Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

When four employees left a Connecticut investment advisory firm to start a competing business, they made the “mistake” of downloading client information from their old employer’s customer contact data base, transferring it to a home computer, and then sending it to a brokerage firm engaged as an asset custodian for their new firm. That mistake proved to be costly when the old employer sued for violations of the Connecticut trade secrets act and the federal Computer Fraud and Abuse Act, and discovered the data transfer.

As often happens, the old employer found the misuse of its computer data only by obtaining discovery from a third party – the firm serving as asset custodian for the new investment business. Responding to a subpoena, the third-party produced communications with the defendants that the defendants themselves had failed to produce in response to direct discovery requests in the litigation. Those communications showed the transfer of the employer’s data. Compounding their error, the employees had refused the old employer’s demand that they voluntarily preserve image copies of their computer hard drives, and had actually discarded one computer that had been used in transferring data.

Upon learning of these facts on a motion to compel discovery, a federal judge in Connecticut ruled that the defendant employees and their new firm had to deliver all of their office and home computers and personal digital devices to a court-appointed computer forensic expert for imaging and data recovery. The court ordered the defendants to pay 80 percent of the cost of the expert’s work, and finding that the defendants’ resistance to the discovery motion had been unjustified, also ordered the defendants to pay the attorneys fees incurred by their former employer in bringing the motion. Genworth Financial Wealth Management Inc. v. McMullan, D. Conn., No. 3:09-cv-1521 (VLB) (order entered June 1, 2010). 

In a subsequent ruling on the old employer’s motion for a preliminary injunction, the court ordered the defendants to refrain from communicating with any current client or known prospect of the former employer except to the extent that the client had already become a client of the new firm or the defendants could show that the client’s information was not included in the data downloaded from the old employer. Id. (order entered June 10, 2010).

The case provides a useful analysis of when imaging of whole computer drives may be an appropriate discovery technique, and illustrates how “sticky fingers” can saddle departing employees with costly litigation and legal restraints on their ability to compete.

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By Jeffrey S. Kopp and Scott R. Kaspar

In non-compete cases, often the most powerful evidence that will convince a judge to enter an injunction is computer records and files showing that an employee or former employee has illegally downloaded confidential or trade secret information on his or her way out the door.  For instance, three employees of one of our clients recently quit to go work for a competitor, and on the eve of their departure they downloaded spreadsheets, cost models, forms, and customer proposals - most likely so that they could use them under their new employment.  Proving what these employees were up to was critical for our client's ability to show the judge that this conduct warranted an injunction.

Often, companies do not have the capability to analyze computer data in-house, so they need to retain a forensic specialist to examine laptops, look for hidden metadata, and see whether files have been altered, copied, or deleted.  Under some state private investigator licensing laws, such computer forensic examiners must be licensed as private investigators.  Some state statutes, including Michigan's, go so far as to expressly include a licensing requirement for anyone who conducts "computer forensics," which is defined as the "collection, investigation, analysis, and scientific examination of data held on, or retrieved from, computers, computer networks, computer storage media, electronic devices, electronic storage media, or electronic networks, or any combination thereof."  MCL § 338.822.  While certain categories of people are excluded from the definition, such as in-house IT professionals, attorneys licensed in the state, and CPAs who conduct financial investigations, the majority of computer consultants that would be retained to examine a hard drive likely fall within the definition of the Act.  Other states, including Florida, South Carolina, Texas, and others also either have express licensing statutes or have broad Private Investigator licensing statutes that also can be interpreted to cover computer forensic examiners.

Violation of a licensing statute at a minimum will subject the forensic examiner to a fine from the licensing state.  However, the implications could be more severe, including an order from a court or from the state prohibiting the forensic examiner from testifying before a court or even possibly the exclusion of evidence.  Considering these risks, it is prudent to make sure that any computer forensic examiner retained in non-compete cases is properly licensed in the state where the examination is being conducted.

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In a recent decision, LVRC Holdings LLC v. Brekka (9^th Cir.), a federal court upheld the dismissal of an employer's case against its former employee, Christopher Brekka, and his consulting businesses, alleging that he violated the Computer Fraud and Abuse Act (CFAA).  The company alleged that Brekka illegally accessed its computer "without authorization" during employment and after his employment terminated.  The court found Brekka did not access a computer "without authorization" when he emailed documents to himself, nor could the company prove that he accessed the company's internal website after he left the company.

The facts were largely undisputed - the company operates a residential treatment center for recovering drug addicts, and it hired Brekka to assist with marketing and interacting with its email and website provider.  At the time he was hired, Brekka owned and operated consulting businesses that provided referrals for rehabilitation services to potential patients.  While Brekka was employed by LVRC, he was provided a user name and a password so he could access company information, including information about LVRC's website and statistics about website usage.  Prior to leaving the company, Brekka emailed himself a number of LVRC documents, including patient admissions reports, LVRC's marketing budget, meeting notes, and a master admissions report that included the names of past and current patients.  Additionally, after he left the company, the company learned that someone had accessed its website using Brekka's log-in information. 

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