On November 13, 2018, the United States Court of Appeals, Fifth Circuit, affirmed the United States District Court for the Western District of Texas’s denial of prevailing party attorneys’ fees in a matter of first impression under the Defend Trade Secrets Act (“DTSA”). In short, the Fifth Circuit held that a dismissal without prejudice of a DTSA case does not support an award of prevailing party attorney’s fees. Continue Reading The Limits of “Taking the Lead Early”: A Dismissal Without Prejudice Will Not Support Defend Trade Secrets Act Attorney’s Fees

Massachusetts Federal Court Enjoins Seafood Supplier Executive from Working for Competitor After Downloading Trade Secrets

A Massachusetts Federal Court recently enjoined the former Director of Research and Development and Quality Assurance of National Fish & Seafood, Inc. (“National Fish”) from working for a competing seafood supplier based in Florida after it determined that she had downloaded thousands of documents from National Fish’s computer systems during her final days with the company.  Kathleen Scanlon had worked for the Gloucester, Massachusetts-based seafood supplier for twenty-three years when she was approached by the CEO of Tampa Bay Fisheries, Inc. (“Tampa Bay Fisheries”) to see if she was interested in taking a position as director of food safety for the company. Continue Reading There’s Something Fishy Going on Here: MA Federal Court Enjoins Seafood Supplier Executive

In Seyfarth’s fourth webinar in its series of 2017 Trade Secrets Webinars, Seyfarth attorneys Robert Milligan and Joshua Salinas were joined by Jim Vaughn, one of California’s leading computer forensics experts, presented Trade Secret Protection: What Every Employer Needs to Know. The panel focused on how to help employers navigate the tricky trade secrets waters and provided best practices for trade secret protection.

As a conclusion to this well-received webinar, we compiled a summary of takeaways: Continue Reading Webinar Recap! Trade Secret Protection: What Every Employer Needs to Know

shutterstock_318803609We are pleased to announce the webinar “So You Want An Injunction in a Non-Compete or Trade Secret Case? ” is now available as a podcast and webinar recording.

In Seyfarth’s seventh installment in its series of 2015 Trade Secret Webinars, attorneys Justin K. Beyer, Eric Barton and Robert C. Stevens focused on the issues confronting plaintiffs in preparing for and prosecuting trade secret cases and the various ins and outs of seeking both temporary restraining orders and preliminary injunctions.

  • Employers can best protect their trade secrets by instituting robust training, policies and procedures aimed at educating its work force as to what constitutes confidential information and that this information belongs to the employer, not the employee. By utilizing confidentiality, invention assignment, and reasonable restrictive covenants, as well as implementing onboarding and off-boarding protocols, educating employees on non-disclosure obligations, educating employees on that data which the employer considers confidential, clearly marking the most sensitive data, and restricting access to confidential information, both systemically and through hardware and software blocks, employers can both educate and prevent misappropriation.
  • If an employee voluntarily resigns his or her employment with the company, the employer should already have in place a specific protocol to ensure that the employee does not misappropriate company trade secrets. Such steps include questioning the employee on where he intends to go, evaluating whether to shut off access to emails and company systems prior to the expiration of the notice period, requesting a return of company property, including if the company utilizes a BYOD policy, and reminding the employee of his or her continuing obligations to the company. Likewise, companies should have robust onboarding policies in place to help avoid suit, such as attorney review of restrictive covenants, offer letters that specifically disclaim any desire to receive confidential information from competitors, and monitoring of the employee after hire to ensure that they are not breaching any confidentiality or non-solicitation obligations to the former employer.
  • If a company finds itself embroiled in litigation based on either theft of its trade secrets or allegations that it either stole or received stolen trade secrets, it is important to take swift action, including interviewing the players, preserving the evidence, and utilizing forensic resources to ascertain the actual theft or infection (if you are on the defense side). Companies defending against trade secret litigation also need to analyze and consider whether an agreed injunction is in its best interests, while it investigates the allegations. These types of cases tend to be fast and furious and the internal business must be made aware of the impact this could have on its customer base and internal resources.

