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: Trade Secret Defendants Outsmarted Themselves Out of a Statue of Limitations Defense and into a Trial

Earlier this month, the Sixth Circuit reversed summary judgment for the defendants in a theft of trade secrets case because they were too successful in arguing one of their substantive theories (that there had been no misappropriation) so as to undercut what had been a successful statute of limitations argument.   Kendall Holdings, Ltd v. Eden Cryogenics, LLC, No. 12-3258 (6^th Cir. 4-5-13).   The defendants argued – and the trial court agreed --  that the individual defendant’s retention of arguably trade secret materials in 1999 started the four-year statute of limitations on any claim for theft of trade secrets and, therefore, the claim was time-barred by the time it was brought in 2007.  However, the Court found that the former president’s acquiescence in the individual defendant’s possession meant that the possession did not constitute misappropriation and the clock did not start to run in 1999.  Therefore, it was only after the plaintiff learned that the defendants had begun improperly utilizing the materials in 2007 that the statute of limitations began. 

The facts of the case are fairly complicated. Each of the two individual defendants had at various times worked in differing capacities for the plaintiff’s predecessor company. In 1999, one of the individual defendants left employment with the plaintiff’s predecessor company while still in possession of arguably trade secret backup materials (which he and/or some of the other defendants may have helped develop). He then worked for a competitor until returning to work for the plaintiff company for a few months in 2004. He was never asked to return the trade secret materials of the plaintiff’s predecessor and did not arguably begin to use those materials to benefit the defendant company until 2006 -- 7 years after he last worked for the plaintiff’s predecessor and about 8 years before the lawsuit was filed. Meanwhile, the former president of the plaintiff’s predecessor (who was also an individual defendant employed by the defendant company) testified that he was aware that the other individual defendant still had the arguably trade secret materials in his possession in 1999 and never requested their return before he was fired by the plaintiff company in 2004 and before he formed the defendant company in 2006.

The  Court’s analysis was fairly straightforward:

Under OUTSA, a plaintiff may recover damages from a party that misappropriated the plaintiff’s trade secrets. Ohio Rev. Code § 1333.63(A). “Misappropriation” is defined in the statute as the “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means”; or the disclosure or use of another’s trade secret without the other’s consent, if the discloser/user acquired it by improper means, in breach of a duty of secrecy, or with the knowledge that it was a trade secret and had been acquired by accident or mistake. Ohio Rev. Code §  1333.61(B). “Improper means” include “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” Ohio Rev. Code § 1333.61(A). An action must be brought “within four years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” Ohio Rev. Code § 1333.66.

The Court noted that the statute of limitations generally does not begin to run until the plaintiff suffers an injury, and does not begin to run under the discovery rule until the plaintiff discovers or reasonably should have discovered that it has been injured.  The trial court concluded that the statute began to run when the plaintiff’s predecessor company knew – or reasonably should have known – that the individual defendant had “unlawfully acquired, disclosed, or used its trade secret information.”  The president of the plaintiff’s predecessor admitted that he knew the individual defendant had retained the trade secret information in 1999 and did not ask for their return even when the defendant went to work for a competitor of the plaintiff’s predecessor.   Therefore, the trial court had concluded that the plaintiff’s predecessor had knowledge of the misappropriation approximately eight years before the lawsuit was filed.

The Sixth Circuit rejected this analysis because there was disputed evidence that the individual defendant had properly acquired the trade secret information in 1999 (based on a convincing argument on the merits asserted by the defendants).   Indeed, the individual defendant convincingly argued that he had the plaintiff’s predecessor’s consent to retain the information in 1999.  As noted by the Sixth Circuit:

In other words, in an attempt to demonstrate that [the plaintiff’s] substantive claim of trade secret misappropriation lacked merit, defendants introduced evidence that fatally undermined their statute of limitations argument.

                . . ..  .

Had [the trial court] viewed the evidence in the light most favorable to [the plaintiff]– evidence introduced, ironically enough, by [its] adversary – no cause of action for misappropriation could have arisen in 1999 because evidence in the record supports a finding that [the individual defendant] did not acquire the shop drawings in breach of any duty or by other improper means.

Therefore, there was no undisputed issue of fact that the materials had been misappropriated more than four years before the lawsuit was filed since the defendant arguably had consent to retain them in 1999.  (Remember the statute of limitations is an affirmative defense for which the defendant bears the burden of proof).  Moreover, there was no undisputed issue of fact on the misappropriation claim because the plaintiff remarkably argued that the defendants conspired to take the information in 1999 with plans to use it six years later and that the defendants did not have permission to ever use the materials even if they arguably had permission in 1999 to retain them.   Thus, a plausible argument existed that the materials were not misappropriated until 2006 when the defendants first began to use them in competition against plaintiff.

All this being said, the parties must now go to trial on the issues instead of having them resolved on a motion.  There has been no finding on liability.

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 Appeals Court: Controller’s Objection to Corporate Misfeasance and Breach of Fiduciary Duty Cannot Support Wrongful Discharge Claim.

