Reviewing Employee’s Email, Quirky Question # 144
Quirky Question # 144:
I’m confused. I thought we could review our employee’s email communications when sent out on our company’s equipment. Our electronic communications policy states clearly that we reserve the right to do so.
I also thought we could review even privileged communications between our soon-to-be ex-employee and his attorney, if these communications were sent on our email system. I’m now being advised that we cannot do so. Can you offer any guidance?
Roy’s Analysis:
Your question illustrates the ongoing legal evolution in areas where advancing technology intersects employment law or affects other facets of legal analyses – here, the attorney-client privilege. Like technology itself, the law is developing and changing quickly in areas affected by technological advancements.
With respect to the issue of whether a company may review email communications of its employees, including even email communications between your employee and his/her outside counsel, I have written on this subject twice before. (To find the earlier analyses, use the “View by Topic” bar on the upper right-hand side of this page and scroll down to the topic, “Attorney-Client Privilege.” There, you will see two articles, QQ # 111 and QQ # 18, both addressing this issue.) Happily, I am pleased to report that the advice I gave two years ago has been validated and reinforced by a recent decision from the Supreme Court of New Jersey.
The “confusion” you may be experiencing regarding this issue likely reflects the fact that this continues to be an area of the law where courts are providing mixed messages to litigants and their lawyers alike. Unsurprisingly, not all judicial decisions have adopted a uniform approach to the question of whether email communications to counsel, when sent on a company’s communications systems or computers, are protected by the attorney-client privilege.
One case that has received considerable recent attention and commentary is Stengart v. Loving Care Agency, Inc., et al., decided by the Supreme Court of New Jersey on March 30, 2010. (I previously discussed the intermediate appellate decision in this case – see QQ # 111.) Stengart is a thoughtful opinion and highlights many of the issues that you should consider in evaluating your unique fact pattern.
The Stengart facts were relatively straightforward. Stengart, an Executive Director of Nursing for Loving Care, had been with the organization since 1994. During her tenure with the organization, she had been provided a laptop computer for company business. With the computer she could send emails on the company’s email system. She also could access the Internet and access her own, password protected email account at Yahoo. Unbeknownst to Stengart, however, Loving Care had installed certain browser software on her computer that automatically copied each web page she viewed, and stored all of her web-based communications on her hard drive.
In late 2007, Stengart used her computer to access her private Internet email account to communicate with her counsel about her situation at work. Her lawyers also communicated with her using that Yahoo email account. Stengart later resigned her employment, at which time she turned in her company computer. She subsequently brought claims for constructive discharge, hostile work environment, retaliation, and gender, religion and national origin discrimination. In connection with her lawsuit, her former employer hired a computer forensic firm to image the computer’s hard drive. The computer forensics firm retrieved the information on the hard drive, including the email messages between Stengart and her attorneys.
Despite the fact that the retrieved files contained the communications between Stengart and her counsel, the law firm representing Loving Care reviewed the information obtained from the computer forensic firm. Further, it was not until they received discovery requests from Stengart’s counsel several months later that they even acknowledged they were in possession of the communications Stengart had had with her lawyers.
Loving Cove’s counsel attempted to justify their withholding and review of the attorney-client communication on several grounds, including the company’s electronic communications policy. That policy, provided in part that: a) the company reserved the right to access and review all information on the company’s media systems at any time; b) email messages, internet use and communication, and computer files were considered part of the company’s business; and c) these types of communications were not to be considered personal or private to any individual employees.
The policy, however, also permitted “occasional personal use,” and the types of activities the company proscribed had nothing to do with the conduct in which Stengart had engaged. Moreover, the policy was silent on the use of the company’s computer system to access private Internet-based email systems (e.g., Yahoo, Gmail, AOL, etc.). Similarly, the policy did not apprise the employees that all Internet communications were automatically stored by the company on the computer hard drive and later would be accessible to Loving Care.
The trial court found that Loving Care’s counsel had acted properly, holding that the company’s policy had put Stengart on notice that her emails would be considered company property. The intermediate appellate court reversed this holding. The New Jersey Supreme Court affirmed the holding of the intermediate appellate court, remanding to the trial court the question of what sanctions should be imposed on defense counsel, including potential disqualification from the case.
