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.

Sixth Circuit Affirms Employee’s ERISA Summary Judgment for Promissory Estoppel, Breach of Fiduciary Duty and Anti-Cutback Violation

[Editor's Note: The Sixth Circuit in October subsequently upgraded its Deschamps opinion  to Recommended for Full-Text publication].

This morning, the Sixth Circuit Court of Appeals affirmed summary judgment for an employee on three ERISA claims after the defendant pension plan reduced his pension credits for the 10 years that he worked for the defendant employer in Canada.  Deschamps v. Bridgestone of Americas, Inc. Salaried Employees Pension Plan, No. 15-6112 (6^th Cir. 9-12-16).  The plaintiff had refused to accept the transfer to the U.S. in 1993 unless he was given pension credit for his prior 10 years in Canada.   The HR and plant managers confirmed with corporate HQ that he would receive that pension credit, which was also included on all of his pension written and online pension summaries until 2010, when the employer reinterpreted the terms of the plan and reduced the pension credits previously awarded to him and other expatriate transfers.  He appealed internally with the Plan, but his appeals were denied and the lawsuit followed.  The Court of Appeals agreed that the undisputed issues of fact in the record confirmed that the employer had been grossly negligent, breached its fiduciary duty and violated the anti-cutback rules in leading him to believe that he would receive the pension credit and then revoking those credits more than 17 years after his transfer and after he rejected two job offers from a competitor (which subsequently went bankrupt).   The employer’s convoluted interpretation of the definition of “supervisor” (which was not otherwise defined in the plan) to exclude the plaintiff (who was an hourly maintenance manager) contributed to the Court’s decision.

According to the Court’s opinion, the plaintiff sought and received assurances from the U.S. plant and human resources managers that they had checked with their corporate office and he would receive pension credit for his 10 years working in Canada if he were to transfer to the U.S. facility in 1993 as the plant maintenance manager. (The retired corporate actuary, however, denied ever approving this information).  For his first 16 years of employment, his online and written pension summaries also listed his 1983 seniority date.  Granted, most (if not all) of these documents stated that they were only estimates and that the actual Plan document governed his eligibility for benefits.  In 2010, the company sought to correct the misapplication of the seniority dates for employees who transferred from outside the U.S. and deducted those 10 years from the plaintiff’s pension accrual.  He appealed internally, but the Plan denied his appeal on the grounds that he was not eligible because he had not been salaried or a “supervisor.”  “Supervisor” was not defined in the Plan or SPD, but the Plan defined it to exclude non-exempt managers like him.  The plaintiff brought suit against the Plan, his employer and its parent company alleging promissory estoppel under 29 U.S.C. § 1132(a)(3), breach of fiduciary duty pursuant to 29 U.S.C. § 1104, and an anti-cutback violation pursuant to 29 U.S.C. §1054(g). The trial court granted him summary judgment on all three claims.  The employer, parent and Plan appealed.

Plaintiffs have a long burden of proof when it comes to promissory estopped claims.  They must show:

(1) conduct or language amounting to a representation of material fact; (2) awareness of the true facts by the party to be estopped; (3) an intention on the part of the party to be estopped that the representation be acted on, or conduct toward the party asserting the estoppel such that the latter has a right to believe that the former’s conduct is so intended; (4) unawareness of the true facts by the party asserting the estoppel; and (5) detrimental and justifiable reliance by the party asserting estoppel on the representation. . . . In the case  of an unambiguous pension plan, the plaintiff must also prove three additional elements: “[(6)] a  written representation; [(7)] plan provisions which, although unambiguous, did not allow for  individual calculation of benefits; and [(8)] extraordinary circumstances in which the balance of equities strongly favors the application of estoppel.”

The Court found that the terms of the Plan were ambiguous because of how it interpreted “foremen” and “supervisors” to exclude non-salaried managers like the Plaintiff when those terms were not defined within the Plan itself.   Further, the defendants conceded that the plaintiff could prove elements (1), (3) and (4).

The defendants attempted to dispute that the Plaintiff could prove that the defendants were aware of the “true facts” because he did not inquire of the corporate HQ pension officials himself, but instead, relied on the plant managers to contact corporate HQ for him.  The Court described this element to require the plaintiff to show “either intended deception or such gross negligence as to amount to constructive fraud.”  The Court construed prior precedent and found that the employer was grossly negligent in assuring the plaintiff for 16 years that he would receive the pension credit and not attempting to correct that mistake (if it was a mistake) shortly after making it in response to his specific inquiries.  Further, the plaintiff could not be held responsible for earlier realizing the mistake in light of the convoluted interpretation of “supervisor” which the Plan adopted (to exclude managers).  Thus, the Court found that the employer could be found liable for “constructive fraud.”

