Breach of Fiduciary Duty

Throughout 2012, Seyfarth Shaw LLP’s dedicated Trade Secrets, Computer Fraud & Non-Competes Practice Group hosted a series of CLE webinars that addressed significant issues facing clients today in this important and ever changing area of law. The series consisted of eight webinars:

1) Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff;
2) Employee Theft of Trade Secrets or Confidential Information in Name of Protected Whistleblowing;
3) Pleading, Providing and Protecting Trade Secrets in Litigation;
4) Protecting Your Trade Secrets in the Financial Services Industry;
5) When Trade Secrets Cross International Borders;
6) Trade Secrets and Non-Compete Legislative Update;
7) Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours; and
8) 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law.

As a conclusion to this well-received 2012 webinar series, we compiled a list of key takeaway points for each of the webinars, which are listed below. For those clients who missed any of the programs in this year’s webinar series, the webinars are available on CD upon request or you may click on the title below of each webinar for the online recording. CLE credit is available as discussed below. We are also pleased to announce that Seyfarth will continue its trade secrets webinar programming in 2013 and has several exciting topics lined up. We will release the 2013 trade secrets webinar series in the coming weeks.

Employee Privacy, Social Networking at Work, and the Computer Fraud and Abuse Act Standoff

The first webinar of the year, led by Seyfarth partners Gary Glaser and Scott Schaefers, addressed the issue of employees’ privacy rights on their work computers; unauthorized use or disclosure of company intellectual property while using social media; and the Computer Fraud and Abuse Act (CFAA).

  • To have the best chance of seeking remedies under the federal CFAA, only give employees access to company networks on a need-to-know basis. Require all employees with access to confidential company information to sign confidentiality and restricted access and use agreements. Have clear written policies in place that leave no doubt that any access and use of company information, for purposes other than company business, is strictly prohibited, and have employees acknowledge receiving copies of such policies. Send out periodic reminders of those policies, each of which should require acknowledgement of receipt by the employees.
  • Do NOT attempt to access an employee’s personal e-mails, files or Internet accounts without advice of counsel. Under both federal and many state laws, employees often have privacy rights in their personal information, even if they store it or access it on company computers.
  • For social networking sites (e.g., LinkedIn), have clear written policies that spell out what company information may/may not be posted on such sites, and identify what information belongs to the company (e.g., contact lists, company photos or graphics, etc.), as well as a process for purging the company-owned information from their contact lists posted on social networking sites such as LinkedIn at the time the employee departs. An exit interview should also be conducted at the time any employee separates, and as part of that exit interview process, each exiting employee should be given a written reminder of their ongoing trade secret, confidentiality and social networking obligations. If an employee leaves the company without such clear written direction, the company risks waiving any proprietary interest in the information in his/her LinkedIn profile. Also consider using ownership agreements that specify that the company owns the particular social media accounts that the employee may work on and remember to obtain the password from the employee to the company owned social media account before the employee leaves.

Employee Theft of Trade Secrets or Confidential Information in The Name of Protected Whistleblowing

In our second webinar of the series, Seyfarth partner Robert Milligan answered the question, “Can employees steal trade secrets and confidential information to support their whistleblower claims?” This program covered recent decisions addressing the interplay between maintaining employer confidentiality and protection of trade secrets and protected activity under whistleblower statutes and “self-help” discovery, as well as the provisions in whistleblower bounty programs that preclude enforcement of confidentiality agreements in certain instances.

  • A central goal of Sarbanes-Oxley is the accurate valuation and protection of a company’s assets. But what does this mean for trade secrets, which have traditionally been thought of as an undefined intellectual property right? Sarbanes-Oxley has mandated duties of disclosure and internal controls that have transformed trade secrets into an asset that must be valued and reported.
  • At a minimum, companies should create a trade-secret protection committee or have a corporate officer whose job it is to identify, value, and protect trade secrets. However, doing so requires an understanding of 1) what a trade secret is, 2) where one finds a trade secret, and 3) how to appropriately protect a trade secret. The key is to identify, inventory and value as well as institute internal controls to protect trade secrets. Seyfarth has extensive experience assisting companies with this process and offers an effective and well-received trade secret audit program.
  • Section 922 of the Dodd-Frank Act prevents any person from interfering with a whistleblower’s report, including by threatening to enforce confidentiality agreements. Whistleblower thieves may seek revenge by making confidential information public in addition to bringing it before the SEC. Companies must act swiftly to have genuine confidential or trade secret information removed from public mediums, such as the Internet, to attempt to preserve its secrecy. New whistleblower rules may decrease incentives to follow internal reporting procedures and instead provide a perverse incentive for sham employees to work for bounties rather than fulfill their employment obligations. Careful planning should be done to make good hiring decisions as well as employing effective performance management of existing hires to attempt to manage the risk of the retention of rogue and disloyal servants.
  • Consider these strategies to protect trade secrets and confidential information when faced with a whistleblower thief:
  1. Make sure you have a clear anti-retaliation policy and document investigation. Follow your corporate compliance programs and ethics policies and procedures.
  2. Be careful in all communications with the whistleblower. Do not make him or her feel threatened. Try to find an employee that the whistleblower thief trusts to get back company documents.
  3. Consider engaging a third-party neutral to maintain confidential documents and information if the whistleblower has not yet gone to the SEC.
  4. Consider amnesty negotiations. Remind the whistleblower of the serious legal consequences of stealing trade secret and confidential information.
  5. Offer to study the problem internally and report to the SEC.
  6. Move swiftly to attempt to obtain the removal of any confidential or trade secret documents from the Internet by working with Internet service providers to obtain the immediate takedown and involve the court as needed.

Pleading, Proving and Protecting Trade Secrets in Litigation

The third installment in the 2012 Trade Secrets Webinar Series was presented by trade secrets practice leader Michael Wexler. Many courts require that claims for trade secret misappropriation be pled specifically as to the nature of the trade secret or suffer the consequences of challenges to the pleadings. The challenge is to plead with reasonable particularity without actually disclosing the secrets in a public document. From a defense stand point, the identity of the trade secret is paramount to prepare defenses, determine the value of the secrets, and determine if they were actually misappropriated. This webinar covered the ethical, technical and practical aspects of initial pleadings that are fundamental to the filing and defending of trade secret claims.