The Supreme Court of New Jersey focused on two primary areas in reaching this result – the adequacy of notice provided by the company’s communications policy and the important public policy considerations implicated by the attorney-client privilege.
With respect to Loving Care’s electronic communications policy, the court found that the policy was imprecise, failing to define a number of critical terms. Equally important, as referenced above, the policy did not apprise the employees that the company reserved the right to review communications sent on private, password protected Internet email systems. And, the company did not inform employees that these communications were being automatically archived and stored. Further, the court felt that the company’s grant of permission for “occasional personal use” made the policy ambiguous.
As for the attorney-client privilege, the court emphasized that it is a venerable privilege . . . enshrined in history and practice.” The New Jersey high court noted that the attorney-client privilege is designed to foster “free and full disclosure of information,” based on “full, candid and confidential exchanges” between a client and counsel.
Given these perspectives, the court found that Stengart had a “reasonable expectation of privacy in the e-mails she exchanged with her attorney . . .”She had not used the company’s email communication system, but rather had used a password protected Internet email account to send her messages. She had not saved her password to access her Yahoo email account anywhere on her computer. Further, the communications from counsel bore a standard confidentiality notice that emphasized the communication was confidential, personal, and covered by the attorney-client privilege. In light of all of these facts, the court concluded that Stengart had a reasonable expectation that her communications, despite having been sent on a company issued computer, would remain private.
In reaching this conclusion, the court emphasized that these types of situations were highly dependent on the individual facts of each case. Some of the variables the court referenced in its analysis included the following:
- the language of the company’s electronic communications policy
- whether a company’s electronic communications policy prohibited all personal email use
- whether the computer was used for conduct specifically prohibited by the policy (e.g., communicating sexually explicit material)
- whether the computer was used for illegal conduct (e.g., transmitting child pornography)
- whether the communications described illegal conduct (e.g., embezzlement of a company’s funds or other illegal schemes)
- whether the employee used the company’s email system to communicate with counsel or whether, as in Stengart, the employee used a separate Internet based email system
- whether the system used by the employee was password protected
- whether the employee had carefully protected the password used to access the Internet email account
- where the computer was located (e.g., an employee working from a home office), and
- whether the messages sent on a company computer through an Internet account even used the company’s communications systems.
Notwithstanding the court’s discussion of these factors, it is clear that in New Jersey, the employee’s expectations of privacy and the priority given to preserving carefully the attorney-client privilege will be weighed heavily in any judicial analysis. Unless there are some unusual circumstances involved, communications between an employee and his/her counsel should not be reviewed by the company or its outside counsel. Conducting this review exposes the company and its outside counsel to the risk of sanctions, including, without limitation, disqualification from the representation.
As noted above, the law in this area continues to evolve. The Stengart court referenced a number of other recent decisions from other courts in other jurisdictions, not all of which have analyzed the issues in the same way. In my view, however, the prudent course for a company’s in-house lawyers and its outside counsel alike is to give the attorney-client privilege the deference it deserves and stay clear of communications potentially covered by the attorney-client privilege.
As I described in my prior analysis of this case, this does not mean that a company is precluded from reviewing carefully the contents of a current or former employee’s computer. This review may be critical in a variety of factual contexts and the information contained on the computer may prove very important (e.g., in a sexual harassment case where the computer contains numerous bawdy and inappropriate email communications). To the extent a company has any reason to believe at the inception of the review that the computer also may contain communications between an employee and counsel, however, special precautions should be put into place. This could involve utilizing a separate law firm to review the arguably privileged materials, with strict, written instructions that the privileged materials are not to be shared with the company. Or, the computer forensic firm could be given clear instructions not to provide any privileged communications to the company that retained it. (Again, in my view, that instruction should be in writing, and must be scrupulously followed once given.) Taking these precautions will insulate both the company and its inside and outside counsel from potentially embarrassing sanctions Likewise, even if the company did not anticipate these types of communications at the inception of the computer review, if discovered during the course of an analysis of the computer, these communications should not be reviewed.When appropriate, consider full disclosure to opposing counsel and judicial involvement.
