Employee Breached Implied Duty of Confidentiality When Using Customer List

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.

Flurry of Restrictive Covenant and Trade Secret Activity This Spring

There has been a number of developments affecting employment agreements, non-compete agreements and trade secrets this Spring.  First, a new federal statute was enacted last month, the Defend Trade Secrets Act of 2016 which, as discussed below, creates federal court jurisdiction over civil trade secret theft lawsuits, authorizes courts to issue ex parte seizure orders in “extraordinary circumstances” and authorizes treble damages and attorneys’ fees  only when the employer amended its confidentiality agreements and/or policies to permit confidential disclosure to government agencies, under seal in litigation, and to attorneys in whistleblower situations, but does not permit court to enjoin individuals from obtaining employment with a competitor.   In one lawsuit, the Ohio Court of Appeals affirmed judgment for an employer who revoked a former employee’s severance pay when he began working for a company and the severance agreement permitted the employer in its “sole discretion” to deem it a “competitor.”  In the second, the employer lost in its attempt to keep temporary employees from continuing to work for a client through a competitor supplier because the court interpreted the contract to only apply if the defendant employees had voluntarily resigned, which they had not.  Finally, in the last decision from earlier this month, the court reversed a shortening of the restrictive period from one year to six months because the hardship on the employee was not undue in light of his considerable financial resources.

 Congressed passed the DTSA in April and it was signed by the President in May.  Federal court may be invoked when a trade secret involving a product or service used in interstate or federal commerce has misappropriated within the prior three years.   In extraordinary circumstances, a court may – without prior notice to the defendant – issue an order for the seizure of property necessary to prevent the dissemination or propagation of the misappropriated trade secret.    The Court may also grant other civil remedies, but may not enjoin an employment relationship or enjoin information that the person simply knows (as opposed to misappropriated trade secrets).  In other words, Congress did not adopt the inevitable disclosure doctrine and only provides a remedy when the misappropriation was through “improper means” or was acquired by someone who knew that the information was “derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret.”  “Improper means” was defined to “include[] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means” but “does not include reverse engineering, independent derivation, or any other lawful means of acquisition.”  The DTSA does not preempt state law or change the burden of providing that particular information is, in fact, a trade secret.

In order to obtain an ex parte seizure order, the plaintiff needs to show that a TRO (i.e., temporary restraining order) would be inadequate because the defendant ‘would evade, avoid, or otherwise not comply with such an order and the plaintiff would suffer immediate and irreparable injury if the property were not seized.  The plaintiff need also show that the harm to the defendant and third parties is outweighed by the plaintiff’s harm, that the defendant has possession of the trade secret and property to be seized, and that it is likely that information is in fact a trade secret which was misappropriated through improper means (or through such a conspiracy).  Finally, the plaintiff needs to show that the application for a seizure order has not been publicized and, if it were, that the defendant (and/or his/her co-conspirators) would move or destroy or make inaccessible the property to be seized.  The property seized is then placed in the custody of the court.  The defendant could have an action for wrongful seizure against the plaintiff.

In order to obtain treble damages or attorney’s fees following the successful prosecution of a trade secret theft action, the employer must have first provided notice of the DTSA’s statutory immunity to defendant through “any contract or agreement with an employee that governs the use of a trade secret or other confidential information”  which is signed or modified after May 11, 2016 or through “a cross-reference to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law.”   “Employees” includes contractors and consultants.  This statutory immunity protects individuals from being held criminally or civilly liable under any federal or state trade secret law if the individual’s otherwise unlawful disclosure was made in confidence to a federal, state or local government official or any attorney solely for the purpose of reporting or investigating a suspected legal violation, or was disclosed in a complaint or other document filed under seal in a lawsuit or, if the individual  files a whistleblower retaliation lawsuit for retaliation against his or her employer, was disclosed to the individual’s own attorney  or used in the court proceeding if the information is filed under seal and only disclosed pursuant to a court order.

As for non-competition agreement cases, the first case involves a non-competition provision inserted in a severance agreement.  Saunier v. Stark Truss Co., Inc., 2016-Ohio-3162.  The non-competition clause was not very strict.  The employee agreed to not work for any competitor for a year, but even if he did, he would only lose his severance pay.  In addition, the Agreement permitted him to work for a competitor in certain non-sensitive positions (i.e., maintenance), but again, if he did so, his severance pay would cease.  The determination of what entity was a “competitor” was left to the “sole discretion” of the employer without any reasonableness standard.   The employee obtained a job shortly thereafter and, wouldn’t you know it, the employer deemed that entity to be a competitor and cut off his severance pay.  The employee sued and lost because the Court found that the Agreement gave the employer the “sole discretion” to deem the entity a competitor.