  • In any trade secrets litigation in which you represent the plaintiff, you must have a frank discussion with your client prior to the inception of the litigation concerning its duties to identify the alleged misappropriated trade secrets with specificity and the resulting discovery disclosure that will be required in the litigation. Simply put, the client needs to know that counsel for the defendant(s) (at a minimum) will be provided access to the allegedly purloined trade secret as well as others. Depending upon the state and occasionally the individual judge, the defendants may also be able to obtain access to the stolen trade secrets subject to a protective order so that they can defend themselves against the claim. A plaintiff must be mindful that their secrets may be further disclosed to a competitor during trade secret litigation subject to non-disclosure obligations and that plaintiff must vigorously defend and protect the confidentiality of said information throughout the litigation.
  • A majority of states either by statute or case law require that a plaintiff disclose their trade secrets with specificity as part of the discovery process. Failure by the plaintiff to provide sufficient specificity regarding the stolen trade secret in discovery may result in a defendant obtaining summary judgment on the claim. Some states require the plaintiff to provide a specific trade secret disclosure document before discovery commences. See California Code of Civil Procedure section 2019.210.
  • Protective orders in trade secret litigation must be carefully tailored to protect confidential information disclosed in discovery and limit the disclosure of such information to those who need to know for purposes of the litigation. A protective order should have appropriate measures concerning how documents containing confidential information will be provided to the court, witnesses, and experts. Careful consideration should also be made on whose burden it is to justify the protection level assigned to particular documents.
  • Plaintiffs should use contention interrogatories to flesh out any allegations made by the defendant(s) that particular alleged trade secrets are in the public domain. Written discovery should probe the basis of such allegations, including when and where such disclosure occurred.

Protecting Your Trade Secrets in the Financial Services Industry

The fourth webinar in the series, presented by partners Scott Humphrey and James McNairy, focused on trade secret considerations in the banking and finance industry, including prosecuting claims against former employees who are FINRA members.

  • When seeking injunctive relief in a trade secrets dispute involving parties that are subject to FINRA regulation, be sure to first consult FINRA (NASD) Rule 13804 governing injunctive relief—while the moving party may first seek injunctive relief from a court of competent jurisdiction, the party must also make specified filings with FINRA.
  • When litigating a trade secret dispute before FINRA, keep in mind that the FINRA process is often less formal than in court, and the arbitration panel may include persons who are not lawyers. Thus, it behooves both parties to keep their legal arguments concise and, where complex trading algorithms or other complex trade secrets are at issue, the trade secret should be described as simply as possible.
  • When the FINRA trade secret dispute arises out of facts involving broker recruitment, the parties should be aware of the 2004 “Protocol for Broker Recruiting,” which currently has well over 400 signatories and allows brokers to take to their new employer certain account information. Other limitations within the protocol should also be carefully considered before filing suit.

When Trade Secrets Cross International Borders

Our fifth webinar in the 2012 series was presented by Robert Milligan, Marjorie Culver and Matthew Werber and provided a high-level discussion of recent non-compete and trade secret issues that impact foreign companies conducting business in the United States and companies operating internationally. This program provided an overview of the key considerations that foreign companies should appreciate in order to effectively navigate trade secret and non-compete law in the U.S. and highlighting the issues facing U.S. trade secret owners attempting to address the theft of stolen trade secrets abroad. This webinar provided valuable insight for companies who compete in the global economy and must navigate the legal landscape in these jurisdictions to ensure they are adequately protecting their trade secrets.

  • In many U.S. states, initial employment and continued employment can be sufficient consideration for non-compete, non-solicitation and non-disclosure agreements, whereas in several European countries, the employer must pay for any post-termination non-compete. In contrast to the law in some foreign countries, employers can still enforce the non-compete even if the employer terminates the employment relationship in some U.S. states. Injunctive relief is typically the top litigation goal in most U.S. trade secret/non-compete matters. There are significant differences in U.S. states concerning the interpretation of the Uniform Trade Secrets Act (which has been adopted in 46 U.S. States). For example, there are significant differences regarding the application of the inevitable disclosure doctrine, trade secret preemption and recoverable damages.
  • Cross-border considerations: employers must be vigilant and think critically about the most likely venue that a non-compete/trade secret battle will occur should an employee later leave the company as forum and choice of law can be outcome determinative. Employers should carefully select employees for cross-border coverage, taking into consideration where the work will likely be performed, where the employee will likely reside, what jurisdiction/choice of law is most favorable, and the likely chance of successful enforcement. The employer should draft to the highest standard based upon the likely locale of any dispute concerning the non-compete.
  • Trade secret holders seeking to remedy misappropriation occurring abroad should consider the United States International Trade Commission (ITC) as a potential forum for seeking relief. In TianRui Group Co., Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), the Federal Circuit ruled that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China so long as the dispute concerns products being imported into the United States.

Trade Secrets and Non-Compete Legislative Update

The sixth webinar of the year, led by Robert Stevens, Erik Weibust, and Daniel Hart, focused on new and pending legislative changes to non-compete and trade secrets statutes, including a review of Georgia’s Revised Restrictive Covenant Act one year after its enactment, recent and pending legislative changes to non-compete statutes in New Hampshire and Massachusetts, adoption of the New Jersey Uniform Trade Secrets Act, and pending legislative changes to trade secrets statutes in Idaho and at the federal level.

  • To the extent that they have not already done so, employers operating in Georgia should have their non-compete agreements evaluated by counsel to ensure that they are taking full advantage of the change in Georgia public policy toward enforcement of restrictive covenant agreements, which permits courts to blue pencil overbroad agreements and which only applies to agreements signed after May 11, 2011.
  • Employers operating in New Hampshire should ensure compliance with the new statutory requirement of disclosing non-compete and non-piracy agreements to employees prior to making an offer of employment or an offer of change in job classification, while employers operating in Massachusetts should stay abreast of proposed legislation that, if enacted, could make enforcement of restrictive covenants more difficult in Massachusetts. Please see our chart that summarizes the various iterations of the proposed legislation.
  • In light of New Jersey’s adoption of the Uniform Trade Secrets Act and proposed legislation in Idaho and at the federal level, trade secrets law is slowly moving toward greater uniformity. In light of the continually developing statutory landscape, employers operating anywhere in the United States should continue to ensure that they have taken reasonable measures to protect their trade secrets, by, among other steps, limiting access to trade secrets to employees with a need for such access, providing password protections on documents, encrypting data, limiting the ability of employees to remotely print highly sensitive documents, and enacting vigorous restrictive covenant agreements in jurisdictions where such agreements are permitted.

Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours

The seventh webinar in our series, presented by Michael Wexler, Robert Milligan and Joshua Salinas, discussed best practices when dealing with newly hired or departing employees and the incumbent trade secret, non-competition and information protection issues.

