Colorado Non-Compete Law Blog : Denver Non-Compete Lawyer & Attorney : Dan Warden : Bond & Morris Law Firm : Adams County, Brighton, Aurora, Bow Mar, Lakeside

There are times when employees take information with them when their employment is terminated. Employees often believe that this information, whether it be customer lists or technical information, will assist them when they are looking for a new job or after they find a new job. 

When their former employer files a lawsuit or sends a threatening letter, however, these employees often panic. They rush to purge the stolen information  from their computer to hide evidence of the stolen information.  

These efforts often fail. There are many computer forensic companies, and they actively market their services to companies in connection with the issues raised by terminated employees.  Once a company files a lawsuit against the former employee, these companies assist the company in developing evidence that demonstrates that information was stolen. Alternatively, these companies can develop evidence to show that information was purged or wiped from the former employee's computer. That evidence can lead to dire consequences for the former employee, as a recent case demonstrates.    

In Telequest International v. Dedicated Business Systems, a March 11, 2009 decision from the federal district court in New Jersey, the defendant formed a new company and began competing with his former employer, Telequest, shortly after his employment terminated.  Telequest's Complaint alleged that the defendant had stolen a list of customers and vendors that it had taken Telequest fifteen years to develop. The Court ordered that the defendant produce his computers for a forensic examination. When the computers were produced, however, Telequest discovered that "defrag" and "wiping" programs had been run on the computers.  

As a result, Telequest sought a default judgment against the defendant for the destruction or "spoliation" of evidence. The Court declined to enter the default judgment but did order that an adverse instruction should be given to the trier of fact based on the efforts to purge information from the computer. That is, an instruction that the defendant had destroyed evidence "out of the well-founded fear that the contents would harm him".  This instruction would permit the fact finder to conclude that the former employee had breached any non-compete or stolen trade secrets. 

Litigants have an affirmative obligation to preserve evidence. Lawyers may debate the scope and timing of this obligation but there is no question that the obligation arises under the proper circumstances. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Laid off or terminated employees commonly take confidential company information, according to media reports covering a recent study released by the Ponemon Institute, an Arizona based research company. 

Nearly sixty percent of departing employees steal proprietary company data. Employees took this information in different ways. Most employees take documents (paper) with the information. But employees also admitted that they downloaded information onto a disc  or sent information as attachments to personal emails. Of the nearly sixty percent of the employees that took information, seventy nine percent admitted that they did so even though they knew that their former employer had forbidden them from taking the information. 

In perhaps its most intriguing finding, the survey reports that approximately twenty five percent of the employees said that they were able to access data on a company's network even after they had been terminated or quit.

These results were based on a survey of approximately 950 employees who were laid off, fired or lost jobs in the last twelve months. 

According to a recent article in the Washington Post, the Ponemon Institute's founder suggested that employees took this information because they believed that they were entitled to information that they had helped create. Another expert made the practical suggestion that the information was taken to assist employees locate a new position or improve their performance once they obtained a new position. 

Not surprisingly, computer forensics companies have used this report to promote their services. These companies sell their ability to prove that a former employee stole information. 

Employees, who are preparing to leave an employer, should take note of the survey. Employers frequently file suit against former employees for the theft of confidential information. As employers become more educated about the risk presented by departing employees, more effort will be expended to prove an employee's theft. 

Employers, on the other hand, also need to be vigilant. To the extent that information is readily accessible by former employees or if a company knows and does not prevent employees from taking information, a court may be reluctant to find that the information is confidential or proprietary.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Employees sometimes are lulled into a false sense of security when they haven't been asked to sign a non-compete (or after they conclude that their non-compete is not enforceable). These employees think that they can do almost anything in anticipation of competing with their employer after they quit their jobs. That's not true and a March 5, 2009 Colorado Court of Appeals decision in Harris Group, Inc. v. Robinson demonstrates how an employee's pre-termination conduct can result in liability.

The facts in Harris Group are worth considering because they provide a lesson on what an employee should not do when preparing to compete with his employer. 

Prior to quitting their jobs, the employees began to make plans to form a new business to compete with their employer. They copied company files and emailed or saved files for use with their new company. The original files were deleted after they were copied. The employees developed a website stating that one of the employees had left the company and taken along the company's entire consulting team. Five employees then quit and gave their employer one day notice. Once they quit, the five employees offered jobs in a new company to five of the seven employees who remained in their department. During the new company's first week, the former employees contacted the company's clients and and told them that the new company could take over their projects. As a result of the employees' promotional efforts, the new company was able to transfer seventeen of the twenty-none active projects from the old employer to the new company. 

Prior to the jury verdict, the company's claims for computer fraud and abuse, for defamation, and for civil theft and misappropriation were dismissed. At trial, the former employer sought to recover damages and lost profits. 

 A Denver District Court jury found that the company had proved its claims against the new business for intentional interference with contract, conversion and unjust enrichment. The jury also found that the company had proved its claims against the former employees for breach of confidentiality agreements, breach of fiduciary duty, intentional interference with contract, conversion; and unjust enrichment. Actual damages of over  $1.9 million were awarded against the former employees and the new company. The jury also awarded punitive damages of over $600,000. 

The Court of Appeals' opinion does not include any surprises. The Court held that the case should be remanded because pre-judgment interest had been improperly calculated and held that damages should not have been awarded for unjust enrichment. The remaining challenges were rejected.

There are a number of lessons to be drawn from Harris Group.  Employees face many economic challenges when they leave a company to form a competing business. Nonetheless, employees should not engage in conduct prior to terminating their employment that will expose them to liability to their former employer. Employers can and will use computer forensics to determine what an employee did before his employment was terminated. An employee should assume that his former employer will be able to determine what the employee did to prepare to engage in competition. Any effort to copy or email computer files will be discovered and may form the basis for claims against the employee.   

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In cases filed to enforce non-compete agreements, employers often include a claim against a former employee under the Computer Fraud and Abuse Act.

In a typical claim, the employer asserts that the employee accessed confidential business information on a work computer, emailed the information to a personal computer and then used the information in connection with the employee's new job. Based on these allegations, the employer asserts a claim under (a)(4) or (a)(5) of the Act.

Section (a)(4) of the Act states that a violation occurs when an individual who "knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value".  A key issue is whether the employee's actions were authorized by the employer.

Employers have had mixed success with these claims. Some courts have adopted an expansive construction of the Act in recognizing that employers have stated claims under the Act. These courts have concluded that, while an employee may have been authorized to access information, that access was terminated when the employee accessed and appropriated the information for their own personal gain and against the interest of their employer.

Last month, a Nebraska federal district court in Ervin & Ervin Smith Advertising v. Ervin joined those courts which have sided with employers in adopting a liberal construction of the Act. In Ervin, the defendants were former executives who emailed documents to their home computers when they were preparing to compete with the company. There was no dispute that the computer access was done prior to the end of employment. Based on these facts, the court denied the employee's motion to dismiss the claim under the Act. 

Neither the tenth circuit, nor Colorado's federal district courts have provided much guidance on the Act. The tenth circuit or Colorado's federal district courts may adopt the approach in Ervin which favors employers. As a result, any employee who transfers company information from his work computer to his personal computer for use in his future employment incurs the risk that a claim may be asserted under the Act. An employer also may be able to assert additional state law claims for breach of the employee's duty of loyalty or breach of the employee's agreement to maintain the confidentiality of information. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link