At-Will Employees’ Fiduciary Obligations In Texas (Part II)

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

In 2010, the Fifth Circuit U.S. Court of Appeals affirmed a $1.43 million award against a company’s two former employees and the new company they formed to compete against their former employer. See Meaux Surface Protection, Inc. v. Fogleman, 607 F.3d 161 (5th Cir. 2010). Judge David Hittner was the trial court judge. The defendants challenged the damages award, claiming that there was no evidence their breaches of fiduciary duty caused plaintiff any harm. Id. at 169. The court rejected that argument, stating:

A jury may infer proximate cause from circumstantial evidence. . . . In Navigant, the evidence showed that the defendants solicited fellow employees to join them in defecting to a competitor. Id. at 290. Following the defendants’ departure, their erstwhile employer lost many key employees to the competitor and experienced a drop-off in business. Id. We held that the jury could reasonably conclude, based on this evidence, that the defendants’ actions sent the plaintiff’s business into a maelstrom. Id. at 290-91. “Alert avoidance of the classical fallacy of post hoc, ergo propter hoc does not require rejection of common sense inferences.” Id. at 291 (quoting Swanner v. United States, 406 F.2d 716, 718 (5th Cir. 1969)). The evidence showed that Fogleman and Kotrla set up CleanBlast several months before they resigned from Meaux. Defendants informed many of Meaux’s foremen and staff that they would form a new company, and indicated that several of Meaux’s jobs would be commandeered by CleanBlast. Patricia Duhon, an employee of Meaux, testified that prior to resigning, Kotrla actively recruited many of Meaux’s employees. Duhon’s testimony was that Kotrla said that once Meaux’s foremen were working for CleanBlast, CleanBlast would get business from Meaux’s clients, because the clients “pretty much followed the foremen.” Within days of Fogleman’s and Kotrla’s resignation from Meaux, several of Meaux’s work crews were working under CleanBlast’s ensign. In suspiciously short order, CleanBlast also procured insurance, master service agreements (“MSAs”), and job contracts with several of Meaux’s largest customers. Meaux’s sales to those customers sank like an anchor.

Defendants say Meaux’s fusillade of evidence fails to strike below the waterline because Ennemann did not have direct knowledge of the above facts, and because other factors could have caused a drop-off in business. Defendants note that 2006 was a bumper year for their industry due to repairs necessitated by hurricanes Katrina and Rita, and business was somewhat becalmed in 2007. Defendants also say that their lawful competition could have caused a drop in Meaux’s business, and note that there is a high degree of turnover in their industry. But defendants cannot navigate a perilous shoal: such arguments are matters for the trier of fact. They do not undermine the legal sufficiency of properly admitted evidence in support of the verdict.

Based on the evidence submitted at trial, the jury was well within its province to find that defendants’ recruitment of Meaux’s employees was not mere palaver, but rather, directly caused Meaux to suffer a loss in business. See id. at 290-91. The district court properly denied defendants’ motions for judgment as a matter of law as to causation.

Id. at 170.

The defendants also argued that the jury’s $1.43 million damages award for lost profits was too speculative to be affirmed. Id. The court rejected that argument too, stating:

The Texas Supreme Court instructs that “[r]ecovery of lost profits does not require that the loss be susceptible to exact calculation.” Szczepanik v. First S. Trust Co., 883 S.W.2d 648, 649 (Tex. 1994) (citing Tex. Instruments v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex. 1994)). Nevertheless, the party claiming injury must show more than some lost profits: “[t]he amount of the loss must be shown by competent evidence with reasonable certainty.” Id. This inquiry is fact intensive. Id. (citing Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992)). “At a minimum, opinions or estimates of lost profits must be based on objective facts, figures, or data from which the amount of lost profits may be ascertained.” Id. (quoting Heine, 835 S.W.2d at 84). The proper measure is lost net profits. Heine, 835 S.W.2d at 83 n. 1. Unless the issues concerning lost profits are “highly technical,” expert testimony is not required. Fairmont Supply Co. v. Hooks Indus., Inc., 177 S.W.3d 529, 532 n. 1 (Tex. App.–Houston [1st Dist.] 2005, pet. denied).

Texas law recognizes that for enterprises with a record of profitability, records of past profits, with other relevant facts and circumstances, may support a finding of lost profits. See Sw. Battery Corp. v. Owen, 131 Tex. 423, 115 S.W.2d 1097, 1098-99 (Tex. 1938). In contrast, new or unestablished ventures must meet more exacting standards to prove that the profits claimed are not “too uncertain or speculative.” See id. The “requirement of ‘reasonable certainty’ in the proof of lost profits is intended to be flexible enough to accommodate the myriad circumstances in which claims for lost profits arise.” Tex. Instruments, 877 S.W.2d at 279. The proper focus is not on the business entity, but on whether the activity in which it engages is generally profitable. See id. at 280.

The jury heard an estimate from Carsten Ennemann that Meaux had suffered a $2.3 million loss of treasure in 2007 thanks to their employees-turned-freebooters. Ennemann was personally familiar with the drop in business suffered by Meaux. Ennemann compared 2007 sales figures for several major clients with the budget projections which were prepared by Fogleman himself before he jumped ship. At trial, Fogleman stood by the projections as reasonable estimates of Meaux’s likely business, taking into account the factors he deemed relevant. Fogleman’s testimony supported Meaux’s case; he was keelhauled by his own windlass. In light of the evidence tending to show that defendants’ acts harmed Meaux, the jury was entitled to find that Fogleman’s and Kotrla’s acts in derogation of a fiduciary duty to Meaux harmed it to the tune of $1.43 million. See Navigant Consulting, 508 F.3d at 291.

Id. at 170-71.

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