  • During the job interview of a competitor’s employee, remember to 1) discuss general skills and talents, not the former employer’s customers or trade secrets; 2) control the interview and put the employee at ease; 3) make clear that the employee should not, under any circumstances, use or bring any of his employer’s information or solicit any former co-workers; 4) focus on making the transition as smooth as possible for the former employer; and 5) check if the employee has any existing agreements with former employers before making an offer.
  • Key agreements/provisions/policies that companies should have with their employees: 1) non-disclosure and trade secret protection agreements; 2) non-solicitation of employee agreements/provisions; as permitted by law 3) agreements/provisions relating to former employer’s trade secrets (don’t use or disclose and do not bring to premises); 4) computer use and access provisions/agreements; 5) social media ownership agreements and policies; and 6) invention assignment agreements.
  • The exit interview process with departing employees is key. Employers should:
  1. Prepare for the interview, identify the trade secret and confidential information the employee accessed/used, consider having in-house counsel or HR and employee’s manager present
  2. Question the departing employee in detail.
  3. Ask the employee why he/she is leaving.
  4. Ask the employee what his/her new position will be.
  5. Check the employee’s computer activities and work activities in advance of the meeting.
  6. Ensure that all Company property, hardware, and devices have been returned, including e-mail and cloud data, and social media accounts; consider using an inventory list.
  7. Ensure that arrangements are made to have all company data removed from any personal devices, accounts, storage areas.
  8. Disable access to company computer networks.
  9. Make sure you obtain user names and passwords for all company social media accounts.
  10. Inform the employee of his continuing obligations under agreements with the Company.
  11. Consider letter to new employer and employee with reminder of continuing obligations.
  12. Consider having departing employee’s emails preserved and electronic devices forensically imaged.
  13. Consider using an exit interview certification.

2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law

In Seyfarth’s final installment of its 2012 Trade Secret Webinar series, Seyfarth attorneys James McNairy, Joshua Salinas and Jessica Mendelson reviewed noteworthy California cases and other legal developments in the increasingly hot areas of trade secret protection, the preemptive effect of the California Uniform Trade Secrets Act, California’s hostility to non-competition and non-solicitation agreements, the continued erosion of the Computer Fraud and Abuse Act as a tool for California employers to curb data theft, and social media’s influence on how organizations identify and protect confidential information.

  • Clearly define company social media policies before problems arise. Avoid restricting employees’ abilities to discuss the terms and conditions of their employment, wages, and other activities protected under Section 7 of the National Labor Relations Act. Employers who make use of social media accounts should consider using contracts to state clearly that the employer owns the accounts, which are to be used only for authorized purposes, but that do not overreach into areas that violate employee rights to privacy.
  • Companies should ensure their computer and network policies cover “access,” not merely “use,” to comply with the Ninth Circuit’s narrow interpretation of the CFAA. Access should be defined clearly to delineate functionally what computer resources and information employees permissibly may and may not access, with data repositories containing sensitive information requiring enhanced access restrictions.
  • To fall under California Business and Professions Code section 16601’s “sale of business” exception, non-competition covenants executed pursuant to the sale of a business should be incorporated into the terms of the purchase agreements and reflect a clear purpose to protect business goodwill.
  • Because preemption under California’s Uniform Trade Secrets act is increasingly invoked by defendants as a basis to dismiss claims related to the taking of trade secret information, it is imperative that potential plaintiffs carefully plead non-trade secret claims as distinct from the trade secret allegations within the complaint. Failure to do so can cause related claims to be preempted and, if the trade secret claim itself is faulty, significantly reduce the number of at issue claims.
  • Create a culture of confidentiality within your company so that at every turn employees are aware of the importance of protecting confidential, proprietary, and trade secret information and the steps required of all employees to protect the company’s information assets. Doing so may enable your organization to invoke the trade secrets exception to California Business and Professions Code section 16600, which may help protect company information assets and moderate high employee mobility in California.

2013 Trade Secrets Webinar Series

Beginning in January 2013, we will begin another series of trade secret webinars. The first webinar of 2013 will be a national year in review on the most important cases and developments throughout the country concerning trade secrets, non-competes, and computer fraud. To receive an invitation to this webinar or any of our future webinars, please sign up for our Trade Secrets, Computer Fraud & Non-Competes mailing list by clicking here.

For attorneys licensed in Illinois, New York or California, who are interested in receiving CLE credit for viewing recorded versions of the 2012 webinars, please e-mail to request a username and password. Seyfarth Trade Secrets, Computer Fraud & Non-Compete attorneys are also happy to discuss with you presenting similar presentations to your groups for CLE credit.

Happy holidays!!!

By Michael Baniak

A Virginia federal court district court recently issued a significant decision awarding lost profits to an aggrieved employer for breach of fiduciary duty by a former employee. The Court found that the ex-employee was not able to deduct his services for the company as an expense against the damages award. Further, the Court found that the employer’s CFAA claim failed becuase there was not a sufficient showing of loss. Ritlabs, SRL v. Ritlabs, Inc., 2012 WL 6021328 (E.D. Va. 11/30/12).

Ritlabs SRL (“SRL”) sued its CEO and part owner Demcenko, for alleged self-dealing through another company he formed (co-defendant), Ritlabs, Inc. (“INC”). The host of counts included breach of fiduciary duty of loyalty, violation of the Computer Fraud and Abuse Act (CFAA), and tortious interference with contractual relations. In a nutshell, Demcenko, while still the director (essentially CEO) of SRL, allegedly formed a rival Internet technology and software company INC with his wife. He then entered into a license agreement between SRL and INC to exclusively sell SRL’s software in the US, with a non-exclusive worldwide. As the Court determined, Demcenko did not obtain approval from his SRL co-owners, nor advise them of his ownership interest in INC, or that he was cancelling a software distributorship agreement between SRL and another company, which he then entered into on behalf of INC.

Needless to say, his co-owners did not take kindly to Demcenko’s activities, and sued. Plaintiff ultimately moved for summary judgment as to all of its claims, which resulted in the Court’s grant of the same generally across the board, along with summary judgment against Defendants on all counterclaims. The Court imposed constructive trusts, issued restraining orders, and ordered an accounting and disgorgement proceeding. A bench trial ensued as to damages, and it is here that interesting tidbits reside.

The breach of fiduciary duty was the big-ticket item, based upon Demcenko’s diversion of corporate opportunities to himself (through INC). SRL went for INC’s gross revenue, without reduction for any expenses, as well as for some other smaller amounts. SRL also sought punitive damages in the way of costs and attorney’s fees.

Applying Virginia law, a plaintiff is entitled to what it would have received “but for” the breach of fiduciary duty, so as to “deny Defendants the fruits of their scheme.” Accordingly, the Court determined that damages should therefore be calculated on the basis that Demcenko was operating INC for the constructive benefit of SRL; ergo, SRL was entitled to only profits, not gross revenue. In what might be seen as a bit of chutzpah by some, the Defendants sought to deduct amounts received by Demcenko for his “services”. The Court was not buying it, however, and concluded that collecting a salary for breach of one’s duty of loyalty, and while he was still receiving a salary from SRL, was not appropriate as a deductible expense.

As for damages under the CFAA, the Court noted that civil liability, and responsibility for compensatory damages or other relief, requires a showing of CFAA qualifying “loss” aggregating at least $5000. 18 U.S.C. section 1030(g). The bar for loss is not terribly high, as any reasonable cost to the “victim,” including the cost of responding to the offense, damage assessment, restoration, revenue lost “or other consequential damages incurred because of interruption of service” will suffice. But here, the Court did not find the necessary nexus with damage incurred because of interruption of service for the bulk of what SRL was toting up on this count. That left an amount below $5000 total, which the Court noted was below the jurisdictional threshold, and divested the Court of jurisdiction. The previous judgment as to liability was thereby vacated for “lack of subject matter jurisdiction.”