In the second case, the employer lost in attempting to keep its temporary employees from continuing to work for its client through a competitor.  Drone Consultants, L.L.C. v. Armstrong, 2016-Ohio-3222.  The plaintiff employer provided temporary employees to a client.  Those employees were required by contract to provide two weeks advance notice of resignation so that their replacements could be recruited and trained and then precluded from returning to their temporary assignment with that client through a competitor.   After the client terminated its contract with the plaintiff employer, the employer notified the six defendant employees that their employment was being terminated and they could collect unemployment.  Instead, they were hired by a competitor who placed them right back in their previous assignments with that client and the plaintiff employer sued.  The Court interpreted the contract to only require the employees to provide notice if they voluntarily resigned, which they had not.  Similarly, the restriction against returning to their previous assignments through a competitor also only applied in the event of their voluntarily resignation and, therefore, did not apply in the event of their involuntary termination.    Although the court ultimately did not discuss or apply it, the plaintiff employer’s contract to provide contingent workers to that client provided that it was required to waive any restrictive covenants that would preclude those workers from continuing to work for the client in the event the plaintiff employer’s contract was terminated by the other party without cause (which it had been).

The final case from earlier this month reversed the trial court’s shortening of the non-compete period from one year to six months.   AK Steel Corp. v. Arcelormittal USA, L.L.C., 2016-Ohio-3285.  In that case, a senior executive with knowledge of the plaintiff employer’s strategic plans for the future was subject to a one-year world-wide non-competition agreement and was recruited to the be the COO of a larger competitor.   The trial court reduced the restrictive period to six months on the grounds that it constituted an undue hardship to the defendant employee without a corresponding benefit to the plaintiff employer.  The appeals court found the restrictive period to be reasonable in light of his confidential knowledge of strategy, business plans, manufacturing processes for current and next generation products, future plant locations, pricing and awarding of contracts, etc.

To be sure, there is no allegation that Howell has in any way attempted to steal confidential or trademarked information for the benefit of ArcelorMittal. Furthermore, it is acknowledged among the parties that certain information available to Howell, such as highly complex and detailed manufacturing processes and patented technology, are simply not capable of reproduction from memory. Rather, the pertinent concerns related to confidential information involving company strategy and information that is relied upon at such a fundamental level that makes non-disclosure nearly impossible. Although there is no evidence to suggest any malicious intent on the part of ArcelorMittal, as competing multibillion dollar companies operating worldwide, there is a certain amount of information, in particular strategic decisions, that the companies have a legitimate interest in remaining confidential. The record establishes that AK Steel has a legitimate interest in restricting Howell, the fourth-highest executive within the company, from accepting employment from a competitor for a one-year period.

Finally, the Court rejected the trial court’s concern with hardship on the defendant employee because every employee suffers some hardship from these covenants, but they can only be modified or eliminated when the hardship is undue:

 . . the trial court failed to consider that "sole means of support," as noted by the Raimonde decision is not limited to employment income. The record here supported a finding that Howell was a highly sought after senior executive of a major steel company, and was recruited by an even larger competitor. Although there was testimony that Howell had a family that depended on his income, there was also testimony that Howell had a large, vested retirement plan from AK Steel, and his new employment with ArcelorMittal would include a $900,000 signing bonus. In resolving the issue of "undue hardship," we find the trial court erred by failing to consider the additional resources in determining whether the noncompete provision deprived Howell of his sole means of support.

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 be changed or 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.

NLRB: Employer Violates §7 By Telling Employees Not to Discuss Matters Under Investigation

On Tuesday, the NLRB reversed a finding by the administrative law judge and found an employer to have violated employees' section 7 rights under the NLRA by instructing them during an internal investigation not to discuss the matters under investigation during the pendency of the investigation. Banner Health Systems,358 NLRB No. 93. While the Board agreed that there was insufficient evidence that the charging party had been disciplined for insubordination in retaliation for him exercising his rights to protest what he thought was an unsafe practice, it concluded that the employer violated the NLRA when the HR consultant investigating the matter routinely asked complaining employees to not to discuss the issue with their co-workers while the investigation was pending. An employer's "generalized concern with protecting the integrity of its investigations is insufficient to outweigh employees' Section 7 rights."

To justify a prohibition on employee discussion of ongoing investigations, an employer must show that it has a legitimate business justification that outweighs employees' Section 7 rights. See Hyundai America Shipping Agency, 357 NLRB No. 80, slip op. at 15 (2011) (no legitimate and substantial justification where employer routinely prohibited employees from discussing matters under investigation). In this case, the judge found that the Respondent's prohibition was justified by its concern with protecting the integrity of its investigations. Contrary to the judge, we find that the Respondent's generalized concern with protecting the integrity of its investigations is insufficient to outweigh employees' Section 7 rights. Rather, in order to minimize the impact on Section 7 rights, it was the Respondent's burden "to first determine whether in any give[n] investigation witnesses need[ed] protection, evidence [was] in danger of being destroyed, testimony [was] in danger of being fabricated, or there [was] a need to prevent a cover up." Id. The Respondent's blanket approach clearly failed to meet those requirements. Accordingly, we find that the Respondent, by maintaining and applying a rule prohibiting employees from discussing ongoing investigations of employee misconduct, violated Section 8(a)(1) of the Act.