Finally, a review of the Stengart opinion does highlight some measures companies could take if they want to try to preserve their rights to review even privileged communications. For example, the electronic communications policies would have to be clear and explicit. They would have to inform the company’s employees that all communications, including otherwise privileged communications, are subject to review. They would have to advise the employees that even Internet accessed and password protected email communications may be preserved and reviewed. They would have to prohibit personal use of the company’s email systems by the employees.
From my perspective, however, these types of policy provisions likely are not worth it. They may generate resentment by the employees. They will be difficult to enforce (and the failure to enforce them may itself undermine the policies). And, even if these steps are taken, a court still may repudiate the company’s approach because of the paramount importance of the attorney-client privilege.
Closely Held Companies and Lifetime Employment, Quirky Question # 143
Quirky Question # 143:
I read with interest your analysis of QQ # 140, dealing with closely held corporations. We are in a similar situation, though we have the sticky additional issue you referenced of the matter involving a family member. This person claims she is entitled to “lifetime” employment. Given that she’s only in her late 40s, that’s a daunting prospect. Moreover, as her siblings will attest (if forced), she simply is not competent. Does the company really have to employ her for the next several decades?
Roy’s Analysis:
As I referenced in Quirky Question # 140, issues involving employment in closely held corporations are especially difficult when the employee involved is an owner/shareholder. Those problems are exacerbated when the person employed is a member of the family that owns the closely held company, and is an owner/shareholder herself.
As previously addressed, the rights and responsibilities of the employer and employee alike depend on the closely held corporation law of the state in question, the decisions of your state court on these types of issues, and the particular facts of your situation. Given that many of these cases involve fundamental issues of equity, courts scrutinize the specific factual circumstances underlying the dispute.
For example, in a seminal Minnesota case, Pedro v. Pedro, 489 N.W.2d 798 (Mn. Ct. App. 1992), a dispute arose among three brothers, each one-third owners of the family’s luggage and leather products company. All three brothers had worked for the company for most of their adult lives. Each brother, as an equal shareholder, received the same benefits and compensation as the others, and had an equal vote in the company’s management.
The relationship among the brother deteriorated when Alfred Pedro discovered an “apparent discrepancy” of nearly $330,000 between the internal accounting records and the company’s checking account. The dispute regarding the missing funds resulted in the two other brothers, Carl and Eugene, firing Alfred. When Carl and Eugene fired Alfred, they discontinued his pay and benefits. They also informed other employees that Alfred had had a nervous breakdown, which was not true.
The trial court found that Alfred was entitled to $766,582 as damages for his one-third ownership of the company, and another $58,260 in prejudgment interest on that award. The court also awarded Alfred $563,417 on the ground that his brothers had breached their fiduciary duties to him, as well as an additional $68,690 in prejudgment interest on that part of the award. In addition, the trial court found that Alfred had a contract of lifetime employment and that he had been wrongfully terminated; this finding resulted in an additional award of $256,740, plus $31,750 more in prejudgment interest. The damages for lifetime employment constituted lost wages that Alfred would have received had he worked until age 72. Finally, the court awarded the plaintiff his attorneys’ fees.
The appellate court began its analysis by emphasizing that the “relationship among shareholders in closely held corporations is analogous to that of partners.” Id. at 801 (citations omitted)(“close corporation has been described as partnership in corporate guise”). As ‘partners,’ the shareholders owed each other a fiduciary duty, a relationship that imposed upon them “the highest standards of integrity and good faith in their dealings with each other,” and the obligation to treat each other “openly, honestly and fairly.” Id. (citations omitted).
The appellate court found that there was ample evidence to support the trial court’s finding of a breach of fiduciary duty. The two defendant brothers had not paid Alfred the monies owed pursuant to the shareholders’ agreement, interfered with his execution of his job responsibilities, hired a private investigator to follow him when he was not in the office, threatened to fire him if he did not stop inquiring about the missing funds, fabricated reasons to justify his termination, and falsely represented to other employees that he had had a nervous breakdown. The court found that this conduct did not comport with the defendants’ obligation to treat Alfred openly, honestly and fairly.