The employer also disputed whether the plaintiff could prove that he detrimentally relied upon the employer’s assurances.  In particular, the plaintiff had rejected attractive job offers from a competitor which subsequently went bankrupt and laid off thousands of employees.   The Court rejected the employer’s argument because there was no evidence that the plaintiff would definitely have been laid off by the competitor.   In addition, there was no legal requirement that the competing job offer be economically better, as long as it was an opportunity which the plaintiff rejected in reliance on his employer’s representations about his pension status.   Further, the plaintiff’s reliance for 16 years on the employer’s written and oral (mis)representation were reasonable when he rejected the competitor’s offer of a higher salary.

As for the breach of fiduciary duty claims, the plaintiff was required to show

(1) Bridgestone acted in a fiduciary capacity in making misrepresentations to Deschamps, (2) those misrepresentations were material, and (3) Deschamps detrimentally relied on the misrepresentations. . . . The second element [was] not disputed. 

The disputed issue was whether the employer was a fiduciary:

A fiduciary is defined by ERISA to include a corporation10 who “exercises any discretionary authority or discretionary control respecting management of [a] plan” or “has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A).  In determining whether a corporation is a fiduciary, rather than looking to the formal title, we use a functional approach, looking to whether it acts in a fiduciary capacity with respect to the conduct at issue.

 While making business decisions which have a collateral effect on employee benefits (such as terminating a plan), processing claims, applying eligibility rules or calculating benefits are not fiduciary  functions, explaining the terms of the plan, and conveying information about likely future plan benefits are fiduciary functions.  Accordingly, in this case, conveying information to the Plaintiff about receiving pension credits and the likely benefits he would receive in the future were fiduciary functions.  The Court also found that the plant and HR managers had apparent authority to bind the employer: “Bridgestone acted as a fiduciary when it, through its agents with apparent authority, misrepresented to Deschamps the status of his pension benefits.”

The employer disputed that it had ever construed the Plan to cover the plaintiff, and, therefore, could not have violated the anti-cutback provisions when in 2010 it retracted his credit for the 10 years he worked in Canada between 1983 and 1993.  It construed the contrary assurances to the plaintiff as a “clerical error.”

ERISA prohibits plan amendments that decrease a participant’s accrued benefits, with two exceptions that do not apply here.  29 U.S.C. § 1054(g).  At issue is whether we look to the text of the Plan or the administrator’s interpretation of the Plan in determining if Deschamps accrued a benefit prior to 1993.  

In essence, an employer can illegally cut-back benefits if it changes or reinterprets the terms of the plan to reduce benefits that a plaintiff reasonably believed provided higher benefits based on a different and plausible interpretation of the plan.

As discussed above, the text of the Plan is at worst ambiguous, but at best, favors Deschamps’s argument that he was a covered employee in 1983 under the classification of  “supervisor.”  It is not untenable that Deschamps, in his capacity as a maintenance manager, was a supervisor under the language of the Plan.  Further, it is undisputed that as a result of the [2010] change in the interpretation of this provision that excluded foreign employees from being classified as covered employees, Deschamps’s benefits were decreased. Therefore, Deschamps has established an anti-cutback violation . . .

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.

Supreme Court: Fiduciary Duty to Continually Monitor Investments Makes Limitations Period a Moving Target

This morning, a unanimous Supreme Court reversed an employer fiduciary’s judgment on a breach of fiduciary duty claim that had been found untimely.  Tibble v. Edison Int’l, No. 13-550 (5-18-15).  The plaintiffs alleged that the fiduciaries violated their duty by paying higher administrative fees for retail funds instead of selecting lower-fee investor class funds while administering the defined contribution ERISA plan (i.e., a 401(k) plan). Based on ERISA’s 6-year statute of limitations, the lower courts found the claim to be untimely as to funds purchased in 1999.  However, the Supreme Court concluded that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.”

Section 1113 [of ERISA] reads, in relevant part, that “[n]o action may be commenced with respect to a fiduciary’s breach of any responsibility, duty, or obligation” after the earlier of “six years after (A) the date of the last action which consti­tuted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” Both clauses of that provision require only a “breach or violation” to start the 6-year period.

While the “Ninth Circuit correctly asked whether the ‘last action which constituted a part of the breach or violation’ of respondents’ duty of prudence occurred within the rele­vant 6-year period,” that court erred in finding the act of selecting the higher-cost funds to be the last relevant action for statute of limitation purposes.

Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting invest­ments at the outset. . . ., the trustee must “systematic[ally] conside[r] all the investments of the trust at regular intervals” to ensure that they are appro­priate.

The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.”

This being said, the Court “express[ed] no view on the scope of respondents’ fiduciary duty.”  It remanded the case to consider whether the fiduciaries failed to review and monitor within the six year limitations period.

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.

Ohio Appeals Court: Death and Taxes May Be Certain, but the Timing Alone is Too Indefinite to Form a Binding Promise.