Whether the HR consultant's instruction was a directive or a mere suggestion, "had a reasonable tendency to coerce employees, and so constituted an unlawful restraint of Section 7 rights." The Board also found it irrelevant that the charging party was not threatened with discipline if he violated the request to not discuss the matter until the investigation was complete. "The law, however, does not require that a rule contain a direct or specific threat of discipline in order to be found unlawful."

Therefore, unless an employer (union or non-union) can show that it has more than a generalized concern with protecting the integrity of an internal investigation and can show that there is a legitimate issue with fabricated testimony, protection of evidence or need to prevent a cover-up, it will need to immediately sequester witnesses during an investigation and interview them almost simultaneously in order to prevent witness contamination.

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.

When Non-Disclosure Agreements Can Hinder Employees From Going to Work for a Customer.

In late January, the Cuyahoga County Court of Appeals upheld a preliminary injunction against the plaintiff-employer’s former employee from using knowledge he gained from the plaintiff-employer when – instead of forming his own business or going to work for a competitor -- he went to work for a customer of the plaintiff-employer (which “coincidentally” stopped using the services of the plaintiff-employer). KLN Logistics Corp. v. Norton, 2008-Ohio-212. Rather than require the employee to sign a non-compete agreement when he was hired, the employer instead required a Non-Disclosure and Non-Circumvention Agreement. In that Agreement, the employee agreed to safeguard proprietary information – including trade secrets, methodologies, personal and business contacts or business plans – and to not in any way whatsoever circumvent the employer or to use the proprietary information for personal gain or otherwise for three years following his employment without prior written permission from the employer.

The plaintiff-employer introduced the employee to several of its customers, including Customer H. The employer began negotiating an expansion of their business relationship, and towards that end, the employer went to great expense to lease warehouse space and engage in other preparatory activities in anticipation of an expansion of the relationship with Customer H. Unknown to the employer, the employee began using the employer’s resources for about a month to conduct his own research about how he could meet the needs of Customer H less expensively and was telling other customers that he could ship their freight less expensively than the employer. Customer H then terminated its relationship with the employer and hired the employee with a salary and profit-sharing bonus. Within a few weeks, the employer sought a temporary restraining order and preliminary injunction, which the trail court granted in December 2006 along with finding the employee in contempt of the TRO for continuing to work for Customer H. In particular, the trial court had enjoined the employee from using the proprietary information – including business contacts – and from having other communications with Customer H, “including without limitation by serving as an employee . . . or otherwise consulting with, any competing individual or group, and/or by soliciting any business from . . customer of [employer] (including without limitation, [Customer H] by using the proprietary information . . ..). . . “

On appeal, the court noted that both the employer and employee admitted that the Agreement was not a non-compete agreement and did not prevent the employee from becoming an employee of Customer H. Rather, the Agreement only prevented the employee from using the employer’s proprietary information, which included the names of business contacts, including Customer H, and the names of other “numerous vendors, suppliers, and customers in the freight forwarding industry, . . . and . . . the specialized services [the employer] provided. [The employer] explained that [the employee] was given access to [the employer’s] confidential information including customer lists, rates, profit margins and other business information” as well as the rates of insuring freight shipments.

The court rejected the employee’s argument that the Agreement only prevented him from disclosing the proprietary information to the employer’s competitors. “Circumvent means “to avoid or get around by artful maneuvering.” [The employer] presented evidence at the hearing to show that [the employee], while employed by [the employer] and in a fiduciary relationship, spent considerable time researching how to go into business with [Customer H]. As a result of his actions, [the employee] shares in [Customer H’s] business profits while [the employer] no longer has [Customer H’s] shipping or warehousing business.” Therefore, the trial court had not abused its discretion in enjoining the employee from using the employer’s proprietary business contact information and from using the proprietary information to perform competitive services for the employer’s customer at the employer’s expense.

Nonetheless, despite the terms of the Preliminary Injunction and the Agreement, the Court did not believe that the employee had necessarily violated the TRO in contempt of court by merely continuing to work for Customer H. The employee testified that after the TRO was entered, he stopped using shipping companies utilized by the employer, and instead, returned to using shipping companies with Customer H had utilized prior to working with the employer, such as UPS and FedEx. The employer did not identify any other proprietary information which the employee was using in violation of the Agreement. “Without evidence of something more than mere continued employment with [Customer H], which [the employer] has conceded is not precluded [by the Agreement], there is no evidence that appellant violated the terms of the TRO as written.” The Court does not explain why the business contact with Customer H was not sufficiently proprietary to justify enjoining the employee from working there (as found by the trial court), but it appears to be based on the employer’s concession that the Agreement did not preclude the employee from working for Customer H. Had the employer not made such a concession, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the customer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.
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There is no word on whether Customer H ever considered using the employer’s services again after the employee sued Customer H’s employee.

Employers should be aware that recruiting and hiring an employee subject to a Non-Disclosure Agreement could result in the employer being sued for tortuous interference with contract, among other things. In this case, the employee admitted that he had not informed Customer H about the Agreement beforehand because he did not think it applied to his working for a customer. Moreover, had the employer not conceded that the Agreement did not preclude employment with Customer H, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the employer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-212.pdf.

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.