Speedreading Acad., Inc., 526 S.W.2d 163, 166 (Tex.Civ.App.-Dallas 1975, no writ)); see also Sands v. Estate of Buys, 160 S.W.3d 684, 687 (Tex.App.-Fort Worth 2005, no pet.); Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551 (Tex.App.-Dallas 1993, no writ); Am. Derringer Corp. v. Bond, 924 S.W.2d 773, 777 (Tex.App.-Waco 1996, no writ). Consequently, employees are entitled to compete with their former employers unless the employer and employee restrict the employee’s future conduct by way of a covenant not to compete. Texas courts have described this right to resign and compete against a former employer as a constitutional right. See Ledel v. Bill Hames Shows, Inc., 367 S.W.2d 182, 184 (Tex.Civ.App.-Fort Worth 1963, no writ).
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Written by Micah Miller | Posted in Employee Exits

Have you ever asked your financial advisor who they work for? Do they truly represent your best interests or those of the firm they work for? Are they acting on your behalf? Is their advice based on a fiduciary standard or a suitability standard? Do you know the difference?

These are very important questions to know the answers to before turning your hard-earned money over to someone to manage on your behalf. For many years, I have encouraged people who are looking for help managing their money to ask questions, lots of questions. One of the best questions you can ask is, “Do you act as a fiduciary?”

What is a Fiduciary Duty?

According to Nolo’s Plain-English Law Dictionary, a fiduciary duty is “a legal duty to act solely in another party’s interests.”¹ Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principal’s express, informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients.