Fenwick Employment Brief - June 2013: Allegedly “Rogue” Employees Expose Employer to Potential Misappropriation Liability

by Fenwick & West LLP
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Even though a company took proactive steps to ensure new employees did not bring or use a former employer’s information to their new job, the company may still be on the hook for the subsequent misconduct of allegedly “rogue” employees.

In Language Line Services, Inc. v. Language Services Associates, Inc., plaintiff Language Lines Service (“LLS”) alleged Language Services Associates (“LSA”) and two of LSA’s then-employees, Patrick Curtin and William Schwartz, misappropriated LLS trade secrets. On cross-motions for summary judgment, the evidence showed that Curtin and Schwartz were former LLS employees. While employed by LLS, Curtin emailed an LLS spreadsheet containing customer data to his personal account. After complying with his one-year non-compete, Curtin took a position with LSA in December 2009. At that time, LLS reminded him of his ongoing confidentiality obligations stemming from his prior employment at LLS. In January 2010, while interviewing with LSA but still employed at LLS, Schwartz sent LSA a 60-day plan outlining his strategy for bringing in new business including projected revenue. Upon learning that Schwartz was interviewing with LSA, LLS fired him and he joined LSA in March 2010.

LSA required both Curtin and Schwartz to sign an acknowledgement stating that they did not have any trade secrets or confidential information from a former employer. Further, Schwartz signed an addendum to his employment agreement stating that he did not have any property or proprietary information belonging to LLS. In March 2010, LSA conducted an orientation for Curtin and Schwartz, which they attended remotely from Schwartz’s home. While there, Schwartz gave Curtin an LLS report with customer and pricing information. From March to May 2010, Curtin used the spreadsheet he obtained while employed at LLS and Schwartz’s report to create several lists of “quality leads” that he shared with his sales team. LSA later learned that the lists possibly contained LLS information, and interviewed Curtin who agreed to discard immediately any LLS information. Less than one month later, LLS filed the instant lawsuit.

In its summary judgment motion, LSA argued that it was not liable for the alleged misconduct. Among other reasons, it asserted “that blame, if any, rests squarely on two ‘rogue’ employees.” LSA claimed it did not know and had no reason to know the circulated lists were acquired by improper means. LLS disagreed, asserting that LSA knew Curtin and Schwartz were former LLS employees and, prior to hire, Schwartz sent LSA executives the 60-day strategic plan containing LLS information. LSA disputed that Schwartz’s conduct was sufficient to raise suspicions of misappropriation and offered that executives “made clear to Schwartz” that he should not use or rely on LLS information.

The court rejected both sides’ motions for summary judgment on the issue. The court noted that, LLS’ efforts with Schwartz notwithstanding, “such preemptive warnings may be insufficient if a company has ‘reason to know’ of a possible trade secret violation,” and held that material issues of disputed facts existed. For instance, a jury would need to decide whether the contents and circumstances of Schwartz’s disclosure of the 60-day plan should have alerted LSA to a possible trade secret violation.

Here, LSA’s well-intended efforts to on-board the new employees fell short, leaving it mired in litigation and facing potential liability for its employees’ conduct. Requiring acknowledgements about former employer information and ongoing obligations is a good start, but it is also essential, especially with competitor hires, to ensure employees actually understand their obligations and to be attentive to any “red flags” that an employee may be using a former employer’s information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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