Trade Secret / Noncompete Blog

A great deal of discussion has taken place in the legal press recently about the use of the Computer Fraud and Abuse Act as a cause of action against those who take with them information from their former employers for use in subsequent competitive activities.  And rightly so, given the explosion in the number of civil claims brought pursuant to the statute in recent months.  Much less discussion has been heard, however, about a long-recognized cause of action – breach of the duty of loyalty – that can be a crucial component of a well-thought-out attack against the misuse of confidential information by a former employee and his/her new employer.  The importance of this cause of action was highlighted in a recent decision of the Wisconsin Court of Appeals, InfoCorp, LLC v. Hunt, Case No. 2007AP2887, 2009 WL 4800140 (Wis. Ct. App. Dec. 8, 2009).

InfoCorp, LLC (d/b/a “InfoCor”) is a reseller of so-called “SMART Boards,” interactive whiteboards that combine the functions of an overhead projector, computer projector and a chalkboard.  Hunt started work at InfoCor in 2005.  Before that, he worked for 2 InfoCor competitors selling the same product and had developed a particularly strong relationship with a customer (“CESA 2”) that, among other things had a cooperative purchasing program representing a number of Wisconsin school districts.  Hunt was employed by InfoCor for a year.  During that time, CESA 2 entered into an agreement with the manufacturer of the SMART Boards to purchase its products at reduced prices and InfoCor was the only reseller authorized by CESA 2 to provide those products to its member school districts.

In 2006, Hunt approached a sales manager at one of InfoCor’s competitors, and was ultimately hired.  During his last month at InfoCor, Hunt attempted to divert a number of customers to his soon-to-be new employer and helped arrange for the new employer to become another authorized reseller of SMART Boards to CESA 2.  A few months later, after Hunt’s employment with InfoCor had ended, CESA 2 terminated InfoCor’s status as an authorized reseller of SMART Boards.

InfoCor sued Hunt and his new employer alleging trade secret misappropriation, violation of Wisconsin’s computer crime statute, tortious interference, common law and statutory conspiracy claims, conversion and breach of the duty of loyalty.  The trial court dismissed all of InfoCor’s claims on a motion for summary judgment except its claim for tortious interference based on Hunt’s interference in InfoCor’s customer relationship with CESA 2 prior to terminating his employment at InfoCor.  InfoCor appealed the dismissal of its duty of loyalty, conspiracy and the portion of InfoCor’s tortious interference claim relating to Hunt’s post-termination activities.

The Court of Appeals reversed, with the bulk of its discussion focusing on the duty of loyalty claim.  While the decision is unpublished and, therefore, not binding (under a recent change in Wisconsin’s rules, however, it may be cited for its persuasive effect), its historical discussion of when a duty of loyalty exists is helpful and identifies the issues that generally arise in those cases.  The result highlights why the claim can be such an effective one for a company seeking to protect its information in the hands of a former employee and its competitors.

The Court’s analysis was primarily addressed to the question whether Hunt owed InfoCor a duty of loyalty in the first instance.  The trial court had held that Hunt did not owe any such duty because he was a mere employee and not a corporate officer or the “’policy-making’ equivalent” of an officer.  In the trial court’s view, it was clear under Wisconsin law that only officers or policy making employees owe a duty of loyalty and that a salesman, like Hunt, did not fit into either category.

The Court of Appeals rejected that conclusion.  Relying on a line of Wisconsin cases going back to the early 1960’s, the Court of Appeals held that the test was not the authority of the employee with respect to the business as a whole which determined whether a duty exists, but whether the actions at issue were “within the scope of the employee’s responsibilities” and “directly contrary to the employer’s interest.”  Put another way, “an employee who uses the power of his employment responsibilities to harm his employer breaches his duty of loyalty” but an employee who was not a corporate officer and who “merely explored the possibility of starting a competing business, but did no actual harm” to the employer does not.  The Court of Appeals referred to this analysis as determining whether the employee’s duties make him a “key employee” giving rise to a duty of loyalty in relation to the performance of those duties.

Thus, even a “mere” salesman, like Hunt, can owe a duty of loyalty to his employee not to use his position to further his own or another’s competitive interests at the expense of his current employer.  Hunt’s actions in helping his future employer become an authorized reseller of SMART Boards to his primary customer, in direct competition with and ultimately to replace InfoCor breached that duty.

The utility of a breach of loyalty claim in dealing with employees who have taken crucial information and “jumped ship” should not be underestimated.

For example, while businesses often place significant value on customer information, courts have been relatively hostile to misappropriation of trade secret claims based on the use of such information.  A duty of loyalty claim, however, does not turn on whether the information or activities at issue involve trade secrets.

Similarly, the claim does not depend on the often-difficult task of justifying the precise terms of a contractual non-compete, particularly in states, like Wisconsin, where an overbroad employee non-compete is void in its entirety and cannot be enforced even to the extent reasonable.  Another advantage is that the claim sounds in tort as well as contract, opening up the possibility of punitive damages for particularly egregious conduct.

Another advantage of such a claim is that it focuses on the information at issue and the actions of the employee with respect to that information, i.e. it is easily tailored to the specific facts of the case.  It does not require the sometimes contortionist tactics needed to shoehorn the facts into a specific statutory cause of action like the CFAA or its state equivalents, which can be particularly problematic when the law under those statutes is changing quickly as the limits of the statutes are being tested and developed in a number of cases.

Finally, in those cases where the employee’s activities, like Hunt’s in the InfoCorp case, cause damage to the employer during his/her employment, the employer can also seek to recover the compensation paid to the employee during the period of the breach, including the value of benefits paid.  Combined with a conspiracy claim against the new employer where appropriate, the addition of a claim for punitive damages and return of employment compensation amounts can add significant dollars to the amounts at issue and, in general, increase leverage in negotiations to get back or prevent the use of the information.