As for costs and attorneys fees, the elimination of the CFAA count removed that as a basis for a fee award. And as for punitive damages, upon which SRL further predicated its costs and attorneys fees, “the Plaintiff did not include a prayer for punitive damages in its Complaint, and should not be considered now.” Nonetheless, the Court reviewed the evidence, and concluded that SRL did not meet its high burden for punitive damages. It was in this discussion that what might otherwise have seemed to be a fairly open and shut case revealed some nuances, such as his former partners having some favorable knowledge of Demcenko’s plans to open a US branch, and “that the affairs of SRL were at times accompanied by rather unorthodox self-driected transactions by each of the owners.”

A high profile trade secret dispute among the board members of one of the fashion world’s most well-known companies has the American fashion elite taking sides. Last month, Christopher Burch filed a breach-of-contract and tortious interference complaint against his ex-wife, fashion mogul Tory Burch, in Delaware Chancery Court. In response, Tory filed counterclaims in early November, in which she accused Christopher of stealing trade secrets to establish stores which looked suspiciously like her own boutiques.

Tory Burch and her ex-husband, J. Christopher Burch, co-founded the fashion empire Tory Burch LLC in 2003. The company is an apparel and accessories brand providing consumers with luxury apparel and other goods. As Oprah Winfrey stated in 2005, the company is “the next big thing in fashion.” Today, the company’s annual sales total more than $700 million annually.

The Burches divorced in 2006, and both Tory and Christopher remained on the board of Tory Burch LLC. Christopher continued to pursue other projects, and in 2008, began to lay the groundwork to launch his own apparel brand, C.Wonder. The company opened its first store in October 2011. Its products included clothing, accessories, and home décor, all of which allegedly resembled Tory Burch’s products, but were sold at a significantly lower price. Allegedly, the store copied the Tory Burch brand, using similarly styled lacquered front doors and store fixtures, as well as furniture and rugs which closely resembled those found in the Tory Burch stores.

In June 2011, Christopher provided the Board of Directors (“the Board”) of Tory Burch LLC with notice that planned to sell his shares of the company. The Company then engaged Barclay’s Capital to assist in the process of locating a buyer. This project was referred to as “Project Amethyst.”

The events which followed the opening of C. Wonder vary depending on who is telling the story. Tory alleges the company sought to “arrive at a consensual resolution of its dispute” with Christopher, despite his violations of his fiduciary duties. In her counterclaim, she states the company continued to move forward with Project Amethyst to find a new investor to purchase Christopher’s stake in the company. In addition, five of the seven board of directors agreed that Christopher would need to enter into a settlement agreement to protect Tory Burch LLC’s brand and confidential information prior to completing any sale. According to Tory’s version of the story, the three bidders positioned to purchase Christopher’s required such an agreement to be in place before they would agree to invest, and Christopher’s refusal to agree prevented the sale from taking place. Christopher tells the story very differently, alleging Tory had cut off his power and “hijacked the bidding process” through which he had been attempting to sell his stake in the company. Furthermore, he alleges Tory manipulated third party bidders into requiring him and his company, C Wonder to reach a one-sided and onerous settlement agreement with the Company regarding trade secret misappropriation and trade dress infringement allegations.

On October 2, 2012, Christopher filed suit against Tory, the other directors, and Tory Burch LLC, requesting a declaratory judgment stating the defendants could not restrain him from pursuing other business ventures. Additionally, Christopher alleged the Board had breached the Operating Agreement by preventing him from engaging in other business ventures, tortiously interfered with his business relationships, and improperly interfered and acted in bad faith to impede his ability to sell his shares of the company.

On November 5, 2012, Tory filed counterclaims against Christopher, alleging Christopher had stolen trade secrets from Tory Burch LLC to establish stores which closely resembled Tory Burch boutiques. Tory alleged Christopher had stocked the stores with mass-market knock-offs of her luxury brand , and that under the terms of the operating agreement, he did not have the right to create knock-off goods, and his right to compete was qualified and limited by his other obligations as a director. Tory’s counterclaim alleges Christopher breached his fiduciary duty by using confidential information belonging to Tory Burch LLC and engaging in unfair competition for his personal benefit. Additionally, Christopher allegedly misappropriated trade secrets from Tory Burch LLC, which he then used in creating C Wonder. Tory’s counterclaim also alleges unfair competition, breach of contract, and deceptive trade practices. She further requests injunctive relief to stop Christopher’s use of Tory Burch LLC’s confidential information and company inventions.

Heavyweight fashion industry players like Anna Wintour and Diane Von Furstenburg have already spoken out in support of Tory Burch. According to Anna Wintour, the editor of Vogue, “As far as we’re concerned [this is] 100% Tory’s business, and we’ve never had anything to do with Chris.” Diane Von Furstenburg, the President of the Council of Fashion Designers of America, echoes Wintour’s support, characterizing Christopher’s behavior as “bizarre and nasty.”

The case is still in the early stages, but has already drawn attention for some colorful hearings. At the first scheduling hearing, which occurred on November 1, 2012, Chancellor Leo Strine promised not to burden anyone’s holidays with this “preppy clothing dispute. . . I’m sorry, but this is — this is not a case about intercontinental ballistic missiles.” In proposing an April trial date, Strine reflected on the popularity of “really ugly” duck shoes, “slightly irregular alligator shirts,” and how “real WASPS actually don’t go and pay full Polo price. . . at Macy’s. No way. They actually will find a bargain. That’s how they got to be, you know, WASPs.” Strine went so far as to suggest, jokingly, that the best way to evaluate the similarities between the C. Wonder and Tory Burch brands would be a fashion show featuring the parties’ attorneys. Finally, Strine discussed his recent reading of John Cheever’s works, and explained its impact on the dispute. “Totally unrelated to this case, I’ve been deep in it, in an autumnal Cheever phase. ” he said. “So I’ll have to just keep that up through the case. Have you read your Cheever lately? You know who he is? … And Mad Men will be coming back at some point in time. So I think if you read Cheever, go see the new Virginia Woolf revival and watch Mad Men, we’ll be all geared up and in the mood for this sort of drunken WASP fest. Are they WASPs? Are the Burches WASPs? Do we know?”

Whether Chancellor Strine’s preliminary views of this “preppy clothing dispute” lead to a quick resolution between the parties remains to be seen. We will continue to keep you apprised of future developments as the case progresses.


