Seyfarth Synopsis: A recent case out of the Court of Appeals in Houston, Texas highlights the challenges in proving liability against a third-party competitor for knowing participation in breach of duty of loyalty/fiduciary duty, tortious interference with contract, and conspiracy when the third-party competitor participates in the solicitation of current employees. The Court’s opinion emphasizes that although an employee owes a duty of loyalty to her current employer, current employees can generally plan to compete—and communicate among themselves to do so—while still employed. The decision further illustrates the difficulty in proving a third-party competitor participated in any unlawful plans to compete, without some evidence showing the competitor had knowledge of the departing employees’ restrictive covenants and directing the wrongful acts. As such, the opinion demonstrates the importance of enforceable non-compete, non-solicit, and confidentiality agreements with key employees.
One of the worst case scenarios for a company is an entire team—including high level executives—jumping ship to a competitor, and directly competing against the former employer in the same space and market. A recent decision from the First Circuit Court of Appeals in Houston, Texas provides an interesting look into just such a situation, and it reinforces that it is difficult for a company to recoup its damages after a max exodus of employees if it hasn’t taken the necessary precautions ahead of time.
Compassus is a nationwide provider of hospice care and related services. In early 2018, its Executive Director of its Houston, Texas programs began planning to leave the company. Eventually, she entered into discussions with Crossroads, one of Compassus’ competitors. She did so despite having a non-solicitation agreement that prohibited her from soliciting clients and coworkers while she worked at Compassus and for one year after she left the company. During her discussions with Crossroads—and while still employed by Compassus—the Executive Director engaged in the following actions:
- She emailed Crossroads with suggested salary range information for certain staff members at Compassus, including Compassus Medical Director. She represented that the Medical Director was “networked like you have no idea.”
- She introduced the Medical Director to Crossroads.
- She provided a list of Compassus employees who were willing to join Crossroads, as well as their salary requests and start dates.
- She requested a draft contract for the Medical Director’s review.
During this process, internal Crossroads emails stated that the Executive Director could “bring her whole team.”
Crossroads eventually hired the Executive Director, the Medical Director, and four other Compassus employees. The Executive Director began working for Crossroads as its Vice-President of Operations, and she subsequently became its Chief Operating Officer. Shortly thereafter, Crossroads opened a Houston, Texas office.
The former-Executive Director then hired another of Compassus’ executive directors as Crossroads Vice-President of Operations.
Compassus brought suit against the Executive Director, the Medical Director, and Crossroads. Compassus alleged that Crossroads knowingly participated in the Executive Director’s breach of her duty of loyalty/fiduciary duties, tortiously interfered with the Executive Director’s contract, and conspired with the Executive Director to commit wrongful acts against Compassus.
Crossroads subsequently moved to dismiss under the Texas’s anti-SLAPP (the Texas Citizens Participation Act). The district court denied Crossroad’s motion, and the company appealed to the First District Court of Appeals.
The Appellate Court’s Decision
The Court of Appeals reversed and remanded, finding that Compassus had provided no evidence that (1) Crossroads knowingly participated in the Executive Director’s scheme to solicit Compassus’ employees or (2) Crossroads knew about the non-solicit agreement. These findings precluded Compassus’ causes of action against Crossroads as a matter of law. In doing so, the Court reinforced several aspects of Texas law—and made clear that proving a company acted with knowing intent and actively participated in the poaching of a competitor’s employees is a heavy lift.
Notably features of the Court’s holding are:
- An employee has a duty to act primarily for the benefit of her employment in matters connected with her employment. Consequently, an employee may not, under such a duty of loyalty, (1) misappropriate the company’s trade secrets, (2) solicit the former employer’s customers while still working for her employer, (3) solicit the departure of other employees while still working for her employer, or (4) carry away confidential information.
- Additionally, when a third-party knowingly participates in a breach of fiduciary duty, the third-party becomes a joint tortfeasor and is also liable.
- However, an “at-will employee may properly plan to go into competition with his employer and may take active steps to do so while still employed,” including secretly planning to do so with other employers without disclosing those plans to his employer.
- In order for a third-party to be held liable for a former employee’s breach of fiduciary duties, the former employer must prove that the third-party participated in the wrongful acts. It is not enough that the third-party merely knew of the wrongful acts or even benefited from them. “The fact that Crossroads hired at-will employees who secretly agreed to compete with their employer and took the necessary steps to do so is not, in and of itself, evidence that Crossroads knowingly participated in [the Executive Director]’s alleged solicitation of those employees in violation of her employment agreement.”
Ultimately, the Court of Appeals found that Crossroads did not participate in any unlawful solicitation of Compassus’ employees because there was no evidence that Crossroads encouraged the Executive Director to take any actions precluded by law and did not knowingly encourage the Executive Director to breach her non-solicit agreement because there was no evidence that Crossroads even knew she had a non-solicit agreement. Accordingly, the Court reversed the district court and dismissed the claims against Crossroads.
The Court of Appeal’s decision reinforces that holding a competitor responsible for the wrongful acts of former employees is an uphill battle. Courts are generally reluctant to intervene in when they believe good old-fashioned American competition is at play, rather than wrongful or deceitful acts.
It is important to note, however that the analysis in this case centered on whether the executive had a duty of loyalty while working at her employer, whether that duty was breached, and whether the third-party company knowingly participated in that breach. The Executive Director did not have a non-compete agreement, which limited Compassus’ ability to preclude her from working at Crossroads.
To avoid battles such as the one in this case, employers can focus on protecting their business interests by reviewing their non-competition, non-solicit, and confidentiality agreements with their key employees. To avoid claims that a third-party competitor has no knowledge of a departing employee’s restrictive covenants, companies should also be ready to immediately send notice of an employee’s restrictive covenant obligations as soon as the company believes that an issue may arise—including sending notice to the new employer, if known.