With respect to the trial court’s finding that the plaintiff was entitled to damages for “lifetime” employment (through age 72), again the appellate court affirmed. The Court of Appeals found that “[t]he unique facts in the record support the trial court’s finding of an agreement to provide lifetime employment to respondent.” Id. at 803. The appellate court noted that Carl Pedro, Sr., had worked for the company until his death. Eugene Pedro (one of the defendants) had worked for the company for more than 50 years and Carl Pedro, Jr. had worked for the company for over 34 years. At the time of his discharge, Alfred already had worked for the company for 45 years. Given this pattern of longevity, the Court of Appeals found that it was reasonable for the trial court to determine that the plaintiff’s employment was NOT terminable at will.
As the Pedro case illustrates, in certain circumstances, an owner/shareholder may be able to make a persuasive argument that she is entitled to lifetime employment. Clearly, in the closely held corporation context, general principles of at will employment do not apply. Integrity, good faith, honesty and fairness are the touchstone principles that govern the treatment of an owner/shareholder employee.
Subsequent generations of owner/employees, however, may not be in precisely the same position as a company’s founding members. As one New York court observed when confronted with a family member/owner/employee who left a closely held company after having been caught stealing from the business, “Even if an original participant had had a reasonable expectation of personal employment, after his death the surviving shareholders would not be bound to employ any dolt who happened to inherit his stock.” Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1019 n.6 (Sup. Ct. 1984). The court went on to note that the then-current owners, two generations removed from the founders, “cannot fairly be said [to have] entered into the business with the same ‘reasonable expectations’ as partners do.” Id.
Finally, in your question you state that your employee is not competent. Although privately held companies must ensure that shareholder/owner employees are treated with care, this does not mean that closely held corporations have no flexibility with respect to incompetent employees or employees who have engaged in wrongful conduct. Depending on the nature and severity of your employee’s incompetence, your firm may be positioned to take appropriate disciplinary action against her, up to and including discharge. It is important, however, that your company afford her appropriate procedural safeguards so she cannot make an argument that the company trampled upon her rights. (This topic was covered in the recent QQ # 140, so you may wish to review that analysis if the bases for discharge are central to your situation.)
Alcoholism and a Last Chance Warning, Quirky Question # 142
Quirky Question # 142:
I work as an HR representative in a medium-sized California business – we employ about 50 people. Recently, a situation with one of our employees was brought to my attention, and I’ve been asked how to handle it. We have an administrative assistant with an alcohol problem. We have reason to believe that her alcoholism was the true reason behind her excessive absenteeism in the middle of last year. Then, a couple of months ago, she came into work drunk – stumbling around the office and slurring her words. We immediately sent her home, but we didn’t want to fire her at that point. Aside from her alcoholism, she fits in very well with our culture and has a great relationship with her co-workers. We also wanted to be careful to comply with California law regarding “reasonable accommodation” of employees with alcohol problems. So the next day I met with her and offered her unpaid leave to enter an alcohol rehabilitation program. She completed the program, and has since returned to work. However, last week we again started to see signs that her alcoholism may be returning. She was absent Monday through Wednesday, and when I finally called her on Thursday, I could tell by the way she answered the phone that she was drunk. On Friday she came in, and I met with her. She apologized up and down and asked if she could enter rehab a second time. What should we do?
Gabrielle’s Analysis:
[Readers: Set forth below is an analysis of our last West Coast Quirky Question. This analysis was prepared by Gabrielle Wirth. If you have any questions, please do not hesitate to contact Gabrielle at 949.932.3690. Additional information about Gabrielle is available at: http://www.dorsey.com/wirth_gabrielle/. Regards, Roy]
This is an excellent question that arises with disappointing regularity. Before turning to the specific recommendation we would make, let’s review a few of the basics.
As your inquiry illustrates, employers have many reasons to educate themselves regarding their rights and obligations with respect to employees who use drugs or alcohol. For instance, firing an employee for being an alcoholic can subject the employer to discrimination liability under the federal Americans with Disabilities Act (ADA), or California’s Fair Employment and Housing Act (FEHA). This is because alcoholism may be classified as a disability under the ADA if it substantially limits participation in a major life activity, or under FEHA if it merely limits such participation. (In California, the standard has become more generous over time. Prior to 2003, courts had used the same “substantially limits” standard employed under the ADA, but in Colmenares v. Braemar Country Club, Inc., 29 Cal. 4th 1019 (2003), the California Supreme Court found that a condition need only “limit”, and not “substantially limit,” participation in a major life activity in order to be classified as a disability.)
