Last week, the Franklin County Court of Appeals affirmed in part and reversed in part an $81k verdict against a former employee and his new business for misappropriating a client list – which his employer had earlier sold to the plaintiff -- to start his marketing campaign. MNM & MAK Ents., L.L.C. v. HIIT FIT Club, L.L.C., 2019-Ohio-4017. The Court found that the employee’s misappropriation of the password protected client information violated Ohio’s Trade Secret Act and that the taking was unlawful based solely on every Ohio employee’s implied fiduciary duty of loyalty. Nonetheless, the Court remanded for a recalculation of damages because the award was improperly based on gross revenue and mistaken assumptions did not account for expenses for declining growth in new clients.
According to the Court’s opinion, the individual defendant was initially hired as an independent contractor subject to an agreement with a confidentiality clause protecting the employer’s proprietary information, as well an arbitration clause. He was later hired as an employee, but had not employment agreement. He was given access to all client contact information, which he eventually downloaded to help start his own competing business in August 2017 a year after the employer closed its New Albany facility. He was unaware that the employer had sold in October 2016 the customer list to another entity, which clearly objected when those clients signed up with the defendant’s new competing business. The employer and the buyer asserted claims for misappropriation against the former employee and his new company. After a bench trial, the court awarded $81,777 in damages. This appeal followed.
The Court found that the independent contractor agreement was relevant for the purpose of showing that the defendant employee knew that the customer information was confidential, but did not otherwise govern the dispute. “There is no public record of the list, and [the employer] never used the list in a public way or provided the list to any mailing company.”
The Court rejected the employee’s argument that his downloading of the information was not unlawful misappropriation because he had lawful access to the information by his employer giving him the passwords and did not subject him to a confidentiality agreement. “[E]xpress consent to access trade secret information in the course of employment does not also confer express or implied consent to use the information for non-work, personal purposes.” Employers are not required to enter into express confidentiality agreements with their employees to protect their trade secrets from misuse:
Employees owe a duty of good faith and loyalty regardless of whether they signed an employment agreement with their employer. . . . The presence of an explicit, binding confidentiality or employment agreement is not required to find misappropriation of a trade secret.
Victorious plaintiffs are entitled to recover damages for the defendant’s unjust enrichment from the misappropriation. “Regardless of whether the damages calculation is based on a plaintiff's loss or a defendant's gain, the damages figure " 'cannot be based upon a gross revenue amount.' . . . . Rather, "Ohio law 'requires that evidence of lost profits be based upon an analysis of lost 'net' profits after the deduction of all expenses impacting on the profitability of the business in question.'" Yet, in this case, the Court found the trial court abused its discretion in awarding damages based the figure on defendants’ gross revenue and speculation tying it to the misappropriation:
Here, appellees requested damages in the amount of $81,776.77 based on their calculation of the membership fees and other revenue HIIT Fit allegedly received from individuals who were previously Knockout members — i.e. appellants' profits, rather than appellees' losses. Appellees admittedly based their calculation on appellants' gross revenue . . . The trial court never considered or discussed whether and how to reduce this proposed gross revenue figure by appellants' expenses to try to reach an amount representing appellants' net profits. The trial court's failure to consider appellants' expenses and net profit was an abuse of discretion.
Further, the plaintiffs admitted that they calculated their damages by extrapolating the defendant’s revenue from its first five months – when it’s biggest month was only its first month – over an entire year even though records showed significant decline in new memberships over that year. Plaintiff’s also mistakenly attributed non-customer revenue – from merchandise sales, etc. -- to their damages.
NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.
