Quirky Question # 276: Ex-Employees Gone Rogue

Question: Our company uses agreements to try to protect our confidential and proprietary information. One of our former sales employees recently left us to work for a competing company.  We have evidence he took with him our confidential information about our clients and is planning to use it to sell products to our clients for his new employer.  When we reminded him he could not use our confidential information, he said we couldn’t stop him because the information does not qualify as a “trade secret” under our state’s trade secrets laws.  We looked into the issue, and he’s probably right that this information is not necessarily a “trade secret”.  We’re worried there’s nothing we can do to stop him from using our information to steal our clients.  Help?

Answer: By Joel O’Malley and Scott Selix

Joel O'Malley

Joel O’Malley

Scott Selix

Scott Selix

This is a great question, and one we get all the time. Many employers and employees are aware that most states have laws that automatically protect a company’s “trade secrets” from improper disclosure or use.  What many do not realize is that through the use of well-drafted confidentiality (e.g., non-disclosure agreements), employers are able to protect much more of their confidential information than just the information that qualifies as a “trade secret.”

The Sixth Circuit Court of Appeals recently issued a decision, Orthofix, Inc. v. Hunter, 630 Fed. Appx. 566 (6th Cir. 2015), that is particularly relevant to this issue and which reaffirms employers’ ability to protect confidential information going beyond trade secrets.

Orthofix sells medical supplies to physicians. The company requiresshutterstock_237498064 all salespersons to sign confidentiality agreements, which prevent the unauthorized use or disclosure of “confidential information,” a term defined in the agreement.

The defendant in this case, Hunter, was a salesperson who had recently left employment with Orthofix to work for a competitor. During negotiations with his new employer, and while still employed by Orthofix, Hunter disclosed to his potential new employer confidential information about Orthofix’s clients to persuade the potential employer he could flip those clients and generate business.  After receiving an employment offer from the competitor, Hunter terminated his employment with Orthofix via email, without notice, just after midnight, and went to work for the competitor the following day.  These actions made it impossible for Orthofix to reach out to the accounts serviced by Hunter before he contacted those clients on behalf of his new employer.

shutterstock_297646496Hunter took with him to his new employment Orthofix’s “playbook,” a binder containing customer lists, wholesale price information, sales data, staff contacts, physician schedules and preferences, and physicians’ prescribing habits.  Over the next several months, Hunter and his new colleagues used the information from the “playbook” to convince Orthofix’s clients to switch to the competitor.

When Orthofix learned all of this, it sued Hunter for, among other things, (1) misappropriation of trade secrets under Ohio’s Trade Secrets Act, and (2) breach of contract for violating the confidentiality agreement.  The district court first held Orthofix’s misappropriation claim failed because the information in the “playbook” did not rise to the level of a “trade secret” as defined in the statute.  The district court then rejected Orthofix’s breach of contract claim, holding the confidentiality agreement protected only trade secrets, which the information in the “playbook” was not.  Orthofix appealed.

The Sixth Circuit Court of Appeals reversed the district court and held in favor of Orthofix on the breach of contract claim. The Court agreed the information did not qualify as a “trade secret” (and thus the misappropriation claim failed), but noted there are two types of protectable confidential information: (1) trade secrets and (2) information that does not rise to the level of a trade secret, but still shares at least some characteristics of trade secret information.  Regarding what types of non-trade-secret “confidential information” can be protected by confidentiality agreements, the court stated that

“[C]onfidential information” is generally defined by the parties, and not by achieving trade secret status, so long as it does not encompass publicly available information or an employee’s general knowledge and skill.

After noting “trade secrets” are statutorily protected from unauthorized disclosure, the Court held an employer may expand the scope of protected information through the use of a well-drafted nondisclosure agreement to include “confidential information.” In rejecting Hunter’s argument that only trade secrets were protectable, the court noted that courts “have given effect to nondisclosure provisions regardless of whether the information covered by the provisions achieves trade-secret status.”

Rather than remand for further fact-finding, the court determined that the information in the “playbook” was covered by the confidentiality agreement and, therefore, Hunter was in breach. The court entered judgment for Orthofix and remanded to the district court only for a calculation of damages.

Another interesting issue raised by this case concerns the permissible scope of confidentiality and nondisclosure agreements. Even in those states that enforce non-compete agreements, a non-compete agreement will be enforced only if it contains reasonable limitations of time and geographic scope.  Analogizing to non-competes, Hunter argued the confidentiality agreement was unenforceable because it did not contain any such limitations.  The court easily rejected this argument:

[N]on-disclosure covenants are more readily enforced than noncompetition covenants because they are not restraints on trade, do not prevent the employee from making use of the general experience he acquired during his employment, and do not offend public policy. . . . [N]on-disclosure provisions need not contain geographic and durational limits to be enforceable.

This case marks a big victory for employers in their ability to protect confidential information. Employers that rely solely on statutes or general/template confidentiality agreements to safeguard their confidential information do so at their own peril. (If Orthofix did not have a well-drafted confidentiality agreement in place, it would have been forced to rely solely on a misappropriation of trade secrets claim–a claim that failed!)  By using clear and specific confidentiality agreements, employers are able to significantly expand their ability to protect the confidential and proprietary information that provides competitive advantages in a highly-competitive marketplace.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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