Thus, an employer may not make adverse employment decisions solely on the basis of alcoholism, and must reasonably accommodate employees who have that condition. While many healthcare practitioners believe that both forms of chemical dependency (drug and alcohol) are similar in their effect on the mind and physiology, the law does not always treat drug addiction and alcohol addiction identically. Under state law, physical disability “does not include psychoactive substance abuse disorders resulting from the current unlawful use of controlled substances or other drugs.” However, alcoholism is not excluded from this definition.
Further, the employer’s right to conduct drug and alcohol testing on employees is limited by, and must be balanced against, the employee’s right to privacy. For instance, in Luck v. Southern Pacific Transportation Co., 218 Cal. App. 3d 1 (Cal. Ct. App. 1990), the court held that the right to avoid giving a urine sample is a privacy interest protected by the State Constitution, and that random urine testing is an unconstitutionally impermissible intrusion on that privacy right where there is no compelling interest to justify it. Therefore, drug testing policies must be carefully written to avoid impermissibly broad requirements.
Finally, in California, there is still another reason to pause before terminating an employee for issues related to substance abuse. California Labor Code Section 1025 requires private employers who employ 25 or more employees to “reasonably accommodate” any employee who wishes to voluntarily enter and participate in an alcohol or drug rehabilitation program. (Employers are not prohibited from taking action against an employee “who, because of the employee’s current use of alcohol or drugs, is unable to perform his or her duties, or cannot perform the duties in a manner which would not endanger his or her health or safety or the health or safety of others.”)
While the statute does provide that the reasonable accommodation must not impose an undue hardship on the employer, it does not specify what constitutes an undue hardship nor how many times the request to enter rehabilitation must be accommodated. The statistics indicate that rehabilitation is successful only 25-35% of the time. Section 1025 is silent as to whether “once is enough,” potentially implying that an employee could stave off termination indefinitely by repeated requests to enter rehab, which the employer would then be obligated to accommodate.
Introducing the Last Chance Agreement:
One tool that you may wish to consider to limit the potentially indefinite obligation of repeated visits to the rehab center is the Last Chance Agreement (LCA). An LCA is a formal, written agreement between an employer and an employee that allows the employee to remain employed despite misconduct, provided that he meets certain conditions. For instance, the LCA might specify that the employee is being given leave to participate in rehab, but if he doesn’t complete the program, or if he engages in any subsequent misconduct, then he will be fired. Thus, the LCA is literally the employee’s “last chance” to remain employed.
Because of the requirements of Section 1025, there has been some risk that LCAs might turn out to be in violation of the employer’s duty to reasonably accommodate. However, there is also some basis to believe that LCAs are a legitimate aspect of reasonable accommodation.
Case-Law Support for the Enforceability and Reasonableness of Last Chance Agreements:
Although the California case law on LCAs is not plentiful, courts have enforced last chance agreements. For example, in Gosvener v. Coastal Corp., 51 Cal. App. 4th 805 (Cal. Ct. App. 1996), a plaintiff sued his employer alleging that it had failed to reasonably accommodate his alcoholism and had illegally discharged him because of it. The plaintiff had signed an LCA with his employer, and then had violated it. Id. at 809. The California appeals court found that the employer had “properly exercised its contractual rights to terminate [Gosvener’s] employment” since Gosvener had “breached the express terms” of the LCA he had signed. Id. at 814. (Note that the Colmenares decision overturned Gosvener to the extent that it suggested that “substantially limit,” rather than “limit,” was the proper test for identifying a disability. However, the other holdings of Gosvener are not affected by Colmenares.)
The court reasoned that “the employer’s duty to accommodate such a disabling condition [i.e. alcoholism] is not unlimited, and an employer cannot be an insurer of recovery.” Id. at 813. Specifically, an employee “cannot gain yet another last chance despite prior warnings, and cannot stave off discharge indefinitely by attempting to enter into yet another course of treatment after each relapse.” Id. at 811 (emphasis added). Otherwise, the “last chance agreement would. . . become meaningless.” Id. at 812.