MPI, a Texas company, went to Kentucky and allegedly attempted to hire two Luvata employees, Foster and Meredith. Foster joined MPI soon thereafter. Over the course of the next few months while Meredith remained a Luvata employee, he and Foster allegedly spoke by phone repeatedly. In addition, prior to leaving Luvata for MPI, Meredith allegedly copied his employer’s computer files that described a trade secret manufacturing process, identified its customers, and contained its financial information. Once Meredith became an MPI employee, it allegedly replicated Luvata’s confidential manufacturing process and began competing with Luvata which then sued MPI, Foster and Meredith in a Kentucky federal court.

MPI’s motion to dismiss for lack of personal jurisdiction, on the ground that the Kentucky long-arm statute does not permit the exercise of jurisdiction over MPI and a related defendant company, was granted. The ex-employees’ Rule 12(b)(6) motion to dismiss the misappropriation claim against them was denied. Luvata Electrofin, Inc. v. Metal Processing Int’l, L.P., Case No. 11-CV-00398 (W.D. Ky., Sept. 10, 2012).

Luvata is in the business of electrocoating (“e-coating”) coils used in the heat transfer industry. Luvata maintained that its e-coating process is unique, is a trade secret, and cannot be reverse engineered. Foster was allegedly the company’s production supervisor, and Meredith was “intimately involved in running the” e-coating process. All Luvata employees signed non-disclosure agreements (but there was no non-compete provision).

At an e-coating conference held in Kentucky, MPI endeavored to hire both Foster and Meredith. After both initially declined, Foster left Luvata and went to work for MPI. Over the course of the next few months, he allegedly spoke to Meredith by phone more than 30 times, and at least twice Meredith reviewed Foster’s computer files at Luvata which contained trade secrets. In addition, Meredith allegedly copied onto his own CD and thumb drives files from his and Foster’s computers. On his last day at Luvata before joining MPI, Meredith allegedly used a program that “cleaned ‘unnecessary files’” from his and Foster’s computers. Foster allegedly told Luvata’s general manager that MPI was building an e-coating line, based on information Foster learned at Luvata, and that MPI soon would be competing with Luvata. MPI allegedly proceeded to reproduce Luvata’s secret e-coating process and began soliciting Luvata’s customers, and Luvata sued.

MPI’s motion to dismiss Luvata’s complaint for lack of personal jurisdiction was granted because, according to the court, MPI did not engage in acts in Kentucky that bore a “reasonable and direct nexus” to Luvata’s allegations of misappropriation of trade secrets. The court conceded the possibility “that something fishy was occurring” between MPI and Meredith but added that was only conjecture since Meredith may have been acting unilaterally to increase his value to his new employer. However, the court found sufficient to state a cause of action Luvata’s claim that Foster and Meredith violated their non-disclosure agreement with Luvata by disclosing its trade secrets to MPI. Luvata’s breach of fiduciary duty claim against its two ex-employees was dismissed as preempted by the Kentucky Uniform Trade Secrets Act.

Under the circumstances of this case, and particularly in light of the court’s decision denying the ex-employees’ Rule 12(b)(6) motion, the order dismissing Luvata’s lawsuit against MPI could be described as harsh, especially without giving Luvata an opportunity to take discovery. The suggestion that Meredith might have been acting on his own seems far-fetched but possible. Moreover, it is surprising that Luvata’s allegations held to be conjectural in connection with granting MPI’s motion to dismiss were found “to plausibly give rise to an entitlement to relief” as against the individuals. Of course, Luvata might have had an airtight action against them if they had signed non-competition agreements. Please see our recent post regarding a  Kentucky appellate case containing an overview regarding enforcing non-competes in Kentucky.

In a legal matchup involving some Hollywood heavyweights, Thomas Randolph filed suit in Los Angeles Superior Court recently, alleging he was defrauded out of his stake in a prominent 3-D movie technology venture.

Randolph sued William Sherak, the son of Motion Picture Academy of Arts and Sciences President Tom Sherak and a prior chairman of 20th Century Fox’s domestic film group; movie producer Christopher Mallick; actor Giovanni Ribisi, star of such films and television shows such as Avatar, My Name is Earl, and Cold Mountain; software developer Kuniaki Izumi; and William Morris talent agent David Phillips.

Randolph alleges that his company’s alleged trade secrets were stolen in violation of a non-disclosure agreement, he was not paid his share of company profits, and he was falsely accussed of self-dealing. Randolph also seeks damages for intentional interference with prospective economic advantage, intentional interference with contractual relations, fraud, negligent misrepresentation and breach of contract.

Mallick formed MRSF LLC, which was previously known as StereoD LLC in 2009. The company is one of the top 3-D conversion companies in the country, and its products include the films Captain America, Avatar and Thor. The company allegedly planned to market and sell Izumi’s software technology, and Randolph was allegedly hired to create the business plan for the company. Randolph, who was a principal at Kerner Technologies, a spin-off of George Lucas’ Industrial Light and Magic at the time, allegedly initially met with Mallick in late 2008. During their meeting, Mallick allegedly expressed interest in converting two dimensional movies to three dimensional movies. According to the complaint, Randolph told Mallick about VDX technology, and persuaded Izumi to combine that technology with Kerner’s CPX technologies, and then allegedly with Kerner’s consent, Randolph entered into an agreement with Mallick.

As alleged in the complaint, the parties verbally agreed that Randolph would be the company’s Chief Technological Officer, and would own a 5-10 percent stake in the company. Under the terms of the alleged agreement, he would also be entitled to license Kerner’s CPX technology freely. Randolph and StereoD entered into a non-disclosure agreement prohibiting Randolph from disclosing the company’s confidential information and business plan. Randolph alleges, however, that before the deal was even completed, Phillips began conspiring against him over finder’s fees, which he believed he was owed in exchange for introducing Randolph and Mallick. According to Randolph, Phillips allegedly double crossed him, notifying Ian Rose, Kerner’s general counsel, that Randolph was self-dealing, and trying to exclude Kerner from any future deals. Mallick, who also believed he was owed a finder’s fee, allegedly furthered the legend of Randolph’s self-dealing. After rumors allegedly arose that Randolph was breaching his fiduciary duty to Kerner in February 2009, Randolph resigned from the company 2009, after he was accused of failing to disclose the VDX deal to Kerner Technologies.

Following Randolph’s resignation from Kerner, Mallick, Ribisi, and Sherak ejected him from StereoD. According to the complaint, Randolph allegedly stayed in touch with Izumi, however, who assured him he would protect Randolph’s interests, and that Randolph would still receive a cut of the profits. Mallick, Ribisi, and Sherak allegedly ended up making tens of millions of dollars when the company was purchased by Deluxe 3-D for approximately $50 million. The company then allegedly proceeded to implement a business plan that was quite similar to the “structure, objectives, development strategy, production methodologies, revenue goals and exit strategy” Randolph had envisioned in 2009. Randolph alleges that after the company’s purchase, he discovered Izumi was part of the overall conspiracy against him, and that he himself lacked any equity or ownership interest in the company. Following this revelation, Randolph filed the lawsuit in July 2012.

