Key Business Court Decisions

Constructive Fraud In The Absence of A Fiduciary Relationship

Where an individual owes a fiduciary duty to his employer if the individual breaches that duty while working for a competitor, the competitor may be vicariously liable to the employer for the individual’s breach.  Global Textile Alliance, Inc. v. TDI Worldwide, LLC, et al, 2018 NCBC 121.  (J. McGuire).  This is so, according to the Business Court, even if the competitor itself owed no fiduciary duty to the employer.

Defendant Ryan was the Plaintiff’s legal representative and head manager of Plaintiff’s operations in China. As part of his job responsibilities in China, Ryan negotiated and entered into contracts on Plaintiff’s behalf with various production mills and cut-and-sew companies, which would produce fabrics and other items for Plaintiff to use in its home furnishing products in the United States.  While in China, Ryan began a number of different companies which competed with the Plaintiff, taking away business opportunities that Plaintiff alleged it otherwise would have conducted.   Plaintiff sued Ryan, the competing companies and others for numerous claims, including a claim for breach of fiduciary duty against Ryan and claims for constructive fraud against Ryan and the competing companies for constructive fraud.  All defendants moved to dismiss Plaintiff’s claims pursuant to N.C.R.C.P. 12(b)(6).

In denying the motions nearly in their entirety, the Court began its analysis by acknowledging that it had determined, sua sponte and without any argument from the parties, that Plaintiff’s complaint sufficiently alleged that Ryan was an agent of the competing companies.  (Opinion, ¶22).  As a result, the Court concluded that any claim that survived against Ryan necessarily survived against the competing companies based on a theory of vicarious liability.  (Id., ¶27).

Finding that “extraordinary circumstances” existed in Ryan’s employment with Plaintiff, the Court determined Ryan had a fiduciary relationship with Plaintiff and that Plaintiff had properly pled claims for breach of fiduciary duty and constructive fraud against Ryan personally.  (Opinion, ¶33).     Thereafter, the Court summarily determined that because Ryan’s actions were made within the scope of his agency for the competing companies, it necessarily followed that the competing companies were liable for Ryan’s constructive fraud under a vicarious liability theory.  (Id., ¶36).  In reaching this decision, the Court noted that Plaintiff had made no allegation that the competing companies had any fiduciary relationship to Plaintiff, owed any fiduciary duties to Plaintiff, or directly participated in any fraudulent conduct by acting through their boards. (Id., ¶23).   Without deciding whether Ryan’s actions gave rise to any direct claim against the competing companies (Id., ¶26), the Court denied the companies’ motions to dismiss finding, at a minimum, they were vicariously liable for Ryan’s constructive fraud.  (Id., ¶ 36).  Under this same analysis, the competing companies would presumably be vicariously liable for Ryan’s breach of fiduciary duty.

Based upon the Global Textile decision, a company would be well-served to determine whether any potential employee possess a fiduciary relationship with her current employer, less it finds itself liable for the employee’s breach of her fiduciary duties even if the company itself has no fiduciary relationship with the employer.

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