Last month, the Franklin County Court of Appeals affirmed summary judgment against a former corporate officer who had been promised employment for the life by the majority shareholder. Steele v. Mara Enterprises, Inc., No. 2009-Ohio-5716. In that case, the plaintiff worked his way up to become president of the corporation. When the founder died, his widow inherited his majority interest and eventually transferred her ownership to a trust. She promised him that he would keep his job as long as she was alive and in reliance on this promise, he turned down two offers of employment. Nonetheless, the Court found her promise to be too indefinite to support a promissory estoppel claim.

According to the Court’s opinion, after many years of employment, membership on the Board of Directors and the purchase of one share in the corporation, the plaintiff was fired after the Board all voted to resign and the new Board was elected. The Court found the verbal promises of employment for the lifetime of the majority shareholder to be too indefinite to be legally binding:

Death, although inevitable, is unpredictable. A future event that, by its very nature, could occur in ten minutes or ten years is too indefinite to constitute a "specific term" for purposes of promissory estoppel. Such statements are, at best, discussions of "possible future career developments and opportunities." . . . . Similarly, here, Laverne Hill's statements were tied to her own death and, as a result, suffered the same deficiency as those "promises" made in Callander: they fail to unambiguously promise continued employment for a specific period of time. Indeed, the statements lacked specificity in other aspects. The statements never included a discussion of job title, job responsibilities, compensation, or contingencies in the event the business closed or Laverne Hill decided to part with her ownership interest before her death. The complete lack of details suggests Laverne Hill's statements were anything but clear and unambiguous promises of continued employment. . . . .

In any event, even if the promise were sufficiently unambiguous, the Court questioned whether a majority shareholder could bind the corporation since she was not an officer, did not make these promises in a meeting of the Board members, was never ratified by the Board and never reduced to writing. On the contrary, the Employee Handbook (created by the plaintiff) provided that all employees were employed at will unless given a written contract.

Finally, the Court rejected the breach of fiduciary duty claim by a minority shareholder because the duty is owed by the majority shareholder (who was not named as a defendant) and not the corporation (who was the only named defendant).

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/10/2009/2009-ohio-5716.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.

Ohio Appellate Court: It Takes More Than Sour Grapes To Prove Tortious Interference and Fiduciary Breach

Late last month, the Cuyahoga County Court of Appeals rejected the claims of a disappointed parts distributor against a former executive and his new employer (a used parts distributor). N. Coast Engines, Inc. v. Hercules Engine Co., 2008-Ohio-793 (2/28/08). In that case, the plaintiff company (the parts distributor) had an exclusive distribution agreement with a manufacturer. The plaintiff-company had promoted the defendant executive to president of the company because of his years of experience selling that manufacturer’s parts and because he had been an excellent employee for five years. The executive was employed at will for $50,000/year and, importantly, did not have any non-competition, confidentiality or non-solicitation agreements with the plaintiff company. The defendant-company was a used parts distributor, who hired the defendant executive (at the same salary, but subject to a non-compete agreement, and a three- year employment agreement with health insurance benefits) on January 10, 2005 and then shortly thereafter – on January 25, 2005 -- won the exclusive right to resell the manufacturer’s new parts. The plaintiff company ended up without a talented president and without its exclusive deal with the manufacturer.

The plaintiff company had considered selling itself to its former president during the prior year. However, when the defendant company learned of that possibility, it expressed its interest in buying the plaintiff instead. When the plaintiff presented the defendant with a confidentiality agreement before permitting due diligence, the defendant company realized that it did not want the business that much and withdrew its interest. Learning that the plaintiff company was for sale, the defendant executive then began exploring other employment opportunities, including going to work for defendant-company. He gave his notice of resignation to the plaintiff-company on January 17 and continued working for the plaintiff through January 28. The last few days were spent helping transfer its inventory to his new employer, which had won the exclusive distribution agreement from the manufacturer on January 25 when the manufacturer learned that it had hired defendant executive.

The Court rejected the breach of fiduciary duty claim against the executive because there was no evidence that the executive “sustained any financial gain, any kickback, or any promotion for joining: the defendant-company or showing that he “intentionally changed employment in order to divest the” plaintiff employer of its exclusive agreement with the manufacturer. As an at-will employee, he was free to resign at any time. In the absence of a restrictive covenant, he was also free to begin working for a competitor following his employment and to continue serving former business contacts also served by his new employer. There was no evidence of any secret dealing or conflict of interest.

The Court rejected the claim that the defendant-employer tortiously interfered with the executive’s fiduciary duty because there was no breach of fiduciary duty. Moreover, there was no tortuous interference with the plaintiff’s exclusive distributorship arrangement with the manufacturer because there was no evidence that the executive had been hired with the intent of inducing the manufacturer to terminate its relationship with the plaintiff company. Rather, the defendant company hired the executive because of his extensive knowledge of the manufacturer’s parts (which the defendant company sold used).

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-793.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.