Last year, talent agent David Phillips filed a similar lawsuit, against the company, alleging breach of oral partnership agreement, breach of contract, breach of fiduciary duty, and conversion. The case settled before trial for an undisclosed sum.

The interplay between Hollywood heavyweights, alleged breach of a confidentiality agreement, purported trade secrets, and white hot 3-D technology makes this new suit an interesting matter to follow and serves as an unfortunate reminder of how some business dealings can run astray. 


By Robert Milligan and Jeffrey Oh

In business, as in life, trust and communication are key to healthy and productive relationships. When these crucial elements are lost, as in the case of What 4 LLC v. Roman & Williams, Inc., 2012 WL 1815629 (N.D.Cal.), the fallout is often contentious and requires court intervention.

In a recent decision granting in part and denying in part defendants’ motion to dismiss, Judge Edward M. Chen of the United States District Court for the Northern District of California examined the principal-agent relationship between the parties to determine what responsibilities each had to the other based on the relationship’s underlying agreements and under California law.

On defendants’ motion to dismiss, the court found that plaintiffs had stated a claim for alleged breach of fiduciary duty and concealment predicated on defendants’ alleged misleading statements/conduct as to their intentions to perform under the parties’ alleged agreement. The court further held that plaintiffs were permitted to assert an alleged claim for breach of fiduciary duty and concealment predicated on the disclosure of confidential information not rising to the level of a trade secret, notwithstanding California Uniform Trade Secrets Act ("CUTSA") preemption.

The plaintiffs, What 4 LLC and 1095 Market Street Holding LLC, planned and secured financing for a joint venture to open a “premium youth hostel” at 1095 Market Street, San Francisco, CA, including purchasing the property and conducting market research and analysis. After completing their designs, applying and receiving all requisite entitlements and permits, plaintiffs allegedly approached the defendants, Roman & Williams (“R & W”) as well as its sole shareholders, Robin Standefer and Stephen Alesch, in November 2010 about hiring them for architectural and design services. On November 4, 2010, R & W signed a nondisclosure agreement prohibiting it from disclosing any of the confidential information given to it by plaintiffs, including market research and design. 1095 Market Street Holding eventually hired R & W on January 31, 2011 to work on the youth hostel, entering into a Letter Agreement. The Letter Agreement stipulated that R & W was to complete the project in six different phases ranging from concept to construction, and that other details would be finalized at a later date in a Definitive Agreement meant to supersede the Letter Agreement. In the interest of time, the parties agreed to proceed with the first two stages without signing a Definitive Agreement, which defendants completed in August 2011.

While R & W waited for orders to begin work on the next phase of the project, in October 2011 it allegedly began negotiations with plaintiffs’ competitor, Sydell, to provide services for their own premium youth hostel project. In a subsequent meeting with Sydell on November 1, 2011, Ms. Standefer allegedly disclosed plaintiffs’ confidential information in a bid to win the contract. On November 15, 2011, R & W allegedly met with plaintiffs to discuss the next steps of the 1095 Market Street project, failing to inform them that it had entered into a multi-year exclusive contract with Sydell to provide the same services it had, and was to provide plaintiffs. Allegedly learning about R & W’s agreement with Sydell from a Wall Street Journal article on November 23, 2011, plaintiffs asserted the following causes of action: (1) breach of the nondisclosure agreement, (2) breach of fiduciary duty, (3) concealment, (4) breach of contract, and (5) violation of CUTSA. Defendants then brought a motion to dismiss plaintiffs’ claims except the CUTSA claim.

Lumping the first and fourth causes of action together,  the court began its analysis by examining defendants’ contention that the two breach of contract claims (i.e., the Nondisclosure Agreement and the Letter Agreement) should be dismissed. Due to the fact that the two individual defendants, Ms. Standefer and Mr. Alesch, were not a party to either contract, a point which plaintiffs conceded, the Court granted the motions to dismiss the claims for these two. However, the court noted that “there are still viable claims for breach of contract against R & W. "

Next in its analysis, the court determined whether or not R & W’s actions constituted a breach of fiduciary duty and concealment. For its part, defendants argued that the claims are preempted by the CUTSA and that the claims are not plausible given the insufficient allegations that they owed a duty to plaintiffs. Codified in California Civil Code § 3426, the CUTSA includes a provision which states that the statute “does not affect… (2) other civil remedies that are not based upon misappropriation,” which courts have interpreted to “preempt alternative civil remedies based on trade secret misappropriation.” Plaintiffs stated in their complaint that all of the confidential information disclosed by R & W constituted trade secrets under the CUTSA. Although they argued in court that some of the disclosed information did not constitute trade secrets, Judge Chen agreed with defendants that CUTSA preempts the breach of fiduciary duty and concealment claims based on plaintiffs’ original filing stating otherwise. The court, however, provided plaintiffs with leave to amend the claims to include, as an alternative theory, allegations that plaintiffs’ confidential information did not constitute trade secrets but was otherwise actionable.

In response to R & W’s assertion that they did not owe a duty to What 4 LLC or 1095 Market Street Holding LLC, plaintiffs argued that defendants did “because (1) they were Plaintiff’s architects and (2) they were Plaintiff’s agents.” Citing Palmer v. Brown, where the court found that an architect’s fiduciary duty to one client does not prohibit the architect from working with a client’s potential competitor, the court did not find plaintiffs’ first argument convincing. However, because plaintiffs hired R & W “to act as their agent” to bid and negotiate with suppliers on their behalf, the court found the existence of an agency relationship to be plausible. Citing the Restatement of the Law of Agency (3rd ed., 2006), the court noted that while an agent is not required to disclose its intentions to compete with a principal, it does have a duty not to mislead the principal about its own intentions. R & W allegedly continued to meet with plaintiffs and led them to believe it was committed to proceeding with the next phase of development while previously entering into a multi-year exclusive contract with Sydell that prevented any such work. Therefore, although it found that there is no viable claim for breach of fiduciary duty based on defendants working for a competitor or concealing that fact, the court denied defendants’ motion to dismiss these claims based on the allegations that defendants allegedly misled the plaintiffs.

This decision is noteworthy because the court rejected plaintiffs’ claim that defendants’ alleged breach of the exclusivity provision in their agreement constituted a breach of fiduciary duty and for the court’s willingness to leave the door open to plaintiffs to assert a claim for breach of fiduciary duty and concealment based upon the misuse of information not rising to the level of a trade secret, notwithstanding CUTSA preemption.

Additionally, the case highlights that selecting reliable and trustworthy agents to assist with the implementation of a vision is paramount to the success of any business venture. When a principal-agent relationship fails, the costs to all parties can be enormous. The threat of these costs, including lost productivity and the price of litigating these disputes, should motivate business planners to be exceptionally thorough in vetting potential business partners. While these considerations are essential, it is also important for any business relationship to be anchored by a comprehensive contractual agreement which explicitly details the duties and responsibilities each party has to the other. By clearly outlining the parameters of a business relationship, both the principal and agent can attempt to protect themselves from any unwanted or unexpected results. Consultation with experienced legal counsel is often necessary to position a party for the best outcome, particularly in California where non-compete agreements and claims of theft of trade secrets and confidential information are highly scrutinized.

