Tag Archives: misappropriation

Defend Trade Secrets Act – Employment Implications

By on June 2, 2016

President Obama recently signed the Defend Trade Secrets Act (“DTSA”), which provides a federal private right of action for the misappropriation of trade secrets. Previously, trade secret claims were handled only at the state level. The DTSA does not preempt state law, but instead provides another avenue for recovery. Trade secret owners may pursue federal claims including property seizure (to prevent dissemination of trade secrets), injunctive relief, and damages for actual loss and unjust enrichment. Property seizure is not lightly granted, and the DTSA provides a detailed framework for when and how property may be seized. Further, if the trade secret is willfully and maliciously misappropriated, courts may award double damages and attorney’s fees.

In the employment context, employees are immune from liability under the DTSA (and arguably state laws as well given the DTSA’s specific wording) for disclosing trade secrets that are made in confidence to a government official or attorney for the purpose of reporting or investigating a violation of law. Employees are permitted to use trade secret information in a lawsuit alleging retaliation by an employer for reporting a trade secret violation, as long as any court document containing trade secrets is filed under seal.

Although the DTSA provides a powerful cause of action for employers, the DTSA also contains some employee protections. Employers must now provide notice to employees of the immunities contained in the DTSA in agreements with employees (such as nondisclosure agreements), which may be handled by including a cross-reference to a company policy containing notice of the immunity. Failure to provide such notice prevents employers from receiving multiple damages or attorney’s fees under the DTSA. While injunctions are available under the DTSA, any injunction may prevent actual or threatened misappropriation but must not prevent the employee from entering into an employment relationship or conflict with state laws concerning the restraint of trade.

In sum, employers may now bring a civil action against employees who misappropriate trade secrets that can lead to damages and injunctive relief including seizure. However, to receive the full benefits of the DTSA, employers must update their nondisclosure and similar agreements to inform employees of the immunities available under the DTSA.  The DTSA’s effect on the technology, biotechnology and pharmaceutical industries almost certainly will be far-reaching.  As a result, the DTSA is of particular importance to businesses in greater Boston, Cambridge and other emerging technical hubs in Masshachusetts and throughout New England.  Both employers and employees should contact a Massachusetts employment attorney to update their agreements and confirm their duties.

Copying Employer Data Ruled Not a Material Breach of Employment Contract

By on March 29, 2016

A recent Massachusetts Supreme Judicial Court case, EventMonitor, Inc. v. Anthony Leness, narrowly interpreted a common employment contract provision. Leness was an executive at EventMonitor. The parties signed an employment agreement, which provided the manner in which EventMonitor could terminate Leness’s employment. The agreement provided a  for-cause termination provision, permitting termination if Leness engaged in fraud or “defalcation” (misappropriation) of EventMonitor’s funds or other assets. The employment agreement also included a nondisclosure provision, requiring Leness to avoid disclosure of any of EventMonitor’s proprietary information and to return all such information if his employment terminated.

After six years of employment, the relationship between Leness and EventMonitor soured, and EventMonitor terminated Leness without cause. Shortly thereafter, EventMonitor learned that Leness had bought a one-year subscription to an on-line data storage service, and used this service to copy all of EventMonitor’s files that were on the computer. These files included proprietary information. After learning that Leness copied such information, EventMonitor retroactively changed Leness’s termination to be “for cause,” which allowed EventMonitor to suspend severance payments owed to Leness.

EventMonitor sued Leness for breach of contract, and Leness asserted several counterclaims, arguing that EventMonitor had no valid reason to consider Leness’s termination “for cause” and cease making severance payments. After a bench trial, the judge found that Leness had not materially breached the employment contract, and thus could not have been fired for cause. The judge found for EventMonitor on other counts, and both parties appealed.

The Supreme Judicial Court upheld the ruling. The court explained that a contract breach is a material breach when it involves “an essential and inducing feature of the contract.” Although Leness’s copying and failure to return EventMonitor’s proprietary information was a breach of the employment contract, the breach was not material because there was no evidence that Leness used the proprietary information for any purpose or disclosed the information to anyone. The court accepted the trial judge’s finding that the essential purpose of the relevant section of the employment contract was to protect the confidentiality of EventMonitor’s proprietary information, and as there was no evidence that EventMonitor’s information was disclosed to any third parties, Leness’s contract breaches were not material.

This ruling may be surprising to some observers because Massachusetts courts are ordinarily very protective of a business’s confidential information, and there was no dispute that Leness retained copies of such information. However, the plain language of Leness’s employment contract indicated that EventMonitor wanted to prevent the disclosure of such information. Because such information was not actually disclosed, EventMonitor’s interests, as stated in its contract, were protected. This ruling is instructive for employers.  Employment contracts should expressly state that the return of all company information is considered a material part of the agreement, and further that any severance packages are conditioned on not only the nondisclosure of proprietary information, but also on its full return, in order to ensure their enforceability. Concerned companies should contact a Massachusetts employment lawyer for a review of their contracts.