A Texas federal trial court, finding the absence of any legal precedence to award an ongoing royalty in a trade secret misappropriation case, looked to the patent laws to impose an ongoing royalty. As a result, rather than permanently enjoining the misappropriator from continuing, the trial court imposed a royalty, thereby allowing the victim some compensation but allowing the other party to continue its activities. Sabatino Bianco MD v. Globus Medical Inc., 2014 WL 2980740 (ED Tx. 02 July 2014)(docket no.: 2:12-cv-00147)

Summary of the Case

Dr. Bianco designed certain spinal implants. The jury ruled that Globus misappropriated Dr. Bianco’s trade secrets and awarded damages. Dr. Bianco wanted disgorgement of Globus’ profits, but the jury instead awarded Dr. Bianco a 5% royalty as back-payment for the taken secrets. Dr. Bianco asked for, but was denied, a permanent injunction. Instead, the district court asked the parties to come up with some figure for the ongoing royalty percentage, which the judge determined to be 5% also. The judge said that the payment period would extend for 15 years.

Dr. Bianco asked for more than 5% (he asked for 6%) and Globus said it wasn’t going to pay anything in the future because the secrets were no longer secret and that the prior 5% back-payment was full compensation. Dr. Bianco said that the previous 5% was a floor and any new rate should necessarily be higher. Globus said that once the misappropriation was publicized and embodied in the actual spinal devices, nothing was a secret. Certainly there was no call for paying royalties over 15 years. Dr. Bianco asked for a higher rate to send warnings to other misappropriators that such behavior is not tolerated. The trial judge rejected both sides’ proposals.

The Court’s Rationales

First the court noted that in Texas, there is no state-based trade secret law covering the ongoing royalty situation. So the court unsurprisingly adopted patent law as the trial judge was in fact Judge William Bryson of the US Federal Circuit Court of Appeals, sitting in designation in Texas.

The court then noted that in Texas, injunctions can continue longer than the period after which a secret becomes public. The court also noted that any increase in the rate cannot be for punitive or willful theft purposes because Texas law does not allow for punitive forward looking remedies and that any punitives were included in the back-payment royalty rate.

Furthermore, the court reasoned that in Texas, trade secret theft is a one-time event, hence the proper calculation would be on what the parties would hypothetically negotiate on the one-time event. In patent law, though, each infringement is a continuing tort.

Finally, the court rejected Dr. Bianco’s deterrent effect argument. The court noted that any deterrent effect is satisfied by the possibility that the court will not award any base damages or ongoing royalties but instead will order a full disgorgement.

Takeaways

This case teaches several aspects: (1) One should not assume that every trade secret theft can be remedied by automatic permanent injunction relief. Rather a court may allow the defendant to continue activities so long as it pays some royalty; (2) In your particular state, as here, there might be no case law precedent that sets the contours of the remedy, and hence, a court may borrow from another legal subject matter; (3) While we do not recommend any such action, this is an instance in which the misappropriation is allowed to continue, with a royalty payment. One could presume that there is still a significant financial benefit to the misappropriator in that it still makes money from its initial misappropriation; and  (4) In the initial disclosure, though in confidence, of Dr. Bianco’s information to Globus, would the result have been different if the disclosure documents included Globus Medical’s agreement that it would be subject to permanent injunctive relief and disgorgement? Perhaps the disclosure documents could have included those statements.

The former employer failed to prove that the parties entered into an effective non-compete agreement, and also failed to prove that the ex-employee had disclosed or had threatened to disclose trade secrets.  But, an Ohio federal judge entered a preliminary injunction forbidding her, until further order, from contacting her former employer’s clients and certain of its prospects.  PharMerica Corp. v. McElyia, Case No. 1:14-CV-00774 (N.D. Ohio, May 9, 2014) (Gwin, J.).