On April 25, 2012, a federal judge in North Carolina issued a ruling granting in part and denying in part motions to dismiss involving claims for trade secret misappropriation, breach of contract, and conversion in a dispute between two pharmaceutical companies in the case of River’s Edge Pharmaceuticals v. Gorbec Pharmaceutical Services, Inc. This decision confirms, to an extent, the need to plead actual, rather than speculative harm to prevent dismissal for failure to state a claim.

River’s Edge Pharmaceuticals (“River’s Edge”) is a company which distributes pharmaceutical products and aims to provide “reasonably priced alternatives to costly name brand pharmaceuticals.” The company began marketing and developing certain alleged unapproved pharmaceutical products through an FDA approved process known as Drug Efficacy Study Implementation (“DESI”).

In 2007, River’s Edge began working with another pharmaceutical company, Gorbec, to manufacture DESI drugs and test and formulate generic drugs under the Abbreviated New Drug Application (“ANDA”) process. According to the pleadings, the parties agreed to a contract, and agreed the terms would be memorialized in writing, however this was never actually done. River’s Edge began submitting purchase orders to Gorbec, however, and Gorbec performed according to the agreed upon terms.

River’s Edge alleges that beginning in 2010, Gorbec’s executives began making statements about how they owned the “know-how, intellectual property, and regulatory approvals” which River’s Edge had hired and paid them to develop. According to River’s Edge, these statements were made despite the fact that River’s Edge was the actual owner. In addition, Gorbec threatened to stop work on River’s Edge’s products, and made statements of intent to compete with the company. River’s Edge alleges that all of these actions would harm the company and would worsen its chances of getting FDA approval. Gorbec, by contrast, alleged it had agreed to manufacture these drugs based on River’s Edge’s representations and proceeded to do so for three years. However, Gorbec alleges that during that time, River’s Edge received a warning letter from the FDA asking the company to cease sales. River’s Edge allegedly failed to tell Gorbec about it. Gorbec alleges River’s Edge also failed to pay in full for the work they had performed.

River’s Edge filed a complaint against Gorbec and its President, J. Michael Gorman, in the Middle District of North Carolina, requesting declaratory relief, and alleging breach of contract, breach of fiduciary duty, constructive fraud, promissory estoppel, unjust enrichment, conversion, misappropriation of trade secrets, and punitive damages. Gorbec filed a counterclaim, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and unfair and deceptive trade practices.

Both parties recently filed motions to dismiss. Gorbec moved to dismiss all counts of the amended complaint, except for declaratory relief, while River’s Edge moved to dismiss each and every one of Gorbec’s counterclaims.

With regard to breach of contract claim, the court granted Gorbec’s motion in part to the extent the claimed breach was based on Gorbec’s statements of ownership or intent to compete, but denied the motion to the extent the breach alleged pertained to Gorbec’s cessation of ANDA-related work.

Similarly, with respect to the breach of fiduciary duty claim, the court granted the motion to dismiss to the extent the claim was based on Gorbec’s threatened or potential conduct, but denied the motion to the extent the claim was based on Gorbec’s refusal to provide River’s Edge with complete copies of communications with the FDA and info regarding pending ANDAs and said things suggesting ownership of River’s Edge’s intellectual property. The court also dismissed the claims for constructive fraud and unjust enrichment, holding the plaintiff’s allegations failed to state a claim. The court however found that there were sufficient facts to state a claim for both conversion and misappropriation of trade secrets. On the misappropriation of trade secrets cause of action, however, the court held that while there was sufficient facts to state a claim, the burden would be on River’s Edge to show Grobec had the opportunity to acquire, use and disclose such information without consent.

With respect to Gorbec’s counterclaims, the court dismissed the claim for negligent misrepresentation and denied the motion to dismiss for unfair and deceptive trade practices and unjust enrichment, finding sufficient information to state a claim. Additionally, the court found Gorbec had sufficiently alleged a claim for breach of contract regarding the work Gorbec had done for the ANDA process, but dismissed the claim to the extent it was based on River’s Edge’s failure to enter into a marketing agreement. Similarly, the court denied the motion to dismiss the count of fraud to the extent it was based around River’s Edge’s fraudulent concealment of the warning letter, but dismissed the claim to the extent it was based on the idea that River’s Edge formed its own manufacturing company in order to get around its contract.

The Court’s ruling suggests the need to plead with specificity. Here, claims based on speculative damages, and threatened or potential conduct failed to survive dismissal. This confirms the importance of alleging clear harm in one’s pleadings, and shows that to gain a more favorable result for a client, a pleading needs to be framed in such a way that it avoids speculation.

The Ohio 12th District Court of Appeals recently uphelda lower court’s injunction against two former employees and their new employer in light of defendants’ apparent breach of duty of loyalty, misappropriation of trade secrets, and tortious interference with business relations. DK Prods., Inc. v. Miller, Case No. CA2008-05-060, 2009 WL 243089 (Ohio Ct. App. 12 Dist. Feb. 2, 2009)

System Cycle, a branch of DK Products, Inc., located in Springboro, Ohio, distributes BMX bicycles, parts and accessories to bicycle retailers throughout the United States. System Cycle employed Matthew Miller and Charles Johantges until System Cycle learned that Miller and Johantges had disclosed sensitive financial information to vendors and attempted to broker distribution deals on behalf of Two Zero Distribution, Inc., a company created by Miller while Miller and Johantges were still employed by System Cycle (“Two Zero”). Per a Dayton Daily News articlediscussing the case, System Cycle learned about Miller and Johantges’s activities by intercepting an e-mail from the defendants to one of System Cycle’s customers.  

 The Ohio courts granted System Cycle ’s request for injunctive relief on each of the counts in the complaint, rejecting each and everyone of defendants’ counter-arguments. With respect to System Cycle’s tortious interference claim that defendants improperly interfered with System Cycle’s existing business relationships through improper disclosure of financial information, defendants argued that System Cycle had not showed evidence of malice on their part, but the Court of Appeals declined to find that malice is a necessary showing for a claim of tortious interference. Additionally, there was ample evidence of irreparable harm to System Cycle. Even defendant Miller admitted that his disclosure of confidential financial information regarding System Cycle was “pretty devastating.”

The courts also rejected Defendants’ challenge to the injunction as it related to the trade secret misappropriation claim. Defendants had asserted that the injunction was improper because System Cycle did not proffer evidence that they used System Cycle’s trade secrets Yet, the Court of Appeals pointed to Defendant Miller’s admission that he had discussed certain trade secret information with a vendor, which falls within the definition of “misappropriation” under the Ohio Uniform Trade Secret Act. 

