Articles Posted in Common Law Remedies

bloomberg.pngPartners Scott Holt, Barry Willoughby, and William Bowser recently co-authored Bloomberg BNA’s Corporate Practice Series on Noncompetition Agreements. The publication provides an in-depth review of the use and enforcement of noncompetition agreements, including practical tips for prosecuting and defending noncompete cases.

The publication is available through the Bloomberg BNA web site

Employers frequently confront the problem of theft or misappropriation of trade secrets and confidential, proprietary information by departing employees. While employers have an arsenal of legal weapons at their disposal to protect their most valuable business assets, it is critical that they take proactive steps to protect against the disclosure of important business information and prevent unfair competition. From a practical standpoint, failure to implement basic security measures makes it easier for an unethical employee or competitor to misappropriate confidential business information. From a legal perspective, absent efforts to preserve the secrecy of such information and avoid unfair competition, a court is unlikely to respond favorably to an employer request for relief.youngconaway

Trade Secret Protection

Delaware, like most states, has enacted the “Uniform Trade Secrets Act” providing employers with legal protection for trade secret information even in the absence of contractual agreements with employees. While many people may believe that “trade secret” status is only afforded to scientific data such as the formula for Coke, in reality, trade secret protection is available for a much broader array of information. The statutory definition for a trade secret is “information” that “derives 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.” To be protected by the statute, the information must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Hiring an employee who is subject to a non-competition agreement can be a risky venture.  In many instances, the new employer can find itself on the receiving end of an expedited lawsuit along with the new hire.  But there are a few simple measures new employers can take to reduce the chances of being named as a co-defendant in a lawsuit. 

First, make certain your new hire has “clean hands” before commencing employment.  This means that all documents, computers, PDAs, flash drives, and any other property arguably belonging to the former employer has been returned intact.  The employee needs to be aware that erasing hard drives and databases before returning equipment (even if inadvertent) can often result in a negative ruling from the court or even a spoliation finding.  Once completed, the employee should confirm in writing that all property in his possession has been returned to his former employer. 

Next, make sure the potential new hire does not engage in competition while still at his old job.  In Delaware, it is generally permissible to make preparations to compete while still employed, which would include discussions with other companies about possible employment opportunities.  But employees often cross the line when these discussions develop into actual competition, and if there’s evidence the new employer encouraged these acts, it may open the door for a civil conspiracy claim. 

Much of the non-compete litigation occurs in Delaware because the parties (usually the former employee and his/her former employer) have consented to the jurisdiction of Delaware courts in the underlying contract. But in many of these cases, obtaining personal jurisdiction over third parties such as the former employee’s new employer may pose difficulties. If there’s evidence of a conspiracy between the defendants, however, one consideration is using the Conspiracy Theory to establish personal jurisdiction over the non-resident defendant.

When determining if it has personal jurisdiction over a non-resident defendant, a Delaware court conducts a two-part analysis. First, it considers whether the defendant’s conduct satisfies the state’s long-arm statute. Second, it considers whether the exercise of personal jurisdiction would violate the Fourteenth Amendment’s due process clause. The Conspiracy Theory is used to satisfy the long-arm statute when one defendant has engaged in conduct within the State that satisfies the long-arm statute, but the other defendant has not. In other words, the Conspiracy Theory is used to impute one defendant’s conduct to the other, thereby obtaining jurisdiction over both.

The standard for establishing personal jurisdiction using this theory not easy. A plaintiff must demonstrate that: (1) a conspiracy existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

Thumbnail image for topsecret_br69.jpgThe doctrine of inevitable disclosure protects confidential information and trade secrets in situations where a former employee will inevitably disclose or use the information in his or her new employment, even absent bad faith. The principle behind this doctrine is that an employee who has knowledge of his former employer’s trade secrets will inevitably disclose this information to his new employer resulting in an unfair business advantage. In asserting a claim under this doctrine, companies may seek to enjoin a former employee from working for a competitor, even if the employee had no existing covenant not to compete.

The inevitable disclosure doctrine has been applied on a number of occasions by the Delaware Court of Chancery. The applicability of the doctrine was first acknowledged in E.I. DuPont de Nemours & Co. v. American Potash & Chem. Corp., 200 A.2d 428 (Del. Ch. 1964). In E.I. DuPont, the Chancery Court considered whether a defendant could be enjoined from working on the development of a chloride process related to the manufacture of TiO2 pigments. In Chancellor Seitz’s words, “I have no doubt but that the court is entitled to consider, in judging whether an abuse of confidence is involved, the degree to which disclosure of plaintiff’s trade secrets is likely to result from the circumstances surrounding Hirsch’s employment by Potash. The defendants say that a finding of ‘inevitability’ would be no more than a ‘prophecy’ here. Nonetheless, in the context of determining whether a threat disclosure exists, it is but a finding as to the probable future consequences of a course of voluntary action undertaken by the defendants. Courts are frequently called upon to draw such conclusions based on a weighing of the probabilities, and while a conclusion that a certain result will probably follow may not ultimately be vindicated, courts are nonetheless entitled to decide or ‘predict’ the likely consequences arising from a given set of facts and to grant legal remedies on that basis. I am satisfied that the degree of probability of disclosure, whether amounting to an inevitability or not, is a relevant factor to be considered in determining whether a ‘threat’ of disclosure exists.”
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A mass exodus of employees from a company often results in the employees joining a competitor or starting up a competing business. Often the employees do not leave empty handed, and involve a concerted effort to use the company’s confidential or proprietary information to obtain an unfair competitive advantage. Such acts may give rise to a common law claim of civil conspiracy.

To be successful on a civil conspiracy claim, a plaintiff must usuallys show that two or more persons engaged in an unlawful act done in furtherance of the conspiracy and some form of actual damages. The court will require that there be some underlying wrongful act, such as a tort or a statutory violation. In Delaware, a breach of contract is not an underlying wrong that can give rise to a civil conspiracy claim.

One of the advantages of a civil conspiracy claim is it provides recourse against parties who may not have participated in the initial wrongful act, but nonetheless participated in the conspiracy. This is significant since each conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance of the conspiracy.

Civil conspiracy claims have led to the award of injunctive relief in the Court of Chancery. Most recently, in Zrii, LLC v. Wellness Acquisition Group, Inc., the Court of Chancery awarded a preliminary injunction against various individuals after finding a their former employer had a reasonable likelihood of success in proving the existence of an unlawful act in furtherance of the alleged conspiracy.
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