Employment Law Update: Recent Cases Address Employer Efforts to Protect Confidential Information

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In recent months, both the Fourth Circuit Court of Appeals, which has jurisdiction over federal cases in North and South Carolina, and the South Carolina Supreme Court have addressed the issue of protecting trade secrets and confidential information.

The Fourth Circuit limited an employer’s ability to use the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. §1030, et seq., against a former employee who downloaded company trade secrets. The South Carolina Supreme Court held that covenants not to disclose confidential information are not in restraint of trade and are not to be construed strictly in favor of the employee but analyzed under a more general reasonableness standard. Although the North Carolina Supreme Court has not ruled recently on the issue, North Carolina affords similar protection for confidential information.

Fourth Circuit Addresses Application of CFAA to Employees

While the CFAA is primarily a criminal statute – it was enacted in 1986 to reduce computer hacking – the law allows an employer who has been damaged to bring an action against an employee who “intentionally accesses a computer without authorization or exceeds authorized access and thereby obtains… information from any protected computer.” 18 U.S.C. §§ 1030(a)(2)(C), (a)(4), (a)(5)(B), and (a)(5)(C). Employers argue that an employee who, in a breach of his duty of loyalty, downloads proprietary information from a company computer and takes that information with him to a new employer has violated the CFAA.

Courts throughout the country disagree on whether an employee in this situation has “accessed a computer without authorization” or “exceed[ed] authorized access.” In WEC Carolina Energy Solutions, LLC v. Miller, 2012 WL 3039213 (4th Cir. 2012), the Fourth Circuit joined the Ninth Circuit in narrowly interpreting the application of the CFAA to an employee’s downloading of information from a company computer.

Mike Miller worked as project director for WEC, a company that provides specialized welding and related services to the power generation industry. WEC allowed Miller the use of a company laptop and provided him access to company trade secrets and confidential information. To protect such information, WEC maintained policies that prohibited an employee from using the information without authority or downloading it to a personal computer.

WEC alleged that prior to resigning from the company in April 2010, Miller emailed confidential documents to a personal email address and, along with the help of his assistant, Emily Kelly, downloaded confidential documents to a personal computer. WEC also claimed that Miller, who went to work for a competitor, used these documents to make a presentation on behalf of the competitor to a WEC customer.

WEC sued Miller and Kelly, alleging that they violated the CFAA. WEC reasoned that under its policies, Miller and Kelly were not permitted to download confidential documents to a personal computer and that, in doing so, they violated their duty of loyalty to WEC, thereby either losing or exceeding their authority to access WEC’s computers.

The Fourth Circuit, however, disagreed, reasoning that the terms “without authorization” or “exceeds authorized access” do not apply where an employee has access to an employer’s data on a computer and then uses that information improperly. Although Miller and Kelly did not have authority to misappropriate trade secrets, they did have authority to access the information as employees of the company. Thus, their acts of downloading the confidential documents did not violate the CFAA. The Fourth Circuit noted:

Our conclusion here likely will disappoint employers hoping for a means to rein in rogue employees. But we are unwilling to contravene Congress’s intent by transforming a statute meant to target hackers into a vehicle for imputing liability to workers who access computers or information in bad faith, or who disregard a use policy.

WEC Carolina Energy Solution, LLC v. Miller, 2012 WL 3039213 at *13. Since five other circuits have interpreted the CFAA to apply to employees who violate company policies regarding the use of information stored on company computers, WEC has filed a petition for a writ of certiorari with the U.S. Supreme Court.

South Carolina Supreme Court Addresses Scope of Non-Disclosure

The South Carolina Supreme Court recently analyzed the enforceability of covenants not to disclose confidential information in Milliken & Company v. Morin, 2012 WL 3111721 (S.C. 2012). Employers often use non-disclosure covenants to protect information that is considered confidential but that may not rise to the level of a trade secret and, therefore, would not be protected by a state trade secrets statute. The court held that, unlike a covenant not to compete, a covenant not to disclose confidential information is not a restraint of trade because it does not limit an employee’s freedom of movement among employment opportunities; rather it seeks to restrict disclosure of information. Id. at 4 (citing Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999)).

In Milliken, the employer brought suit against a former employee, Brian Morin, for breach of a covenant not to disclose confidential information contained in his employment agreement after he resigned and started a new company. The covenant prevented Morin from using or disclosing confidential information for a period of three years after his resignation. It defined “confidential information” as “all competitively sensitive information of importance to and kept in confidence by Milliken, which becomes known to me through my employment with Milliken and which does not fall within the definition of Trade Secret” set forth in the agreement.

Morin argued that the non-disclosure covenant, like a non-compete, was a restraint of trade and should be strictly construed in favor of the employee. He reasoned that the covenant was not reasonable because it was so broad as to prevent him from using his own general skills and knowledge, as opposed to only restricting his use of confidential information.

The court disagreed, finding that the covenant was not a restraint of trade. Nevertheless, it held that a non-disclosure covenant was still a restrictive covenant, and public policy demands that it be subject to judicial review for reasonableness. In this case, the covenant was reasonable because the definition of confidential information was limited, encompassing only important information not generally known to the public that became known to Morin during his employment. The court held that Milliken had a legitimate business interest in protecting such information. The court also noted that, although not necessarily required, the covenant was reasonably limited to only three years.

North Carolina Law Is Consistent

For North Carolina employers, the Milliken decision reflects existing state law in this area. The North Carolina Court of Appeals held in 1996 that an agreement restricting the disclosure or use of confidential information was not a restraint of trade. ChemiMetals Processing, Inc., v. McEneny, 476 S.E.2d 374, 376-77 (N.C. 1996). Like South Carolina law, North Carolina law permits confidentiality agreements designed to protect a legitImate business interest of an employer to be unlimited as to time and geographic area.

What These Cases Mean for Employers

As a result of the Fourth Circuit’s holding in WEC Carolina Energy Solutions, an employer does not have a claim under the CFAA against a former employee who had access to the company’s computer and downloaded or copied confidential documents. However, where the employer has required the employee to enter into a covenant not to disclose confidential information that is reasonable in scope, as outlined in Milliken, the employer may have a claim for breach of that covenant. In those instances, the employer should make sure that the definition of confidential information is not overly broad and does not include information that the employer does not have a legitimate business interest in protecting. Note also that almost all states, including North and South Carolina, have statutes protecting trade secrets that prohibit misappropriation by former employees.

The Employment Law Update is published as a service to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation.