Confidential Information and the Departing Employee

I recently ran a seminar for the Human Resources Association of Central CT on "Effectively Managing Your Departing Employees."  The issues concerned  how attorneys can help to eliminate, prevent, or mitigate the risks of intellectual property theft.  In this post, I will define the basics of the problem.  In the next post, I will cover how to address the problem.  

  • Employees will Leave (Millennials average job tenure is 2.5 years)
  • Employees will be disgruntled (Wall Street Journal: 75% of departing employees are disgruntled)
  • Employees will have access to electronically stored data (UC Berkeley study shows 90% of critical business data is digital)
  • Digital is portable, easy to copy, saved in seconds, and transferred to multiple locations
  • Employees do take confidential information, even if by mistake. (Ponemon Institute says 59% of departing employees take information, and 90% of IT professionals)

Based on the these numbers, you could fairly argue that in a three year time frame an average business will likely have to deal with an unhappy, departing employee that will copy accessible confidential information.   This paints a pretty grim picture.  Nevertheless, it is a fair way to think about the problem to manage risks appropriately. 

One of the biggest risks is financial loss from theft of intellectual property and confidential information.  This might cover any of the following:

  • Trade secrets (confidential client lists, formulas, data)
  • Patents (fully or partially disclosed inventions)
  • Copyrights (original works such as software code)
  • Trademarks (counterfeit goods, brand damage) 
  • Proprietary information (anything you do not want in hands of a competitor)

How does employee or insider theft typically happen?  Here are a few examples:

  • Email (with or without attachments)
  • Portable drives (thumb or flash drives)
  • Smartphone 
  • File Transfers (FTP sites)
  • Remote access programs (GoToMyPC)
  • File Synching programs (Dropbox)
  • Old fashion printing and copying

In the next post, I will cover what you can do to help stop or reduce the risks of intellectual property theft. 

Damages for Breach of Non-Compete Agreement In Connecticut

When deciding whether to hire an attorney to seek enforcement of a non-compete agreement in Connecticut, a business should consider the available remedies or damages.  The following are the basic remedies or damages for breach of a typical non-compete agreement in Connecticut.

1. Injunctive relief.  Injunctive relief basically means a court ordered act or prohibition against an act.  For example, when seeking to enforce a non-compete or non-solicitation agreement, your attorney will request that the court issue an order preventing the employee from working for a competitor.  If there is a non-solicitation clause in the contract, the attorney will ask the court to issue an order to prevent the departing employee from soliciting or "stealing" clients.  The court will only issue such an order if the agreement meets a series of factual requirements.   Essentially, the restrictions in the agreement must be reasonable in relation to protecting legitimate business interests.  

2. Actual losses.  In some situations, a business will have no measurable losses and will need to resort to injunctive relief only.  However, in other instances, a business will have provable loss of business from breach of an agreement.  The traditional rule for breach of contract is to measure the damages or losses to the business and not the gains of the departing employee or competing business.  A typical example would be the loss of incremental profits from losing a customer arising from the improper conduct of the departing employee.  In Connecticut, a business must prove these damages with reasonable certainty and not guesswork.  

3. Disgorgement of profits.  In certain circumstances, a business could win an award that disgorges (or takes away) the ill gotten gains or profits of the departing employee.  For this type of damages, the focus is on the profits of the departing employee.  

4. Attorney’s fees.  The traditional rule requires each party to pay their own attorney’s fees. However, if the employment contract has a provision that covers an award of attorney’s fees, a court may award attorney’s fees incurred in enforcement of the non-compete.

5. Punitive or multiple damages.  In a standard breach of contract case, punitive, exemplary, or multiple damages are not available.  However, if the conduct involved provides the basis for a violation of some other statutory or common law, a business may recover some type of extra contractual damages.  An example would be if the breaching conduct also provided the basis to prove a willful violation of Connecticut’s Uniform Trade Secrets Act.

 

First Amendment Suit Filed Against Hartford Courant Following Termination of Columnist

I was tipped off by a reader that George Gombossy, the consumer columnist at Ctwatchdog, would be filing his wrongful termination suit against his former employer the Hartford Courant.  Sure enough, the lawsuit now has been filed and made its way around cyberspace today.  

Hartford Attorney Mark Dumas posted a copy of the lawsuit on Twitter.  You can read the lawsuit here (download).  You can also read about the suit at the Laurel and in a post by Christine Stuart at CTnewsjunkie.

Mr. Gombossy also posted the lawsuit on his new blog, ctwatchdog.com.  You can read Mr. Gombossy’s comments on the suit here.  He claims that "Courant management attempted to pressure [him] from writing negative columns about key advertisers."  He claims that his termination followed after he wrote a column about Sleepy’s that the Courant never published.  

The Courant denied the allegations according to an article today by Kenneth Gosselin. The Courant also issued a statement calling Mr. Gombossy’s claims a "mischaracterization."

The focus of relief for Mr. Gombossy’s lawsuit is Connecticut’s free speech statute, which provides for damages in the event of termination for exercise of certain first amendment rights.   Dan Schwartz at the CT Employment Law Blog dissected the suit earlier today and provided a possible defense to the free speech claim. 