Summary of Case

McElyia was one of several salespersons employed by PharMerica, a provider of pharmacy products and services to skilled nursing facilities.  At the time she became a PharMerica employee, she covenanted to keep its client information confidential.  She never signed a non-competition agreement.  On the eve of her resignation, she downloaded to her personal computer extensive PharMerica documents.  Then she went to work for a competitor as its sole salesperson.  PharMerica sued her and her new employer.  She quickly returned the PharMerica documents.  But PharMerica nonetheless sought a TRO and preliminary injunction to prevent both defendants from competing with PharMerica.  The court denied PharMerica’s motions directed at McElyia’s new employer and the motion for a TRO against McElyia.  But after holding an evidentiary hearing on the preliminary injunction motion directed at her, the court enjoined her until after a trial from contacting PharMerica’s clients or any prospective clients she had called on during her final six months of employment by that company.  The injunction was conditioned on PharMerica posting a $50,000 bond.

Non-Compete Injunction without a Non-Compete Covenant

Judge Gwin concluded that there was insufficient evidence of an effective non-competition covenant.  PharMerica had asked McElyia to sign one.  It provided that she would not work for a competitor for six months, and would not solicit current clients and employees for one year, after her termination.  However, she declined to execute it. 

The judge found that when she took the PharMerica documents she intended to share them with her new employer, but he added that there was no evidence that she did disclose, or was threatening to disclose, PharMerica’s trade secrets.  Judge Gwin said that McElyia had not solicited any of PharMerica’s clients. 

Although the phrase “inevitable disclosure doctrine” does not appear in Judge Gwin’s opinion, perhaps it was a basis for entering the injunction.  He stated that “some Ohio courts do permit injunctions in the absence of a non-compete agreement and without a prior instance of disclosure” of trade secrets.  He cited only one decision.  While no injunction was entered in that case, the court there did reference (but distinguished) several “inevitable disclosure” cases.

Courts typically find “inevitable disclosure” only when there is a high probability, not a mere possibility, that trade secrets will be revealed.  Usually, (a) the parties executed a non-compete covenant, and/or (b) the ex-employee had disclosed or destroyed, or at least had threatened to disclose or destroy, confidential information.  Not so in PharMerica.  Further, injunctions to prevent “inevitable disclosure” of confidential information despite the absence of a non-compete covenant usually pertain to engineering data or technical manufacturing processes rather than mere marketing information as in PharMerica

Curiously, the opinion in PharMerica does not suggest the presence of either of two factors some courts have used to justify entering an “inevitable disclosure” injunction:

(a) the former employer went to considerable lengths and expense to develop the purloined information and to keep it confidential; and

(b) the ex-employee was a high-level executive for the former employer.

Takeaways

The facts and circumstances present in PharAmerica would more often warrant denial of an injunction against competition rather than justifications for entering one.  If the court was relying on the “inevitable disclosure” doctrine at all, it seems to have been treated as a de facto (partial) non-compete covenant even though the parties did not agree to one.  Moreover, the description of the “confidential” PharMerica information McElyea supposedly possessed was extremely general: “pricing, contract terms, and marketing and product packaging strategies.”  If the court intended to enjoin its use, more specific and identifiable data would have been required so that McElyia knew precisely what she was forbidden to disclose.

Significantly, the injunction did not order McElyea to refrain from using PharMerica’s trade secrets.  It simply circumscribed the universe of prospective clients she could contact.   

In the end, PharMerica may have achieved a pyrrhic victory.  Judge Gwin’s preliminary injunction is unlikely to be long-lasting, and the company has been required to post a rather large bond.  Perhaps the court simply intended to send a message to the parties that failure to resolve the case amicably could entail substantial risk. 

In a stunning per curiam ruling, the Fourth Circuit Court of Appeals last week vacated a judgment of nearly $1 billion, and a 20-year non-compete injunction, entered by an Eastern District of Virginia judge in favor of the DuPont Company.  The appellate tribunal held that the lower court committed prejudicial error by granting DuPont’s pre-trial motion in limine to bar defendant Kolon Industries from offering any evidence relating to an earlier lawsuit involving DuPont.  The case was remanded for a new trial before a different judge.  E.I. DuPont De Nemours & Co. v. Kolon Industries, Inc., No. 12-1260 (4th Cir., Apr. 3, 2014).