Defendants’ final challenge was to the injunction as a remedy for the apparent breach of defendants’ duties of good faith and loyalty. The defendants contended that System Cycle failed to show irreparable injury in connection with this claim, but the defense fell on deaf ears. The Court of Appeals deflected that criticism by pointing to the very real potential for irreparable injury in connection with the other two claims.

As a result, the Court of Appeals affirmed the trial court’s order enjoining Defendants from solicitng System Cycle’s customers and from misappropriating System Cycle’s confidential information for the benefit of Two Zero. The case now returns to the trial court, where System Cycle may pursue a permanent injunction and money damages.

The key to System Cycle’s success likely had much to do with the early interception of the e-mail from Miller to a System Cycle customer. Procedures designed to prevent the loss of trade secrets through electronic means are becoming more commonplace and more important to protecting a company’s intellectual property. 


 In RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, the Supreme Court of Canada recently addressed a verdict against a group of departing employees by a British Columbia trial court.

RBC operated an office in Cranbrook, British Columbia. In November 2000, almost every employee in the office abruptly resigned and moved to Merrill Lynch.  Don Delamont, the RBC branch manager, coordinated the move.  The departing employees copied and retained a number of files relating to RBC customers before resigning.

RBC sued, asserting the following claims:

  • Against its former employees for breach of fiduciary duty, breach of implied contractual term not to compete unfairly upon leaving RBC’s employ, breach of implied contractual term to give reasonable notice of termination, and an action for misuse of confidential information;
  • Against Merrill Lynch and its local manager James Michaud for breach of duty in tort for inducing RBC staff to terminate their contracts of employment without notice and to breach their contractual obligation not to compete unfairly; and 
  • Against all the respondents for conspiracy and conversion, the latter related to the removal of documents known to be the property of RBC.

The trial court found for RBC and awarded damgaes on a variety of theories against the departing employees, Merrill Lynch, and Michaud.

On appeal, the British Columbia Court of Appeal overturned two categories of damages: (1) an award of five years worth of lost profits in the amount of $1,483,239 against Delamont for breaching his duty of good faith by coordinating the departure of almost all of the employees from the office that he supervised; and (2) an award of $225,000 for unfair competition against the departing employees.

On review by the Supreme Court of Canada, the highest court reinstated the award against Delamont, rejecting the Court of Appeal’s reasoning that the collapse of the branch was not a foreseeable result of Delamont orchestrating the departure of the office’s investment advisors. Instead, the Supreme Court concluded that Delamont had a duty of good faith (akin to the duty of loyalty set forth in most American states) to manage and retain the investment advisors at his branch.  The Court also decided that Delamont violated that duty by facilitating the resignation of the investment advisors and that Delamont was therefore liable for RBC’s lost profits incurred as a result of the collapse of the branch.  Notably, the dissent points out that the trial court decided that Delamont did not owe a fiduciary duty to RBC. Therefore, the dissent attacks any award of damages against Delamont based on the judicial creation of a category of "quasi-fiduciary" employees who are liable to their employers if they do not perform their job duties properly.

From there, the Supreme Court decision focuses primarily on the proper calculation of damages, finding that a former branch manager can be liable for five years’ worth of lost profits for facilitating the departure of the employees under his supervision.

In contrast, the Supreme Court overturned the award of $225,000 for unfair competition against the departing employees to the extent that it was awarded based on a duty not to compete. The Court held that employees in Canada owe a duty to provide reasonable notice to their employers before resigning, but that they do not owe a duty not to compete during the notice period (absent a non-compete agreement establishing otherwise). The case highlights a difference between Canadian and American law: the requirement in Canada that an employee provide "reasonable notice" before resigning. And, courts in Canada have discretion to determine what that reasonable notice period will be.

The trial court determined that a reasonable notice period for the employees would have been 2.5 weeks and thus assessed damages in the amount of $40,000 against the employees for failing to provide notice. The Supreme Court held that this category of damages was proper, but the additional award of $225,000 based on the departing employees’ competing during the 2.5 week period was not proper because the employees were not required to refrain from competing.

The Supreme Court further found that the $225,000 award against the departing employees could not be based on the departing employees’ retention of RBC documents because any award for lost profits resulting from the retention and use of the documents was covered already by the lost profits award against Delamont.

TalentBurst, Inc. v. Collabera, Inc., Civ. No. 08-10940-WGY (D. Mass. July 25, 2008).

A federal court in Boston has dismissed a complaint brought by information technology temp agency TalentBurst against competitor Collabera for aiding and abetting a breach of fiduciary duty by TalentBurst’s former employee, who subsequently joined Collabera, on the ground that the employee owed no fiduciary duty of loyalty to TalentBurst.

Raj Mohan Pallerla was hired by TalentBurst as a systems administrator and, as a condition of his employment, was required to sign an employment agreement that included non-compete and non-solicitation provisions. While employed by TalentBurst, Pallerala performed work for one of Collabera’s clients pursuant to a consulting services agreement between the two firms. Immediately after resigning from TalentBurst, Pallerla became employed by Collabera where he continued without interruption servicing the same Collabera client he had serviced while employed by TalentBurst. In response to TalentBurst’s letter demanding that it enforce Pallerla’s restrictive covenant, Collabera asserted that TalentBurst had waived enforcement of the covenant by entering into the consulting services agreement with Collabera.

TalentBurst brought suit against Collabera alleging that Collabera aided and abetted Pallerla’s breach of his fiduciary duty to TalentBurst. The court, however, rejected this claim because Pallerla’s job title, duties, and the fact that he was hired out to clients while at TalentBurst demonstrated that he was a “worker bee” rather than a manager, executive, or officer. Thus, under Massachusetts law he owed no fiduciary duty of loyalty to his employer. The court concluded that because there was no predicate breach of fiduciary duty by Pallerla, and no direct fiduciary relationship between TalentBurst and Collabera, the claim must fail. 

Of particular interest, the court noted that TalentBurst failed to allege that Pallerla “was entrusted with confidential information or that other special circumstances existed such that he could be said to have occupied a position of ‘trust and confidence.’” In a footnote, the court further observed that “although it is clear that the employment agreement, including the Covenant, created contractual duties on Pallerla’s part, TalentBurst cites no authority for the proposition that the signing of a restrictive covenant also creates a fiduciary obligation.”

Based on this conclusion, the court also dismissed TalentBurst’s claim for tortious interference because the “aiding and abetting” was the sole basis upon which TalentBurst alleged that it had satisfied the element requiring improper means or motive. The court went on to consider whether Collabera’s interference with the restrictive covenant itself created a presumption that Collabera had an improper motive. Although other Massachusetts state court cases suggested this might be sufficient, the court found those cases distinguishable because in those cases the defendants obtained and used confidential information through the employee, whereas here there was no allegation that Collabera did anything more than simply hire TalentBurst’s employee. In addition, the court concluded that Collabera might have had a legitimate motive for hiring Pallerla, namely to save money by employing him directly.