Equally helpful to employers was this court’s finding that Gosvener’s breach of contract and covenant claims were without merit, since the LCA constituted an express contract under which the employer was entitled to terminate. The court found that such an express contract supplanted any implied contract between the parties. Id. at 814-15.
There is also federal case law that supports the enforceability of last chance agreements. While such case law is not directly binding with respect to the California Labor Code, it does give some indication of the general attitude towards LCAs, and is persuasive to California courts, particularly given the lack of any contrary California authority. For instance, in Fuller v. Frank, 916 F.2d 558 (9th Cir. 1990), the Ninth Circuit upheld a termination in accordance with the terms of an LCA, noting that reasonable accommodation of alcoholism “must be limited in scope” since “continued ‘accommodation’ would simply enable an alcoholic to continue his or her drinking.” Id. at 561. Fuller pertained to the federal Rehabilitation Act of 1973; yet the Gosvener court had no trouble applying Fuller to California law. It noted: “we may follow Rehabilitation Act cases in the absence of California authority.” Gosvener, 51 Cal. App. 4th at 812 n.1.
The Eighth Circuit has held that LCAs do not violate the ADA, see Longen v. Waterous Co., 347 F.3d 685, 689 (8th Cir. 2003), and a recent district court case, Basso v. Potter, 596 F. Supp. 2d 324 (D. Conn. 2009), found that the express terms of an LCA governed, permitting an employer to terminate an employee for having more unscheduled absences than the LCA permitted.
The Last Chance Agreement as the Final Step in a Process of Reasonable Accommodation:
Despite the fact that there is some case law giving employers a basis to use and rely on LCAs, it remains prudent for your company to err on the side of caution in dealing with alcoholism and other forms of substance abuse in your employees. In each of the cases discussed above, the employer went far beyond simply providing a single last chance agreement to the employee. It is therefore likely that reasonable accommodation with respect to a request to enter rehabilitation goes beyond a single last chance agreement.
For instance, in Gosvener, the employer signed two separate LCAs with the plaintiff, who attended substance abuse treatment programs two separate times before the employer finally terminated him. When the employer initially found out that the plaintiff had both alcohol and methamphetamine abuse problems, it referred him to a private clinic, provided money for treatment by a private physician, reassigned him to a less stressful job position while continuing his higher rate of pay, and cleared him to return to work while undergoing therapy. Even after he violated the terms of the first agreement, the employer still executed a second LCA with him and gave him a second chance to attend another treatment program. Only after the employee violated the second LCA did the employer make the decision to terminate.
In Fuller, the employee was referred to the employer’s in-house counseling program three different times and given leave to participate in both alcohol and cocaine abuse treatment programs on three separate occasions until finally he signed an LCA and was subsequently terminated for drinking on the job.
Finally, in Basso, the employee was given numerous formal letters of warning, and was twice given the opportunity to rehabilitate himself before he finally came back to work under the express terms of an LCA, violated it by numerous absences, and was fired.
As you can see, the facts of these cases suggest that a single Last Chance Agreement, with nothing further in the way of accommodation, may not be sufficient to constitute reasonable accommodation of a substance abuse problem. To the contrary, the employers in these cases were accommodating in many different ways, and allowed problem employees numerous chances at rehabilitation before executing the final LCAs that ultimately gave rise to termination.
Thus, one lesson to take from these cases may be that a Last Chance Agreement is an enforceable component of reasonable accommodation, provided that it really does represent the employee’s last chance at employment given a history of attempts to work with that employee. In other words, the LCA should be one step in a series of attempts to accommodate the employee’s substance abuse disability.
Elements of a Last Chance Agreement:
As explained above, the basic purpose of an LCA is to: (1) provide the employee with one last chance at employment, and on the other hand, (2) strictly define the terms of continued employment and make it clear that any further misconduct will result in termination.
In structuring an LCA, employers should be specific about the types of misconduct that will result in termination. The following are some examples of potential LCA provisions:
(1) that the problem employee successfully complete a substance abuse program;
(2) that the employee will be subject to unannounced drug and alcohol testing for a certain period of time (e.g., two years);
(3) that the employee will be terminated either for failure to participate in unannounced testing, or for a positive test result;
(4) that the employee must maintain an exemplary attendance record without any unverified absences.