Summary of the case.  DuPont maintained that one or more former employees, working as consultants to Kolon, misappropriated DuPont’s trade secrets relating to the manufacture and marketing of “Kevlar,” a strong, synthetic fiber used, for example, in bullet-resistant armor.  Kolon contended that what the consultants disclosed was not confidential because it was part of the public record in prior trade secret misappropriation litigation DuPont filed against a company — not Kolon — that was, at the time, DuPont’s primary competitor with respect to “Kevlar.”

Granting DuPont’s in limine motion in the Kolon case, the trial court ruled that any reference to that prior lawsuit would be confusing and prejudicial.  The Court of Appeals reversed, holding that the trial judge’s “wholesale preclusion of any mention” of the earlier litigation was arbitrary, irrational, and an abuse of discretion.

Kolon also contended that the trial judge should have recused himself because he formerly had practiced law at the firm representing DuPont in both the earlier and this litigation.  That contention was rejected on appeal — 2-1 — as untimely but, in the exercise of its “supervisory powers,” the panel unanimously directed the Chief Judge of the district court to whom the case was remanded to assign a different jurist to conduct further proceedings.

Origin of the lawsuit.  Former DuPont employee Mitchell, who had extensive knowledge concerning the manufacturing and marketing of “Kevlar,” allegedly communicated repeatedly with Kolon about the product.  In the course of an FBI investigation of Mitchell’s conduct, he agreed to cooperate.  As a result, Kolon and several of its officers were indicted for theft of trade secrets, conspiracy, and obstruction of justice.  DuPont then sued Kolon.

The erroneous pre-trial evidentiary decision.  Kolon contended, in its defense to DuPont’s misappropriation claims, that at least some of the trade secrets at issue in this case were “strikingly similar” to details of the production process described in exhibits in the court’s public files relating to DuPont’s earlier lawsuit against the different competitor.  Moreover, one of Kolon’s witnesses was an expert witness for DuPont in the previous litigation.  Mention of the prior case seemingly was inevitable at the Kolon trial.  The trial judge granted DuPont’s motion in limine to bar any reference to the earlier lawsuit on the ground that no showing had been made that a trade secret at issue in the Kolon case actually was disclosed in the earlier trial.  The appeals court held, however, that the lower court applied “too stringent a standard for admissibility.  Under the circumstances [here], a ‘strikingly similar’ standard of relevance is enough” to allow the jury to decide whether the information retained the requisite confidentiality.

Takeaways.  Although the Fourth Circuit’s opinion is designated “Unpublished” and, therefore, “not binding precedent,” it seems to include carefully drafted guidelines regarding pretrial motions.  The appeals court recognized that streamlining a trial and “fostering the orderliness of evidentiary presentations of complicated issues cannot be doubted”  but cautioned that “a court is often wise to await the unfolding of evidence before the jury before undertaking to make definitive rulings on the likely probative value of disputed evidence.”  By the same token, a party who succeeds in obtaining an in limine instruction and who prevails at the subsequent trial may find that it was an exercise in futility.  Lengthy trials — the one between DuPont and Kolon lasted seven weeks — are costly, and a retrial adds expense.  So, litigants should think carefully before seeking to exclude a large volume of evidence.

Another lesson learned in this litigation is that confidential information disclosed in the course of a misappropriation trial thereafter may cease to qualify as confidential. 

Finally, the Fourth Circuit’s plurality and partially dissenting opinions relating to Kolon’s effort to disqualify the trial judge also may be instructive in a future case.  The plurality of the per curiam court denied disqualification, but all three judges voted nevertheless to remand for further proceedings before a different judge.  So, consideration might be given to requesting, as an alternative in a federal appellate court motion seeking a recusal on remand, the exercise of “supervisory powers” with respect to assignment of another trial judge.  Both requests seek substantially the same relief. 