As noted by Dan Schwartz, nothing needs to happen in the lawsuit until November 13th, at the earliest, when the Courant has to file a response to the lawsuit.  Based on its statement on the case, it appears that the Courant intends to vigorously defend the suit.  We will have to watch how this case develops. 

Dispute Between Business Partners Ends In Dissolution and Double Damages Under Connecticut Wage Act

In Saunders v. Firtel, a decision to be officially released on September 22, 2009, the Connecticut Supreme Court upheld an award of double damages under Connecticut’s wage and hour laws in what amounted to a dispute between two business partners, Barry Saunders and Burton Firtel.  The supreme court also upheld judicial dissolution of a company owned by the partners.  The case highlights the complications that can arise between partners when one partner is also an employee in the business.  

In this case, Saunders became part owner of a company that Firtel previously formed by himself.  Saunders also became an employee of the company as part of a larger business relationship.  This is not an uncommon arrangement in business, especially when a small business is purchased by a larger company.    Saunders and Firtel also formed another limited liability company together as equal owners. The business relationship was documented with an operational agreement. 

Although the partners successfully operated the business for years, a dispute arose out of unpaid wages after Saunders unsuccessfully tried to change the compensation structure of the business relationship.  In response, Firtel fired Saunders.  Saunders brought a lawsuit in Connecticut state court for unpaid wages claiming he was an employee.  He also sought to dissolve the limited liability company formed with Firtel. 

A few months ago, Connecticut’s wage and hour laws were in the national spotlight because of the scandal with AIG’s bonus plan for its employees in Wilton, Connecticut.    AIG claimed that it had to pay the bonuses because it feared double damages under Connecticut’s wage and hour laws.  In this instance, Saunders brought his case in court relying on the same provisions that AIG feared. 

Connecticut’s unpaid wage law, General Statutes section 31-72 ,provides that:

When any employer fails to pay an employee wages . . . the employee may recover, in a civil action, twice the full amount of such wages, with costs and such reasonable attorney’s fees as may be allowed by the court . . 

To recover double damages, although not mentioned in the statute, courts require a finding of bad faith, arbitrariness, and unreasonableness by the employer.  In Saunders’ case, he won because the trial court found that the failure to pay was willful.  What might seem strange about the case is that Saunders was not only an employee, but he was also a 49% stockholder and an officer in the company he sued to obtain double damages.  Firtel was a 51% owner, and the President. 

Dan Schwartz’s Employment Law Blog has a nice summary of the supreme court’s treatment of how Saunders qualified as an employee as well as the implication of the decision on employers.  I tend to agree with Dan that there is no significant impact on employers because if wages are earned, the wages should be paid regardless of the business relationship.

I think the case does highlight important considerations for business partners.  The case demonstrates how a breakdown in the relationship between two business partners can turn into a dispute where one partner effectively ends up in the shoes of the employer subject to wage and hour laws.  This was probably not intended and it is unlikely that Saunders and Firtel viewed themselves as employee and employer.  In fact, they appeared to be nearly equal partners.

The case is also another example of a once successful business partnership ending in arguments over compensation and written agreements.  It further shows that dissolution of a company is another judicial remedy, along with disassociation and expulsion in partnerships, for a company that can no longer operate in a practical manner. 

 

Social Networking Lawsuits Are Big Risk to Business

I just read an excellent article posted on Law.com from the New York Law Journal on social networking and challenges to business owners and their legal counsel.  The authors Christopher Boehning and Daniel Toal focus on a new emerging problems associated with electronic discovery of social networking data.  The authors also point out many of the potential problems for employers and businesses related to social networking sites.

When Facebook started exploding in popularity, you could see that the future in communication was social networking.  Boehning and Toal cite to a New York Times articles that indicates the future is now upon us as more people spend time on social networking sites than e-mailing.  The authors correctly point out something I emphasize to all my business clients:  businesses need to have a policy on how to handle social networking sites like Facebook, MySpace, LinkedIn and Twitter.  The policy should cover the business’ use of such sites and use by employees.  Policies on preservation of the data should also be included as social networking data is akin to the new email.

Lawsuits involving some aspect of social networking sites are increasing in frequency from across the country. Take for example the recent jury verdict in New Jersey against Hillstone Restaurant for violation of the Federal Stored Communications Act.

In that case, the employers accessed an employee MySpace group that was dedicated to criticizing the employer.  Although the verdict amount was relatively small, the implications are far reaching.  This case was reported on by Charles Toutant in the New Jersey Law Journal.  The employees’ trial brief is a good read and spells out some of the arguments in favor of employees’ rights to privacy with social networking sites. 

The outcome in the New Jersey case may have been different if the restaurant had a policy addressing use and access to social networking sites.  Businesses will have different concerns when it comes to adopting a policy, and no policy will cover every situation.  However, the lack of any policy at all is likely to lead to problems and potential litigation.  The best way to avoid litigation is to implement a written policy on use and access to social networking sites.