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

In 2006, Hunt approached a sales manager at one of InfoCor's competitors, and was ultimately hired.  During his last month at InfoCor, Hunt attempted to divert a number of customers to his soon-to-be new employer and helped arrange for the new employer to become another authorized reseller of SMART Boards to CESA 2.  A few months later, after Hunt's employment with InfoCor had ended, CESA 2 terminated InfoCor's status as an authorized reseller of SMART Boards.

InfoCor sued Hunt and his new employer alleging trade secret misappropriation, violation of Wisconsin's computer crime statute, tortious interference, common law and statutory conspiracy claims, conversion and breach of the duty of loyalty.  The trial court dismissed all of InfoCor's claims on a motion for summary judgment except its claim for tortious interference based on Hunt's interference in InfoCor's customer relationship with CESA 2 prior to terminating his employment at InfoCor. InfoCor appealed the dismissal of its duty of loyalty, conspiracy and the portion of InfoCor's tortious interference claim relating to Hunt's post-termination activities.

The Court of Appeals reversed, with the bulk of its discussion focusing on the duty of loyalty claim.  While the decision is unpublished and, therefore, not binding (under a recent change in Wisconsin's rules, however, it may be cited for its persuasive effect), its historical discussion of when a duty of loyalty exists is helpful and identifies the issues that generally arise in those cases.  The result highlights why the claim can be such an effective one for a company seeking to protect its information in the hands of a former employee and its competitors.

The Court's analysis was primarily addressed to the question whether Hunt owed InfoCor a duty of loyalty in the first instance.  The trial court had held that Hunt did not owe any such duty because he was a mere employee and not a corporate officer or the "'policy-making' equivalent" of an officer.  In the trial court's view, it was clear under Wisconsin law that only officers or policy making employees owe a duty of loyalty and that a salesman, like Hunt, did not fit into either category.

The Court of Appeals rejected that conclusion.  Relying on a line of Wisconsin cases going back to the early 1960's, the Court of Appeals held that the test was not the authority of the employee with respect to the business as a whole which determined whether a duty exists, but whether the actions at issue were "within the scope of the employee's responsibilities" and "directly contrary to the employer's interest."  Put another way, "an employee who uses the power of his employment responsibilities to harm his employer breaches his duty of loyalty" but an employee who was not a corporate officer and who "merely explored the possibility of starting a competing business, but did no actual harm" to the employer does not.  The Court of Appeals referred to this analysis as determining whether the employee's duties make him a "key employee" giving rise to a duty of loyalty in relation to the performance of those duties.

Thus, even a "mere" salesman, like Hunt, can owe a duty of loyalty to his employee not to use his position to further his own or another's competitive interests at the expense of his current employer.  Hunt's actions in helping his future employer become an authorized reseller of SMART Boards to his primary customer, in direct competition with and ultimately to replace InfoCor breached that duty.

The utility of a breach of loyalty claim in dealing with employees who have taken crucial information and "jumped ship" should not be underestimated.

For example, while businesses often place significant value on customer information, courts have been relatively hostile to misappropriation of trade secret claims based on the use of such information.  A duty of loyalty claim, however, does not turn on whether the information or activities at issue involve trade secrets.

Similarly, the claim does not depend on the often-difficult task of justifying the precise terms of a contractual non-compete, particularly in states, like Wisconsin, where an overbroad employee non-compete is void in its entirety and cannot be enforced even to the extent reasonable.  Another advantage is that the claim sounds in tort as well as contract, opening up the possibility of punitive damages for particularly egregious conduct.

Another advantage of such a claim is that it focuses on the information at issue and the actions of the employee with respect to that information, i.e. it is easily tailored to the specific facts of the case.  It does not require the sometimes contortionist tactics needed to shoehorn the facts into a specific statutory cause of action like the CFAA or its state equivalents, which can be particularly problematic when the law under those statutes is changing quickly as the limits of the statutes are being tested and developed in a number of cases.

Finally, in those cases where the employee's activities, like Hunt's in the InfoCorp case, cause damage to the employer during his/her employment, the employer can also seek to recover the compensation paid to the employee during the period of the breach, including the value of benefits paid.  Combined with a conspiracy claim against the new employer where appropriate, the addition of a claim for punitive damages and return of employment compensation amounts can add significant dollars to the amounts at issue and, in general, increase leverage in negotiations to get back or prevent the use of the information.

Application of the "inevitable disclosure" doctrine is neither universal nor automatic, however.  For example, in states that have not adopted the UTSA, some courts have construed the absence of an express statutory provision allowing for claims based on threatened (as opposed to actual) misappropriation as precluding the use of the doctrine.    

Even in those states where the UTSA has been adopted, the applicability of the doctrine remains an open question.  For example, in some UTSA states, courts have expressly rejected the doctrine, holding that it "cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets."  See, e.g., Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277 294 (Cal. Ct. App. 2002).  In other states, despite the fact that the doctrine has been recognized for at least 40 years, the state appellate courts have simply not addressed the issue, leaving the federal courts to predict what is likely to happen in those jurisdictions.  Compare, e.g., Clorox Co. v.  S.C. Johnson & Son, ___ F.Supp.2d ___, No. 09-CV-408, 2009 WL 1615522 (E.D. Wis. June 9, 2009) (noting lack of Wisconsin decisions addressing the viability of the inevitable disclosure doctrine) with Square D Co. v. Van Handel, No 04-C-775, 2005 WL 2076720 (E.D. Wis. Aug. 25, 2005) (assuming, without deciding, that even without an enforceable noncompete agreement, the inevitable disclosure doctrine would justify injunctive relief under Wisconsin law, if the information allegedly possessed by the former employer were a trade secret).  

Finally, even where the state courts have adopted the doctrine, it will not "inevitably" lead to the granting of injunctive relief for the former employer.  As the Square D court noted, there is still a threshold issue of whether the information the former employer seeks to protect is a trade secret.  And, even if a trade secret is involved, to determine whether disclosure is truly inevitable, courts will often look closely at just how much overlap there is between the employee's former and current positions or whether other actions can be taken to protect against disclosure short of enjoining the employee from working for the competitor.  See, e.g., Bridgestone/Firestone, Inc. v. Lockhart, 5 F. Supp. 2d 667 (S.D. Ind. 1998) (where sales executive had been assigned to work in a non-competitive division and "ethical walls" would be used to isolate him from decisions where his trade secret knowledge could be used, no inevitable disclosure threat existed).  Courts also continue to look closely at the balance of harms.  Thus, even while recognizing that you can't put toothpaste back in a tube and, similarly, a trade secret once disclosed is, by definition, no longer a trade secret, courts remain very concerned about limiting the mobility of employees, especially those with highly specialized knowledge.   

In short, despite the long-standing nature of the doctrine, courts continue to struggle to balance the legitimate needs of both employees and employers and, even where prior case law indicates that the doctrine is viable, where a particular court will strike the balance remains an open question.