Some Lessons from a Million Buck Case
Almost $1 Million in damages awarded by a trial court in Tennessee in favor of an employer against a single former employee was recently upheld by a state court of appeals. The Hamilton-Ryker Group, LLC v. Keymon, No. W2008-00936-COA-R3-CV (Tenn. Ct. Appl. Jan. 28, 2010). Besides the lessons the case teaches to naughty employees who may endeavor to compete or solicit in violation of an employment agreement, and thereby damage their employers, it also provides some guidance on best litigation practices in bringing such claims, guidance for employers on how to protect confidential and "trade secret" information and even drafting practices for practitioners for agreements containing restrictive covenants.
The employer, The Hamilton-Ryker Group ("H-R"), employed Tammy Keymon for about 14 years. She had an Employment Agreement with noncompete, nonsolicitation and confidentiality provisions. In the summer of 2004, H-R reorganized jobs within the company, eliminating Keymon's particular position. Because H-R wanted to retain her, it offered Keymon a new position with the same salary and, per H-R, a decreased travel schedule. Keymon felt the new position would require more travel, and she rejected it. H-R and Keymon then agreed that she would be temporarily laid off for a ninety-day period, during which time H-R would try to find a position for her; and if not, they would discuss a possible permanent layoff.
Here's the naughty part: The ninety-day period was to begin on Monday, July 12, 2004, so Keymon's last day of work was Friday, July 9. On the morning of Saturday, July 10, Keymon called the owner of one of H-R's main clients - for whom Keymon supervised the H-R employees who worked on the client's needs and also for whom Keymon was the main point of contact - and told the client's owner that H-R had laid her off. In that phone call, Keymon and the client's owner agreed that Keymon would take over doing all the work that H-R had been doing for the client. Several hours later that same day, Keymon emailed fifty-six documents from her H-R work email address to her personal email address. The documents included the client's production schedules, a profit-loss analysis for completed projects and invoices for recent projects. On July 16, Keymon began billing H-R's client, and sixteen days after Keymon emailed the documents to her personal account, the client informed H-R that it had "decided to pursue another avenue for" its needs. Keymon eventually hired employees to assist her with the client's work, including some H-R employees who had worked on the client's work for H-R, under Keymon's direction when she worked at H-R.
The appeals court noted several times in its opinion that Keymon began to collect unemployment benefits for her layoff from H-R during the time period in which she was billing H-R's now former client for the services she performed for the client.
At the end of the ninety-day period, Keymon and H-R - shockingly - did not reach an agreement for Keymon to return to H-R. They therefore agreed to sever the employment relationship, and Keymon signed a severance agreement. For consideration of $6,000 to be paid in installments, Keymon released all claims against H-R and agreed to cooperate in any investigation into a breach of any employment agreements.
H-R became aware that Keymon was doing work for its former client, and on November 11, 2004, H-R's lawyer sent her a letter asking that she cooperate with its investigation into a breach of an employment agreement. The letter sought many documents from Keymon. Keymon produced some of the requested documents but not all; and she also sent a check to H-R for the amount of the first installment paid to her for severance. H-R soon after filed suit against Keymon, alleging breach of her noncompete, nonsolicitation and confidentiality covenants in her Employment Agreement and violation of the state Uniform Trade Secrets Act. It is worth noting that the appeals court - as many courts in many jurisdictions do - conflated the noncompete and nonsolicitation covenants - referring to them singularly in its opinion as "the noncompete agreement."
By the date of the bench trial in the case, Keymon had billed H-R's former client $1,450,388 for the work she and her new employees did for the client.
At trial, H-R elicited testimony from its witnesses about the steps the company took to keep its information confidential: a company server protected by a firewall to prevent outside access to the information; requiring employees to execute confidentiality and restrictive covenant agreements; and policies allowing employees to access only certain information needed to complete the employee's own job. All entities that wish to enforce confidentiality and restrictive covenant agreements need to consider implementing similar protections.
When Keymon testified at trial she said she emailed the H-R documents to her personal email account in order to create billing invoices for H-R. None of the reviewing courts ever bought this story. She also stated that the work she did for the client on her own was different in nature from the work she did for the client while she worked for H-R.