Late last month, the Holmes County Court of Appeals reversed a jury verdict in favor of a discharged controller on the grounds that the trial court should have entered summary judgment in favor of the defendant employer on the claim of wrongful discharge in violation of public policy. Schwenke v. Wayne-Dalton Corp., 2008-Ohio-1412 (3/27/08). In that case, the plaintiff controller alleged that he had been terminated for complaining about corporate officer misfeasance and misappropriation. However, the court determined that the plaintiff had failed to identify a specific source of public policy which was violated by the alleged corporate misfeasance and misappropriation. The defendants had claimed that the plaintiff had been fired because of “his inability to work with his direct supervisor and with senior management, his negative and arrogant attitude and "the on-going degenerative nature of [his] work performance.” Accordingly, the judgment of $72,000 and $148,000 in attorneys fee was reversed.

The plaintiff had alleged that the CFO and president of the privately-held corporation had engaged in misappropriation and malfeasance in engaging in the following actions for over three years:
* The “corporate office would `issue' credits for expenses incurred in Europe (France was facility location). The driver of the amount of the credit would be based on the financial deficit reflected on Europe's financials that the executives were looking to conceal. Credits would be issued against the Mt. Hope manufacturing facility and possibly other facilities;”
* The American “facilities would as a matter of business sell products to [the company]. As such the US had an ongoing receivable for which Europe would have to issue payments to the US. These `credits' would be used to offset legitimate receivables. The credit would reduce [corporate] expenses, and the offset to A/R would allow for no exchange of cash for this specific issue, [r]esulting in overstated [corporate] Europe profits; [r]esulting in fictitious [corporate] cash flow; [r]esulting a stronger appearing [corporate] Europe balance sheet; [f]avorable credit terms from vendors for the [corporate] entity; and [r]esulting in overstated costs in the USA and if the Credit was treated as a return, an understatement of revenues (same P & L effect but in different areas of the income state).”
* “[C]orporate accounting personnel, under the direction of the executives, would write-up manual journal entries to decrease costs in Europe and increase costs in the US. On occasion there would be no credits issued, just a transfer of costs on paper that would inflate US costs while masking costs and losses in Europe.”
* The defendant corporate officers “misused company assets for personal gain. Specifically, [one] defendant . . . received massive personal loans (to fund personal assets such as homes) from [the corporation] at interest rates significantly below the Fair Market Value (i.e. 2.5%) while earning large interest rates on their deferred compensation (i.e. 13%-17%). This occurred over a 3 1/2 year period between January 2001 and July 2004. The inappropriate moving of costs across [corporate] facilities allowed for inaccurate bonus accruals, rewards, and deferred compensation accruals for [the individual corporate officer defendants]. Numerous employee (management, supervisory and non-supervisory) bonus awards (and sometimes departments) were subjectively lowered, with no basis, to decrease lower ranking employees' annual bonus payouts allowing for inflated executive . . . . bonus and deferred compensation awards;”
* The corporate individual defendants “were engaged in inappropriate accounting procedures and misappropriation of corporate assets. Specifically, defendants implemented the `3-B Plan', which allowed major shareholder . . . . to receive undisclosed commissions in the amount of millions of dollars by selling products in Europe below costs (i.e. `dumping').”

The plaintiff controller denied that his claims were governed by Ohio’s Whistleblower statute, and thus, he had not been required to prove that he had put his concerns in writing to his supervisors or complained to a government agency. Rather, he claimed that his protests were protected as a matter of public policy and that his retaliatory discharge violated public policy.

In order to prevail on such a claim, a plaintiff must demonstrate: "1. That clear public policy existed and was manifested in a state or federal constitution, statute or administrative regulation, or in the common law (the clarity element); 2. That dismissing employees under circumstances like those involved in the plaintiff's dismissal would jeopardize the public policy (the jeopardy element); 3. The plaintiff's dismissal was motivated by conduct related to the public policy (the causation element); and 4. The employer lacked overriding legitimate business justification for the dismissal (the overriding justification element)."

The court determined that, notwithstanding the detailed allegations, the plaintiff controller could not prevail because he had failed to satisfy the clarity element by identifying a public policy existed. “Nor did [the controller] cite or present the trial court with any legal authority in support of his argument that his termination violated public policy. [The controller] merely alleged that he questioned [the individual corporate officer defendants] about alleged inappropriate accounting practices and misappropriations of corporate assets and was fired and that his firing violated public policy. [The controller], . . . merely alleged that his firing violated public policy. In short, . . . [the controller] never offered any legal authority suggesting that [appellant's] conduct and alleged reaction from or by his employer forms a basis for a "public policy' exception to Ohio's at will relationship."

While the concurring judge was willing to consider that fiduciary duties may have been violated, the judge was unwilling to believe that breach of fiduciary duty constitutes a source of public policy sufficient to override the employment at will doctrine.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/5/2008/2008-ohio-1412.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.