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Misappropriation claims present special challenges

brier-michaeliPhones, iCloud, Google Docs — these days, there are any number of remote ways through which a departing employee can, wittingly or unwittingly, retain access to the documents of a former employer.

Understandably, many company executives are deeply concerned about the prospect of ex-employees retaining access to such information, so they draft employment agreements to require the return not only of physical company property, but of every bit of company-related electronic data on personal computers, iPhones and “cloud” accounts.

But, of course, just because a departing employee’s contract includes such a “return” provision does not mean the employee will abide by it, especially when the departure was involuntary.

With modern forensic technology, it often isn’t hard to tell when an ex-employee continues to retain access to company electronic information. When they do, lawsuits frequently follow. But Massachusetts companies seeking damages for misappropriation face formidable obstacles given a recent decision by the state’s highest court.

To recover damages for misappropriation of confidential information in Massachusetts, a plaintiff must show (1) the existence of confidential information; (2) reasonable efforts were made to preserve the confidentiality of the information; and (3) the defendant used improper means, in breach of a confidential relationship, to acquire and use the trade secret. (See Incase Inc. v. Timex Corp., 488 F.3d 46 (1st Cir. 2007).)

The standard under the Uniform Trade Secrets Act adopted in many states is similar.

A vigilant employer who has key employees sign confidentiality agreements and who has genuine confidential information to protect should be able to establish the first two elements. Moreover, modern computer forensics may make proof of the acquisition of the employer’s confidential information straightforward.

The rub often lies in proving the final element — the use of the trade secret or confidential information — because hard evidence that a defendant used the information in question can often be hard to come by: both the defendant and the recipients of any such information have an obvious incentive not to abide its use, and electronic evidence may well not exist.

Without evidence of use, even an otherwise solid misappropriation claim is liable to dismissal on summary judgment.

That reality has led some enterprising employers to seek an alternative to the traditional tort-based misappropriation claim. These employers argue not that a defendant is liable for misappropriating confidential information per se, but rather for breach of their employment agreements by retaining the information.

The way to set up a claim works something like this: First, the employer drafts an initial employment agreement that combines a sweeping definition of “confidential information” with prohibitions on the use or disclosure of such information, and a requirement that an employee delete any such information under his or her control after resignation or termination. These provisions are coupled with tough financial penalties for any violation (such as forfeiture of vested stock options or other compensation).

The idea is that by coupling these contractual provisions with the tough penalties, ex-employees will be deterred from retaining company electronic information without the need to prove use. In theory, the mere retention of company documents would amount of to a breach of contract, and a potential lawsuit could effectively be won before the complaint was even filed.

Unfortunately for employers, the Massachusetts Supreme Judicial Court recently dealt a major setback to contractually-based remedies for misappropriation of confidential information.

On its face, Eventmonitor Inc. v. Leness, 473 Mass. 540 (2016), involves good facts for the employer, Eventmonitor. The judge found that Anthony Leness, a company vice president, secretly uploaded all of the information on his company laptop, including customer information and business plans to a data backup and storage service accessed over the Internet.

He paid for the storage service with his personal credit card and unsuccessfully attempted to hide the evidence of the download with a “cleaning” program. Leness failed to return the uploaded information to Eventmonitor following his termination, in breach of his employment agreement.

But proof of breach alone is not enough to recover under a contract; the breach must be “material.” In the absence of evidence of disclosure or use of the information that Leness uploaded, the trial judge found that the breach was not material and ruled for the defendant. The SJC agreed with the trial judge’s assessment and upheld the verdict.

The SJC’s ruling makes sense from a legal perspective: Since the purpose of a confidential information “return” provision is to prevent the disclosure of company information, then it is hard to argue that a breach is “material” without evidence of the disclosure or use of the information.

Moreover, although the SJC did not reach the issue, it is questionable whether a forfeiture provision, which must be reasonable under the totality of the circumstances, (see Struck v. Plymouth Mortgage Co., 414 Mass. 118 (1993)), would be enforceable.

But at the same time, the idea that use of improperly acquired confidential information needs to be proven may be counterintuitive to many businesspeople, who assume that violation of an important contractual provision will necessarily result in real financial repercussions.

Accordingly, it is important that in-house counsel understand the limitations of contractually-based misappropriation claims when advising company decision-makers.

Just as even the most ironclad non-competition agreement requires a showing of irreparable harm to be enforceable, (see Packaging Indus. Grp., Inc. v. Cheney, 380 Mass. 609 (1980)), so too no matter how clearly an agreement sets forth a departing employee’s obligation to return company information, unless a plaintiff can prove that the defendant did something with the information in question, it is unlikely to recover damages.

That is not to suggest that it does not make sense to bring misappropriation claims against departing employees in many circumstances. Sometimes company decision-makers will have concrete and reliable information that a competitor is using information that an ex-employee took from them. Even in the absence of such information, there may be compelling business reasons to bring suit.

But company counsel should consider the risks, as well as the rewards, of pursuing misappropriation claims without hard evidence of use. While there might turn out to be a “smoking gun” — such as an email from the defendant to a competitor with confidential information attached, or a witness who is willing to admit in deposition that he or she was offered such information — there might not be, in which case what seemed like an easy win could be dismissed on summary judgment.

And even if the employee did use company information, unearthing that truth could involve long and costly discovery battles.

It is therefore particularly crucial to consider how much harm the information that an employee has could do to a business, and whether the employee really intends to disclose the information to a competitor, before an employer decides to bring suit.

After all, some employees take emails and other documents not because they want to use them to compete against an ex-employer, but because they feel that their work and communications on some level belong to them.

Others might indeed take company information with a malign intent, but later on think better of it. Those possibilities can sometimes be forgotten in the turbulent wake of an employee’s departure.

This sort of cost-benefit analysis is not different in kind from that a smart litigant uses in any sort of dispute. But it is particularly important in trade secret litigation, where there can be such a disconnect between how a case looks when the complaint is filed and where it ends up.

That disconnect makes careful evaluation of the information an employee has taken, and of how the employee is likely to use the information, a wise course of action for any employer.

Michael Brier is a trial attorney at the Boston law firm Arrowood Peters.

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