The LCA can also be further tailored to encompass the employee’s particular history of misconduct. In general, use of a LCA should provide you an opportunity to clarify your expectations of your employee once and for all, and put your employee unequivocally on notice of the ultimate consequences of his failure to fully correct a history of bad behavior. Repeated rehabilitation efforts do not have to be accepted by your company.
Quirky Question # 141, Customer Lists as Trade Secrets
Quirky Question # 141:
One of our sales employees recently left our company. He now is starting to call on our customers. It appears that he may have some of our customer lists in his possession.
We do not have any post-employment restrictive covenants, such as a non-compete or a non-solicitation agreement, that would govern his conduct. But, aren’t customer lists trade secrets that he is precluded from using?
Roy’s Analysis:
You ask whether your company’s “customer lists” can be protected as trade secrets. Although I would like to be able to offer you a bright line response to that inquiry, I cannot. The evaluation of whether any information constitutes trade secret data depends on an analysis of many variables, none of which you have described in your query. But, I can offer you a few general observations that I hope you will find helpful, coupled with some specific comments that focus on the issues surrounding customer lists. Armed with this information, you should be able to conduct the appropriate analysis applicable to the specific facts of your situation.
By way of general background information, in most, though not all states, the law of trade secrets is largely governed by the Uniform Trade Secrets Act (UTSA). This uniform statute sets forth the fundamentals of trade secret law. Note, however, that when the various state legislatures enacted this uniform statute, they tweaked it in different ways, the result of which is that the statutes in each state are similar but not identical. Thus, I’ll repeat one of my mantras in my Blog writings – you need to review carefully the governing version of the UTSA in your state (or, if different, the state where you claim the misappropriation has occurred).
Further, there is other relevant law that you will need to explore to understand your company’s and your former employee’s rights with respect to the trade secrets you believe he misappropriated and is using. For example, you should examine your state’s common law on fiduciary duties and how that law might apply to someone in the position formerly occupied by your employee. You also will need to understand whether your state’s version of the UTSA preempts pre-existing common law claims addressing the subject of confidential or proprietary information. In some instances, these common law rights will be deemed to be preempted but this is not always true.
Other potential underlying legal issues will depend in part on what contractual obligations your company and your ex-employee may have toward each other. As you stated in your question, however, your company did not utilize non-competition or non-solicitation agreements, at least for the particular former employee whose conduct concerns you. As you undoubtedly have deduced, perhaps with some regret, had your company utilized post-employment restrictive covenants, including non-competition and non-solicitation agreements, your current legal arguments might be quite different now.
Having made those preliminary observations, it is important to understand the basics of trade secret law. In Minnesota, where I live and work, for example, prior to the 1980 adoption of the UTSA, the Minnesota Supreme Court had relied upon the Restatement of Torts (1939) to define trade secrets. Under the Restatement test, to constitute a trade secret, information had to: “(1) not be generally known or readily ascertainable; (2) provide a competitive advantage; (3) have been developed at plaintiff’s expense, and (4) be the subject of plaintiff’s intent to keep it confidential.” Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890, 898 (Minn. 1983) (citations omitted). Although the Minnesota Uniform Trade Secrets Act, which I’ll refer to as MUTSA, made some changes from the Restatement definition, the Minnesota Supreme Court noted in Electro-Craft that the Restatement test is now “more or less embodied in the [MUTSA].”
The MUTSA defines a trade secret at Minn. Stat. § 325C.01, subd. 5, as information that meets two basic elements: a) the information must derive “independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use;” and b) the information must have been “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” As you can see, this MUTSA definition largely incorporates the Restatement position that to qualify as a trade secret the information must not be generally known or readily ascertainable.
With respect to this fundamental requirement regarding the definition of a trade secret, companies’ claims that their “customer lists” are trade secret information often break down. Especially in the age of the Internet and instant communications, contending customer lists constitute “trade secrets” may be a tough sell to a court.
For example, I’m presently involved in a case where the plaintiff corporation has sued my client claiming that its customer lists, composed of national retailers, constitute protectible trade secret information. Really? I’d wager that in 15 minutes or less, a reasonably resourceful person with a computer connected to the Internet could come up with a fairly comprehensive list of national retailers operating in the U.S. Given the easy availability of this type of data, it is very difficult to construct a compelling argument that this information is not “readily ascertainable by proper means.”