At the conclusion of the trial, the judge ruled that H-R was liable to Keymon for $6,000 on her counterclaim for breach of the severance agreement. The judge further ruled that the restrictive covenants in the employment agreement were enforceable, despite a lack of a geographic restriction; that the information Keymon downloaded from the H-R system and emailed to her home computer constituted trade secrets information; that Keymon improperly competed with and solicited from H-R; and that she willfully and maliciously took the trade secrets. The trial judge awarded H-R about $948,000, with actual damages of about $477,000 being doubled as "exemplary damages" under the Uniform Trade Secrets Act. Keymon appealed.
The appeals court found, despite the fact that the restrictive covenants in the agreement were not limited in geographic scope, they were still reasonable. The court followed a line of reasoning used by courts in several states in its holding: "In some cases, however, a restriction against soliciting the employer's customers can in effect substitute for a geographic limitation, by stating the impermissible actions of the employees by other means." In other words, in certain jurisdictions, failing to specify a geographic scope for a restrictive covenant may not be fatal - perhaps even in states that refuse to follow the "blue pencil" doctrine - if the covenants at least specify the customers whom the employee is prohibited from soliciting.
As a best practice in drafting agreements, a practitioner should provide geographic limitations; but often they are not practically definable. In such instances, the drafter will want to define as specifically as possible the customers or other class of persons or entities with whom contact is prohibited. Such drafting will increase the likelihood that a court will find the agreement reasonable and enforceable.
The appeals court also upheld the trial court finding that the confidential information that Keymon emailed to herself from her H-R email address constituted trade secrets. The court described the history of common law trade secrets claims in Tennessee prior to the passage in 2000 of Tennessee's Trade Secrets Act, which preempted any prior inconsistent and conflicting law in the state regarding the misappropriation of trade secrets. The court noted that the Tennessee law adopted definitions from the Uniform Trade Secrets Act, and it also readily in its opinion adopted holdings from other jurisdictions, noting the Tennessee legislature's instruction to courts to enforce the law consistent with other states enacting it.
Keymon argued on appeal that she could have gotten the information she emailed to herself in the fifty-six documents, from the client itself, so it was not trade secrets. The court rejected Keymon's argument, holding that even if she could have acquired parts of the information directly from the client, and "[e]ven if Keymon could have obtained 'individual pieces of information' by other means, the integration and aggregation of it may be deemed confidential or a trade secret." The court noted that the speed with which Keymon used the information to compete against H-R, only six days, demonstrated its independent economic value.
The appeals court next rejected Keymon's argument that exemplary damages under the Trade Secrets Act were inappropriate. As mentioned, the Tennessee court relied on trade secrets cases from other jurisdictions in making certain rulings. Citing cases from Montana, Minnesota and Rhode Island, the court held that "[w]e are persuaded by these cases that the standard for exemplary damages under the Trade Secrets Act should be interpreted differently from the traditional standard for punitive damages so as not to require a finding of 'hatred, ill will or spite.'" Drawing from the facts the trial court judge used to award exemplary (double) damages, the appeals court ruled that Keymon's actions warranted such damages: the day after her last work day she contacted the client's owner and solicited business; she then immediately emailed herself H-R's trade secrets; "while drawing unemployment compensation and accepting severance payments, Keymon was surreptitiously utilizing [H-R]'s trade secret information to purloin [its client's] business, even utilizing [H-R] employees to do so. We must conclude that this conduct amounts to willful and malicious misappropriations under the Trade Secrets Act."
Finally, the appeals court rejected Keymon's claim that the trial court had been incorrect in awarding damages to H-R for lost profits for the four-year period between her last day working at H-R and the trial dates, claiming that it was too speculative to conclude that H-R would have provided services to the client during this four-year period of time. The appeals court held that because the Trade Secrets Act allows for damages for not only actual loss but also for "unjust enrichment" damages, the trial court reasonably calculated that Keymon was unjustly enriched during this four-year period. Therefore, the damages award was upheld.
The naughty employee in this case lost at trial and appeal. The employer was able to prevail in large part due to the way it protected its confidential and trade secret information; the way it specifically defined in its employment agreement which particular clients the employee could not solicit; the way it required its employee in its severance agreement to cooperate with any violations of any employment agreements; and its ability to point out to the courts other "bad acts" by the employee, such as drawing unemployment while simultaneously competing with her former employer and earning money from that employer's own client. The case contains good lessons for employers and practitioners in jurisdictions around the country.