An employment agreement non-competition provision stated that, for 18 months after termination, the employee shall not become employed by or act “directly or indirectly, as an advisor, consultant, or salesperson for, or become financially interested, directly or indirectly, [in an entity] engaged in the business of selling flavor materials.” Earlier this month, the North Carolina Court of Appeals held that the provision was impermissibly broad. Horner Int’l Co. v. McKoy, Case No. COA 13-964 (N.C. App., Mar. 4, 2014).

Summary of the case

McKoy, a plant manager in North Carolina, was a party to an employment agreement with Horner, a manufacturer of flavor materials for use in food and tobacco products. The agreement contained non-competition and trade secret confidentiality clauses. McKoy had been in the food processing and flavor industry for decades. He resigned after six years with Horner and went to work in New Jersey for a company that manufactured food and beverage flavoring items. Horner sued him and sought preliminary injunctions with respect to both clauses. Earlier this month, the trial court’s ruling — denying the motion for an injunction with respect to the non-compete but granting the injunction motion relating to the confidentiality provision — was affirmed on appeal.

The appellate court’s rulings

The appeals panel stated that it was guided by the familiar rules that employee covenants not to compete are disfavored but are enforceable if they are no broader than necessary to protect the employer’s reasonable business interests. The non-competition covenant here had no geographic limitations and was not restricted to performance of tasks similar to those McKoy performed for Horner. Further, the covenant purported to prohibit him from associating with any company selling flavoring materials even if that company’s products did not compete with Horner’s. Finally, because he was precluded from investing “directly or indirectly” in such a company, the appellate court concluded that the non-compete was intended to prevent him even from owning shares in a mutual fund that was a Horner stockholder. For all of these reasons, the court held that the covenant exceeded permissible boundaries.

The injunction relating to the confidentiality clause, however, was upheld. North Carolina law permits injunctions for actual or threatened misappropriation of trade secrets the employee knows and has the opportunity to use or disclose. McKoy had access to Horner’s trade secrets. By averring “with great detail and specificity the information Defendant has allegedly provided to his new employer,” Horner met the “sufficient particularity” pleading standard.

Takeaways

Non-compete covenants must be limited in scope not only with respect to time and geography, but also concerning the activities which are prohibited. Horner teaches that an employer’s use of virtually limitless phrases such as “directly or indirectly” and “financially interested” can be risky. Also, purporting to extend the covenant to services beyond those actually performed for the employer, and locales where the employee did not work, may doom the enforceability of the non-compete. Violation of a confidentiality clause may be enjoined, however, if the employee’s access to the employer’s trade secrets is demonstrated, they are described in sufficient detail, and the likelihood the employee may exploit or divulge the confidential information is shown.

In two unrelated cases decided earlier this month, employers failed in their attempts to enjoin former employees from competing. The Texas First District Court of Appeals vacated parts of the lower court’s injunction order, one part because it did not detail with sufficient specificity the conduct that was enjoined, and another part where the order was sufficiently specific but erroneously enjoined activities that were permissible. Lasser v. Amistco Separation Products, Inc., No. 01-13-00690-CV (Tex. Court of App., 1st Dist., Feb. 6, 2014). The North Carolina Court of Appeals held that a covenant’s array of prohibited activities was too broad to be enforceable. CopyPro, Inc. v. Musgrove, Case No. CCA13-297 (N.C. Court of App., Feb. 4, 2014).

Lasser v. Amistco Separation Products, Inc.

Summary of the case

The appellate court held that “The requirements of Rule [of Civil Procedure] 683 are mandatory and must be strictly followed.” The injunction order here violated the mandate of Rule 683 that orders “shall be specific in terms.”