Moreover, companies asserting the identity of their customers is secret data worthy of statutory protection had better be sure that they communicate that message to their Web-page designers. It is very common (and quite legitimate) for companies to list their customers on their firms’ websites. This is one way of communicating to prospective customers that the company is capable and reliable. Often times, the Web-page listing of customers will describe in some detail particular successes achieved with certain customers, or testimonials from those customers extolling the capabilities of the company in question. Again, there is considerable value in publicizing this type of data. But, it undermines completely the assertion that this information is not “readily ascertainable.” Last year I was involved in a preliminary injunction hearing in New Hampshire where the plaintiff corporation had sued my client for alleged misappropriation of trade secrets. The cross-examination of the company’s CEO was enjoyable for me, consisting in part of a series of questions regarding the “secret” customer information displayed on the plaintiff company’s Website. The Motion for a Preliminary Injunction was denied and the plaintiff company dropped the lawsuit entirely soon thereafter.
Many courts have weighed in on the subject of whether customer lists may constitute trade secrets. See, for example, Internet Incorporated v. Tensar Polytechnologies, Inc., 2005 WL 2453170 at 8 (D. Minn. 2005) (denying preliminary injunction and noting that “ultimately, Internet will have a high burden to overcome” to show that customer lists constitute trade secrets “as customer lists, even with specific information customers attached to them, are generally not considered to rise to the level of a trade secret under Minnesota law”); Nationwide Mutual Insurance Co. v. Stenger, 695 F. Supp. 688, 692 (D. Conn. 1988)(ex-employee of plaintiff solicited customers with whom he formerly worked, encouraging them to switch their business to his new employer; plaintiff sued for misappropriation of trade secrets, focusing particularly on the customer files; court denied injunctive relief, finding that the customer files did not warrant trade secret protection, and noting that it was not convinced the plaintiff had “expended substantial time, money and/or effort on developing the information contained in the [customer files].”
At times, companies make the argument that the identities of intermediaries between the company and the customer, or other industry contacts, are protectible trade secrets. Here, too, courts have expressed skepticism. For example, in Fox Sports Net North, LLC v. Minnesota Twins Partnership, 319 F.3d 329, 336 (8th Cir. 2003), the appellate court noted that “knowledge of industry contact people does not rise to the level of a trade secret because this type of unprotected information is readily ascertainable within a trade.” A couple of years ago, I handled a case involving similar allegations. The plaintiff employee benefits insurance company sued my client for misappropriation of trade secrets and numerous other claims. The plaintiff company contended that the identities of the insurance brokers with whom it worked were confidential, proprietary information. But, if one merely Googled the words “stop loss insurance,” numerous insurance brokers were identified, including those the plaintiff contended were somehow confidential (though known to the employees who had resigned). Both the trial court and the court of appeals found plaintiff’s argument unavailing, the former denying the plaintiff’s motion for a preliminary injunction and the latter affirming the judge’s decision. As the appellate court found, “Viewed in the light most favorable to respondents, the record reflects that, in the employee benefits insurance business, information about customers is not considered confidential or given special protection and is readily accessible from many sources. Brokers have access to information about customers and accounts and share it with sales representatives. Broker relationships and contact lists are treated a sales representative’s asset that an insurance company expects its new lateral hires to use for the company’s benefit.” Reliastar Life Insurance Co. vs. KMG America Corporation, et al., No. A05-2079 (Minn. Ct. App. 2006).
As you can see from the decisions referenced above, absent some unusual facts, courts may not be too receptive to the notion customer lists constitute trade secrets. In certain circumstances, it is hypothetically possible that this skepticism could be overcome, but this will depend on the development of additional facts that highlight why your customer lists warrant special protection. Keep in mind too that even if your company is able to convince the court that your customer lists are not readily ascertainable, were developed at significant expense, and deserve to be treated as trade secret, there are other critical issues on which your company still bears the burden of proof. As set forth in the UTSA, your company also will have to demonstrate that it took reasonable steps to maintain the secrecy of the information. That subject, however, will be addressed in a future Blog posting.
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