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Suing employees for breach of fiduciary duty

Fiduciary duties

People who are in a fiduciary relationship (that is, in a position of trust), such as a corporation’s high-level employee, owe a number of duties to their employers, such as acting in their employer’s best interest, free of conflicts of interest and self-dealing. Thus, corporate employees cannot use corporate assets or property for their personal purposes, or take for themselves corporate opportunities.

Arizona case law

Some recent Arizona court cases have defined how breach of fiduciary duty is interpreted under state law. In 2010, the Court of Appeals decided Taser Intern., Inc. v. Ward, in which a former employer brought an action against a former employee for, among other things, breach of fiduciary duty. In this case, the company’s vice president resigned voluntarily and formed his own company, which then sold products similar to his old company. He had begun preparations for this endeavor while employed for his former company. His former company sued him. The trial court summarily granted judgment to the former company and the employee appealed.

The appellate court held that, absent a restrictive covenant in an employment contract, the employee is still precluded from actually competing against his company while still employed, but he is not precluded from preparing to compete. The court stated that the determination of what is actual competition versus preparation involves a factual inquiry and, therefore, the trial court was incorrect when it awarded summary judgment. The case was reversed and sent back to the trial court for a jury trial.

This case point out the importance of the employer using contractual restrictions to protect its interests and property.

In 2013, the Court of Appeals decided Orca Communications Unlimited, LLC v. Noder, in which a company sued its former president, who had resigned and formed her own company, which offered similar services as his former company. The former company alleged that the former employee had breached her employment contract and had engaged in several business torts, including breach of fiduciary duty. The trial court dismissed the complaint for failure to state a claim. The company appealed.

The appellate court decided that the former president owed her former company a fiduciary duty that prohibited her from competing against her company while still employed, but that the breach of contract claim was properly dismissed, as it was based upon provisions in a confidentiality agreement that were unenforceable. Among other conclusions, the court specifically decided that the definition of “confidential information” in the agreement, which forbade the employee was using the same, was overbroad, in that it included information that was available through “published literature.” Such information, easily or readily available to the public, remained public knowledge.

This case illustrates the need for employers to make sure that the restrictions that they do incorporate into their employment contracts are reasonable and necessary. To put it into the language used by the court, “A restrictive covenant is unreasonable and will not be enforced (1) if the restraint is greater than necessary to protect the employer’s legitimate interest; or (2) if that interest is outweighed by the hardship to the employee and the likely injury to the public” (quoting from the 1999 case of Valley Med. Specialist v. Farber).

Former employees are not the only possible targets of litigation. Employers who recruit former employees and encourage or facilitate the former employees’ breaches of fiduciary or interference with contract can also be liable for compensatory and punitive damages, as occurred in the 2008 case, Sec. Title Agency, Inc. v. Pope, 219 Ariz. 480, 490, 200 P.3d 977, 987 (Ariz. Ct. App. 2008).

Conclusion

If you are an employer who wants to make sure that employees properly maintain their fiduciary duties, including their duty not to compete, and their duty not to reveal confidential information, you should contact an experienced commercial law attorney, who can guide you in how you can best write and enforce your employment agreements.