Turning The Spotlight On The Disloyal Employee

Tuesday, August 1, 2006 - 00:00

On June 28, Philip Berkowitz and Jerome Coleman, labor and employment law partners at Nixon Peabody LLP, introduced another excellent Nixon Peabody CLE program - this one entitled The Disloyal Employee, Non-Competes and Damages: An Advanced Course. Mr. Coleman began with an appropriate quote from the Gospel of Luke: "A man cannot serve two masters. Either he will hate the one and love the other, or hold to the one and despise the other."

Messrs. Berkowitz and Coleman were joined on the panel by Erica Bunin, Associate General Counsel at Morgan Stanley. The program was sponsored by the Association of Corporate Counsel - Greater New York Chapter.

The Biblical reference was particularly on target, at a time when the loyalty of an employee to his employer - something an earlier era may have taken for granted - is of diminished value. Mr. Coleman noted that today, employees change jobs with startling frequency, often taking with them proprietary customer information, even trade secrets, with little thought of the consequences to the employer they are leaving or of their own fiduciary responsibilities. Given the technologies available to them, he said, for the employer to detect such misappropriation is both difficult and expensive.

Mr. Coleman provided an overview of the legal doctrines that offer remedies to the injured employer, including New York's faithless servant doctrine, the common law doctrine of fiduciary duty and the common law proscription against the misappropriation of trade secrets. He noted that the federal Computer Fraud and Abuse Act (the CFAA), a criminal statute with civil amendments, had been broadly interpreted by the courts and today constituted a formidable weapon in the employer's arsenal.

He cited the recent case of Shurguard Storage Centers, Inc. v. Safeguard Self Storage, Inc., (W.D. Wash., 2000) where employees, while still on Shurguard's payroll, used its computers to send proprietary information and trade secrets to the employer they had agreed to join. The CFAA, he said, covered both intentional access to a computer without authorization and obtaining information from a computer by exceeding authorized access. The employees, he pointed out, argued that, since they were on Shurguard's payroll at the time they accessed this information, they had not acted without authority, an argument the court dismissed by noting that their authority to access the information ended when they began to act as agents for the new employer.

Mr. Coleman also cited a variety of advantages that the CFAA offered employers in an environment which appeared, at first blush, to favor the disloyal employee, and he reviewed ways in which employers might use the federal Economic Espionage Act of 1996 to address theft of trade secrets, pointing to the very broad definition that term received under the statute.

Ms. Bunin provided a ground-level look at the retail securities world, where every employer had to be concerned about both the brokers it lost to competitors and those it recruited from competitors. Both coming and going, she said, many securities brokers took customer information with them as a matter of course and some went so far as to alter or even delete information in the former employer's systems. She reviewed the use of employment contracts and, in particular, restrictive covenants prohibiting the solicitation of customers. She noted wide state-to-state variations in the enforcement of such covenants, with California being a particularly difficult jurisdiction from the employer's point of view.

Company policies and a code of conduct, she said, were also valuable, particularly where restrictive covenants were not well received in the courts. She stated that many courts would rely on a company code of conduct to issue injunctions, and she indicated that Morgan Stanley had its employees acknowledge their code on an annual basis. Customer privacy legislation was also important in the misappropriation of confidential information, she said, and she went on to cite the Gramm-Leach-Bliley Act and a number of states with privacy laws which, unlike Gramm-Leach-Bliley, included a customer notification requirement in the event of a breach of customer data systems. She added that this area was extremely active, and that a federal notice requirement under Gramm-Leach-Bliley was currently under consideration.

Mr. Berkowitz focused much of his discussion on the efficacy of non-compete agreements in the case of the disloyal employee. Noting the public policy considerations favoring competition and the free flow of information, he went on to indicate that most courts will subject a non-compete agreement to a test of reasonableness and enforce it to the extent necessary to prevent solicitation of the employer's customers or disclosure of trade secrets. He advised seeking injunctive relief at an early stage in the proceedings, and he went on to discuss the elements necessary to establish entitlement to such relief: irreparable harm in the absence of an injunction; a likelihood of success on the merits; a balancing of the equities; and the absence of an adequate remedy at law. The award of such relief, he said, is often an indication that the employer will indeed prevail on the merits and serves to incline the parties toward settlement. He was quick to point out, however, that irrespective of the facts of the case, if an employer arrived in court seeking to enforce an unreasonable non-compete agreement, the court was unlikely to see things the employer's way.