Texas Supreme Court Limits Fraud Claims by Terminated Employees

by Eversheds Sutherland (US) LLP

In a case of first impression, the Supreme Court of Texas declared that at-will employees may not bring an action for fraud that is contingent on the promise of continued at-will employment.  The Court also held that employees subject to a collective bargaining agreement are bound by the agreement’s exclusive remedies provision and are similarly barred from asserting fraud claims.  

Although the Court failed to entirely bar fraud claims relating to termination of employment, the decision is nevertheless consistent with the Court’s protection of the at-will doctrine and its refusal to expand the duties owed by employers when terminating employment.  Sawyer, et. al v. E. I. du Pont de Nemours & Co., No. 12-0626 (Tex. April 25, 2014).

Factual Background

The decision arises from a wrongful termination suit filed by 63 former E.I. du Pont de Nemours and Company (DuPont) employees who alleged the company fraudulently induced them to transfer to a DuPont subsidiary. Many of the 63 employees were covered by a collective bargaining agreement (CBA), which gave them the right to transfer to other DuPont jobs rather than move to the new subsidiary, DuPont Textiles and Interiors (DTI). The CBA also protected the employees against termination except for “just cause.”  

The employees were hesitant to move to DTI, fearing DuPont would sell the company, resulting in an adverse impact to their compensation and retirement benefits. DuPont allegedly assured the employees that DuPont would keep DTI, although it was already discussing a sale to another company. Shortly after the employees moved to DTI, DuPont sold the company to Koch, which reduced the employees’ retirement and compensation packages.  

The 63 employees filed suit against DuPont in the Southern District of Texas, alleging the company fraudulently induced them to terminate their employment and accept employment with DTI.  The employees claimed $23 million in damages. The trial court granted several motions for summary judgment by DuPont, holding that the 63 employees, including those subject to the CBA, were at-will employees and were therefore unable to assert fraud claims against the company under Texas law. The employees appealed, and the U.S. Court of Appeals for the Fifth Circuit certified questions to the Supreme Court of Texas on whether the employees’ fraud claims were valid under Texas law.1

At-Will Employees May Not Justifiably Rely on the Promise of Continued Employment.

The Texas Supreme Court rejected fraud claims by at-will employees when the claims are premised on the promise of continued at-will employment.  

In reaching its holding, the Court noted that the Texas legislature and Texas courts have long protected the right to terminate at-will employees for good cause, bad cause, or no cause at all. The Court therefore reasoned that a representation dependent on continued at-will employment cannot be material since employment may terminate at any time. Similarly, at-will employees may not justifiably rely on the promise of continued employment when employment is terminable at will. Without a material representation or detrimental reliance – essential elements of fraud – the employees’ claims cannot survive.

Moreover, as explained by the Court: “To allow a promise that is contingent on continued at-will employment to be enforced in a suit for fraud would mock the refusal of enforcement in a suit for breach of contract, making the non-existence of a contract action largely irrelevant, and would significantly impair the at-will doctrine.”

At-will employees are not barred entirely from asserting fraud claims, however. The Court acknowledged that representations made before employment may be actionable.

Employees Are Bound By Exclusive Remedies of a Collective Bargaining Agreement.

The Texas Supreme Court also rejected fraud claims by employees covered by a CBA when that agreement provides an exclusive remedies provision for wrongful termination.  

The Court first noted that the CBA at issue modified the at-will employment relationship by requiring DuPont to provide “just cause” for termination and providing “assertable [and] determinable” consequences if the company failed to comply with the just cause requirement. Nevertheless, the employees were barred from asserting fraud claims because the CBA established the exclusive remedy for wrongful discharge.  

The Court explained: “To allow a fraud action when the [e]mployees had a contractual remedy would not only be unnecessary, it would defeat the parties’ bargain…. [B]oth DuPont and the [e]mployees must be held to the CBA.”

The Sawyer Decision Is Consistent with the At-Will Doctrine and Limited Duties When Terminating Employment.

In answering the Fifth Circuit’s certified questions, the Texas Supreme Court followed well-established precedent, which protects the at-will employment relationship. Indeed, had the Court recognized fraud claims for at-will employees or those subject to a CBA, the Court risked undermining the nearly uniform Texas case law concerning employers’ limited duties to employees when terminating employment.

1The Fifth Circuit certified the following two questions:

1. Under Texas law, may at-will employees bring fraud claims against their employers for loss of their employment?

2. If the above question is answered in the negative, may employees covered under a 60-day cancellation-upon-notice collective bargaining agreement that limits the employer’s ability to discharge its employees only for just cause, bring Texas fraud claims against their employer based on allegations that the employer fraudulently induced them to terminate their employment?

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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