The covenant

Lasser, a salesman for ACS, signed a covenant which prohibited him — for two years after his termination — from (a) copying or using for his personal benefit ACS’ “confidential information,” and (b) soliciting “sales of competing goods to customers of ACS.” Thereafter, ACS sold its assets, including Lasser’s covenant, to Amistco, a company which makes metal separation and connection products. He became one of its salesmen. He resigned 15 months later and went to work for a new employer which then opened a division Amistco considered to be a competitor.

The lawsuit and injunction

Amistco made a forensic examination of Lasser’s company-owned laptop and concluded that he had accessed confidential information before he resigned. Amistco sued him for breach of contract, misappropriation of trade secrets, and other misconduct. The company obtained a preliminary injunction which directed Lasser to cease using, and to return, all of Amistco’s “confidential information and trade secrets,” without specifying what intellectual property was encompassed. In addition, the order prohibited him from deleting any files or communications from any electronic device in his possession, regardless of whether the files or communications relate to allegations of wrongdoing. Finally, he was enjoined from soliciting any of Amistco’s customers. Lasser appealed.

Reversal

The appeals court held that the injunction order violated Rule 683 by “failing to identify, define, explain, or otherwise describe” what proprietary data Lasser was directed to return. The purpose of Rule 683’s specificity requirement for injunctions “is to ensure that parties are adequately informed of the acts they are enjoined from doing and the reasons.”

The injunction also was faulty because it compelled him to refrain from deleting his personal electronic records unrelated to the litigation. Moreover, the injunction was improper because it prohibited all solicitation of Amistco’s customers whereas the restrictive covenant precluded only solicitation of orders for competing goods.

CopyPro, Inc. v. Musgrove

Summary of the case

Restrictive covenants prohibiting employees from associating with a business rival of the employer in a vast geographic area for three years after termination were unenforceable.

The non-compete agreement

CopyPro, a company primarily engaged in leasing office equipment in 33 North Carolina counties, required its employees to sign a nondisclosure agreement and a covenant not to compete. The covenant prohibited the employee from having any connection with a CopyPro competitor operating anywhere in those 33 counties. Musgrove was a CopyPro salesman whose customers were almost exclusively in just two of the 33 counties.

The lawsuit, injunction, and reversal

When Musgrove resigned and became employed by a competitor, CopyPro sued him and obtained a preliminary injunction that encompassed the entire territory referenced in the covenant. The Appellate Court held that entry of the injunction order constituted reversible error. It “far exceeds [restrictions] necessary to protect [CopyPro’s] legitimate business interests” since the company had no right to restrain Musgrove “from working in a capacity unrelated to that in which” he previously was employed.

Takeaways

Care should be taken not to over-reach when drafting confidentiality, non-compete, and non-solicitation covenants, and when filing motions for injunctive relief to enforce the covenants. There is a societal benefit in enforcement of contracts, but courts will invalidate covenants that serve only the interests of the person or entity seeking enforcement without regard to the public interest or interests of the person or entity resisting enforcement. The longer the covenant’s duration, the wider its territorial restriction, and/or the more extensive its limitation on activities, the less likely it is to be enforced. Over-reaching can lead not only to an adverse court ruling but also to expense and generation of ill will among the parties.

By Christopher Robertson

Hypothetical, based upon a real fact pattern: Employee believes she has witnessed improper activities at her employer and begins preparing a qui tam whistleblower complaint alleging False Claims Act violations to file under seal. During the course of preparing the complaint, employee removes highly confidential electronic and original documents from her workplace, copying entire folders of sensitive corporate and personal information and downloading substantial electronic files from the company’s secure network. After the complaint is unsealed, the employer learns of the significant theft of information in violation of multiple agreements signed by the employee at the time of hiring. Those agreements prohibit the removal of confidential information and require its return when the employee leaves the company. The employee claims that the removal of this information is protected because it was in furtherance of her whistleblowing activity. 

What should the Company do?

