Court Rules On Lost Profits, Lost Good Will, Disgorgement, and Forfeiture Remedies Against A Former Employee For Breach of Fiduciary Duty

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In Samuel D. Orbison & Am. Piping Inspection v. Ma-Tex Rope Co., a jury found that a former employee breached fiduciary duties by working for a competitor while being employed by the plaintiff. No. 06-17-00112-CV, 2018 Tex. App. LEXIS 4381 (Tex. App.—Texarkana June 15, 2018, no pet. history). The jury awarded lost profits, lost good will, and the court awarded other disgorgement and forfeiture relief. The defendant appealed.

The court of appeals first reversed the award of $2,000 in lost profits because there was not sufficient evidence to show how such an award was calculated. The court stated:

Matthews testified that Ma-Tex had lost profits of $2,321.00 based on the total amount API charged Halliburton Pinnacle and Arklatex. He provided no explanation of how these lost profits were determined, and Ma-Tex points to no other evidence in the record that provided an explanation of how the lost profits were determined.… [H]is testimony … does not provide this Court with the objective facts, figures, or data from which the amount of lost profits were calculated, nor the method he used to calculate them. Consequently, the evidence is legally insufficient to support the finding of $2,321.00 in lost profits.

Id. The court also reversed the award of damages due to lost good will because the evidence was simply too conclusory:

Matthews merely testified that the damage to Ma-Tex’s good will would be $10,000.00 a month for twelve months, totaling $120,000.00. Matthews never testified how he determined these estimates. Ma-Tex does not point to any testimony, and we have found none, that provides any objective facts, figures, or data in support of his opinion. Consequently, we find the evidence is legally insufficient to support the trial court’s finding of $120,000.00 in good will damages.

Id. The court then turned to the disgorgement damages and affirmed. The court discussed the concept of an employee breaching fiduciary duties:

Generally, the term fiduciary “applies to any person who occupies a position of peculiar confidence towards another” and “contemplates fair dealing and good faith.” It is well established in Texas that an employee may be in a fiduciary relationship with his or her employer. An employee may not, without breaching his fiduciary duties, “(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.” In an unchallenged conclusion of law, which is supported by the evidence, the trial court found Orbison breached his fiduciary duties in each of these ways.

Id. The court then discussed the legal standards for forfeiture/disgorgement relief:

When the court finds a breach of fiduciary duty, it may fashion an appropriate equitable remedy, including forfeiture of fees and disgorgement of any profit made at the expense of the employer. As the Texas Supreme Court noted, when an agent breaches his fiduciary duty, he is entitled to no compensation for conduct related to the breach, and if his breach is willful, “he is not entitled to compensation even for properly performed services.” The main purpose of these equitable remedies “is not to compensate an injured principal,” but rather “to protect relationships of trust by discouraging agents’ disloyalty.” Thus, a court “may disgorge all ill-gotten profits from a fiduciary when a fiduciary . . . usurps an opportunity properly belonging to a principal, or competes with a principal.” It may also require the fiduciary to forfeit any compensation for his work paid by the principal.

Id. Regarding the application of these standards to the fact, the court sustained the trial court’s award of a forfeiture of the compensation that the defendant was paid by the plaintiff and also a disgorgement of the compensation paid by the new employer to the defendant:

Since the trial court found that Orbison breached his fiduciary duties to Ma-Tex, it had discretion to impose appropriate equitable remedies for the breach. Here, it elected to require forfeiture of a portion of the compensation paid by Ma-Tex to Orbison during the period of time that Orbison was assisting API to set up its recertification shop and was soliciting two of Ma-Tex’s employee’s to work for API. In addition, the trial court required disgorgement of an amount equal to the compensation paid by API to Orbison during the time that Orbison was actively competing with Ma-Tex by using Ma-Tex’s confidential information to solicit its customers. Under Swinnea and the cases cited therein, we see no essential distinction between forfeiting a fee paid to an attorney or trustee who breaches his fiduciary duty and forfeiting the salary paid to an employee who does the same. In each instance the breaching fiduciary received compensation from the principal while breaching his trust. Neither do we see an essential distinction between disgorging a fee paid to, or the profit made by, an agent who usurps his principal’s business opportunity and disgorging an amount equal to the salary paid to a former employee by his new employer when the former employee uses confidential information and trade secrets to solicit the customers of his former employer. In each instance, the breaching fiduciary profited by, or received compensation for, breaching the trust of his principal. The same principles apply to each of these circumstances, and the remedies of forfeiture and disgorgement are “necessary to prevent such abuses of trust.” Consequently, we find that, under the circumstances of this case, Orbison was subject to the forfeiture of his salary paid by Ma-Tex and to the disgorgement of the salary paid to him by API while he was actively using Ma-Tex’s confidential information to solicit its customers.

Id.

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