Most business owners know they will be held responsible for their mistakes. This is true in a properly functioning market economy (i.e., poorly served customers leave) and a just legal system. What gets less attention is a business’s legal exposure for the mistakes of others. This article will discuss four common situations in which business owners can be responsible for the mistakes of others: vicarious liability; conspiracy; aiding and abetting; and aiding and abetting breach of fiduciary duty.
Vicarious liability is the most common form of joint liability. Vicarious liability includes an employer’s liability for the acts of its employees. While employees are at work and pursuing the business of their employer, the employer is legally responsible for their mistakes.
The simplest example of this type of liability is the liability of UPS for the negligent driving of its delivery employees. If the negligence of a UPS employee causes a car accident while the employee is delivering packages, UPS is legally responsible for the driver’s negligence. This means that a person injured in the accident can sue UPS directly for his/her injuries.
In the case of vicarious liability, the employer’s liability remains even when the employer has good policies and procedures and the employee has been properly trained. While car accidents make for an easy example, vicarious liability extends to all types of wrongful conduct including misrepresentations, fraud and the violation of consumer protection laws such as the Texas Deceptive Trade Practices Act.
The second most common form of joint liability is conspiracy. While the term conspiracy is commonly used, the legal concept is complex and, in the opinion of this author, not well-defined.
Generally, in Texas, a person can be found to be part of a conspiracy when a person joins with two or more persons to accomplish an unlawful purpose, or to accomplish a lawful purpose by an unlawful means; the members agreed on what they wanted to achieve or a course of action, and one or more members committed an unlawful, overt act to achieve the purpose or as part of the course of action. Got that?
In the business context, conspiracy liability cannot be imposed on persons who are part of the same company. Employees cannot conspire to commit a fraud with their employer. The employer is just vicariously liable for the fraud. Likewise, a company president cannot conspire with the company he runs.
Also, because conspiracy involves an intent to harm, there cannot be a conspiracy to commit a negligent act. As an example, a conspiracy could involve a building owner and a contractor hiding a defect in the owner’s building from a potential purchaser, such as painting over water damage or covering up evidence of foundation damage. Examples of intentional acts that could give rise to a conspiracy allegation also include defamation or misappropriation of trade secrets.
Texas recognizes a general form of aiding and abetting liability, which applies to most forms of tort liability (any legal liability not created by a contract). The Texas Supreme Court has not adopted a single test for aiding and abetting liability.
However, the most accepted test requires the following: The person the defendant aids performed a wrongful act that causes injury; the defendant was generally aware of his or her role as part of the illegal activity when assistance was being provided; and the defendant knowingly and substantially assisted the illegal activity.
While this definition sounds like the legal definition of conspiracy, there are important differences — the most important being that courts have held that “general awareness of the illegal activity” does not require the defendant to have “wrongful intent.” Therefore, an allegation of aiding and abetting can lower the burden for imposing joint and several liability.
A claim for aiding and abetting breach of fiduciary duty arises when a breach of fiduciary duty has occurred by a third party, the person aiding the third party is aware of the fiduciary relationship between the third party and another, and the aider is aware he is participating in the breach of fiduciary duty.
A common situation where claims for such aiding and abetting liability can arise is when a new employee joins a company from a competitor. If the new hire brings trade secrets with them (which includes nonpublic information used to create a competitive advantage — for example, a customer list), the business has exposure if the company is aware of the employee’s former employment, the use of trade secrets (a customer list from a former employer), and the company participates in the breach (e.g., reimburses the new employee for taking a customer from the former employer’s customer list to lunch).
Given the proliferation of knowledge-based jobs (meaning jobs where what you know that others don’t is your competitive advantage), employers should consider a process for screening and attempting to limit exposure to aiding and abetting breach of fiduciary duty claims in the new hire context.
This article is not exhaustive, but hopefully will better enable you to evaluate when you can be responsible for other people’s mistakes or intentional wrongs. Of course, the best advice is to keep good company.
Or, to paraphrase an often repeated saying, “Show me your associates and I will tell you your future.”