The company has a number of options in this situation. First, it may seek to obtain an injunction from the court prohibiting the disclosure of the confidential information and requiring the return of the documents that had been previously removed. For example, in Zahodnick v. IBM Corp., 135 F.3d 911, 915 (4th Cir. 1997), the United States Court of Appeals for the Fourth Circuit upheld an injunction issued by the district court prohibiting the disclosure of confidential information and requiring the plaintiff to return that information.

As to Lockheed’s counterclaim for breach of confidentiality, the record discloses that Zahodnick signed two nondisclosure agreements. In these agreements, Zahodnick agreed not to disclose confidential information to anyone outside of IBM and to return all IBM property to IBM when he left IBM’s employment. Zahodnick retained confidential materials belonging to IBM after termination of his employment and forwarded those documents to his counsel without IBM’s consent. Under such circumstances, the district court did not err either in enjoining Zahodnick from disclosing Lockheed’s confidential materials to third parties or in ordering Zahodnick to return all confidential materials to Lockheed. Accordingly, we affirm the district court’s order.

The company can also file a counterclaim for independent damages, as long as such claims are not in the nature of indemnification or contribution. That is, they should not be styled as a set-off of the whistleblower claims, but rather an independent claim for damages based on the violation of the employee agreements not tied to the qui tam claims. This was the case in United States ex rel. Madden v. General Dynamics Corp., 4 F.3d 827 (9th Cir. 1993), where the United States Court of Appeals for the Ninth Circuit reversed the district court’s dismissal of General Dynamics’ counterclaim for damages holding that “[c]ounterclaims for independent damages are distinguishable, however, because they are not dependent on a qui tam defendant’s liability.” Although monetizing “independent” damages may be a challenge, the claim is viable. 

Likewise, the United States Court of Appeals for the Ninth Circuit has rejected the concept of “blanket” protection for whistleblowers for violation of confidentiality agreements and misappropriation of confidential documents. In Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047 (9th Cir. 2011), the employee removed vast amounts of confidential information from the company, including attorney-client privileged communications, trade secrets, internal research and development information, sensitive government information and documents under a secrecy order. The employee claimed that “public policy” should allow for the removal of this information by a whistleblower. The Ninth Circuit disagreed, holding that “[t]he need to facilitate valid claims does not justify the wholesale stripping of a company’s confidential documents.” In so holding, the court affirmed the district court’s grant of summary judgment to General Dynamics on its counterclaim against the employee.

Because an injunction is often the first and best option, a company that learns of the removal of information in violation of its confidentiality agreements with employee should not sit on its rights. It should demand that no information be disclosed to third parties and all confidential documents returned. If the demand is rejected, it should take action to protect itself. Waiting after knowledge could negatively impact the ability to obtain an injunction. If quantifiable, the company can also seek independent damages.

What are the risks to the employee?

Until recently, an employee removing confidential information likely correctly believed that the worst that could happen is she would be enjoined from using or disclosing the information or required to return it. A recent decision in New Jersey, however, has potentially increased the stakes for employees. In State v. Saavedra, 2013 WL 6763248 (N.J. App. Dec. 24, 2013), a public sector employee took highly confidential original documents from the North Bergen Board of Education. These documents included sensitive personal information, such as individual financial and medical information regarding individual students. The employee asserted that the criminal indictment against her for the removal of this information was required to be dismissed because the information was taken in furtherance of her claims under the New Jersey whistleblower law. The appellate court disagreed and upheld the indictment, refusing to “categorically insulate” employees from criminal theft and official misconduct statutes if they take documents, even as a whistleblower.

Although a company often feels helpless to stop the removal of information by whistleblowers either cooperating with the government or building their own claims, and the trend has been to not punish employees cooperating with the government, a company is not without recourse. Judicial avenues are available, and in the most egregious cases, possibly even criminal prosecution. Having clear confidentiality policies signed by the employee, however, is critical.

Christopher Robertson is a partner and co-chair of Seyfarth’s Whistleblower Team. If you would like further information or to submit a question regarding this post please contact the Whistleblower Team at ask-whistleblower@seyfarth.com.