Rash v. J.V. Intermediate, Ltd.

Former employee (D) v. Former employer (P)

498 F.3d 1201 (10th Cir. 2007)

NATURE OF CASE: Appeal in action for breach of fiduciary duties. [The complete procedural posture is not presented in the casebook extract.]

FACT SUMMARY: J.V. Intermediate, Ltd. and J. V. Industrial Companies, Ltd. (collectively, JVIC) (P) contended that its former employee, Rash (D), by owning a company that competed and contracted with JVIC (P) without JVIC’s (P) knowledge, breached his fiduciary duties to JVIC (P).

RULE OF LAW

An employee has a fiduciary duty, as the employer’s agent, to disclose to the employer what the employer, as principal, has a right to know.

FACTS: J.V. Intermediate, Ltd. and J.V. Industrial Companies, Ltd. (collectively, JVIC) (P) in 1999 hired Rash (D) to start and manage a Tulsa, Oklahoma, branch of JVIC’s (P) business. For the first two years of the employment relationship, Rash (D) had an employment contract that provided he would “devote [his] full work time and efforts” to JVIC (P). Starting in 2001, Rash (D), without telling JVIC (P) or its president, Vardell, became the owner of several businesses, including Total Industrial Plant Services, Inc. (TIPS), a scaffolding business. At that time, JVIC (P) was not in the scaffolding line of business. Between 2001 and 2004, TIPS bid on projects for JVIC-Tulsa, which often was awarded the business, and during this time period, JVIC (P) paid TIPS over $1 million. At some point during Rash’s (D) tenure, JVIC (P) started a scaffolding business, but JVIC-Tulsa never used that business. JVIC (P) sued Rash (D) for breach of fiduciary duties, claiming Rash (D) had a duty to disclose to JVIC (P) his interest in TIPS. The federal district court, interpreting state law, rendered an opinion, and the court of appeals granted review. [The complete procedural posture is not presented in the casebook extract.]

ISSUE: Does an employee have a fiduciary duty, as the employer’s agent, to disclose to the employer what the employer, as principal, has a right to know?

HOLDING AND DECISION: [Judge not stated in casebook excerpt.] Yes. An employee has a fiduciary duty, as the employer’s agent, to disclose to the employer what the employer, as principal, has a right to know. First, Rash (D) was JVIC’s (P) agent, as he was the principal operator and manager of the Tulsa division, and he had contractually agreed to perform the duties of an agent, having agreed to devote his full work time and efforts to JVIC’s (P) business. Further, Rash (D) does not deny he was JVIC’s (P) agent, but instead argues that the scope of his agency did not include scaffolding-related ventures. Under state law, which has adopted the Restatement (Second) of Agency, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency, unless the parties otherwise agree. Accordingly, Rash (D) owed a fiduciary duty to JVIC (P), and the issue becomes what was the scope of that duty. Under state law, the inquiry is whether a fiduciary duty exists with respect to a particular occurrence or transaction. Here, under the particular circumstances of the case, Rash (D) violated his fiduciary duty by failing to disclose his interest in TIPS to JVIC (P). This conclusion flows from the duty an employee has to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business. Although an employee does not have an absolute duty of loyalty and may prepare to start a competing business while still employed, at the very least, an employee’s independent enterprise cannot compete or contract with the employer without the employer’s full knowledge. Even if, as Rash (D) contends, Vardell told him he had no problem with Rash (D) forming a business that might contract with JVIC (P), and even if Rash (D) owed no specific duty to JVIC (P) regarding its scaffolding business, Rash (D) nonetheless had a general duty of full disclosure respecting matters affecting JVIC’s (P) business. Thus, by failing to inform JVIC (P) of TIPS, Rash (D) breached that general fiduciary duty as a matter of law. [The outcome of the case is not presented in the casebook excerpt.]

ANALYSIS

As this case illustrates, whether an agency relationship is created in the employment context depends on the particular facts of the case. Here, the court found it significant that Rash (D) was hired to build the Tulsa division of JVIC (P) from scratch and had sole management responsibilities for operations at the branch; that he was charged with finding facilities to operate the business, hiring and training employees, gathering tools and equipment for the branch, and promoting the new venture; that he solicited and received bids for subcontracts and directly received the invoices for those bids; that he set the rates charged to JVIC’s (P) customers for work performed by the Tulsa division and kept track of all the costs of the division; and that, in general, he “ran the shop” and was “responsible for generating business for the Tulsa upstart.” The key for the court seems to be that the arrangement between Rash (D) and JVIC (P) was not merely an arm’s length business arrangement between the two parties entered for their mutual benefit, but instead was a formal employer/employee relationship. It seems that in the court’s view, the formality of the relationship created a relationship of special trust between the parties, which in turn supported fiduciary duties being owed by Rash (D) to JVIC (P).

Quicknotes

AGENT An individual who has the authority to act on behalf of another.

BREACH OF FIDUCIARY DUTY The failure of a fiduciary to observe the standard of care exercised by professionals of similar education and experience.

FIDUCIARY DUTY A legal obligation to act for the benefit of another, including subordinating one’s personal interests to that of the other person.

RESTATEMENT (SECOND) OF AGENCY, § 1 Agency is a fiduciary relation resulting from consent of one person to have another act on his behalf.