Monday, November 22, 2010

Protecting Confidential Information from Employee Theft

In today’s electronic age, most employers maintain proprietary, confidential information in electronic form accessible to its employees. This access can be particularly problematic when an employee resigns from employment or is terminated. In a matter of minutes, the employee can discreetly copy the employer’s electronic data onto a disk or flash drive. The former employee can use this information to compete against the employer, to solicit the employer’s clients or for other improper purposes. While the law does provide certain protections to an employer against such behavior after the fact, the employer’s business can still be irreparably damaged.

These issues were raised in Tryco, Inc. v. U.S. Medical Source, LLC, et al., a recent case before the Fairfax County Circuit Court. In that case, a sales representative of a small business resigned from employment and accepted a position with a competing company owned by his sister-in-law. Before leaving, he copied onto his flash drive all of his personal files and two documents containing confidential company information. He also sent an e-mail to each of his clients from his company e-mail address informing them that he was no longer with the company; these e-mails were sent as a blind copy to his personal address (and thus, he retained the e-mail address of each of his clients).

Shortly after commencing work for his new employer, his former employer filed a lawsuit against the employee on various theories including breach of fiduciary duty, civil conspiracy and computer trespass. The former employer alleged that the copied documents contained confidential information which was misappropriated and used by the employee and his new employer for competitive purposes. However, the employer was unable at trial to demonstrate that the documents were used for an improper purpose. Making the case harder for the employer was that the employee did not have a non-compete provision in his employment agreement.

This case is a warning to employers that, even when former employees retain their confidential information without authorization, they may not find a remedy in court. This case can be easily contrasted with other Virginia cases in which employers were able to obtain judgments against former employees that used confidential information to the detriment of the Employer. For example, in Banks v. Mario Industries, 274 Va. 438 (2007)  the Virginia Supreme Court affirmed a Circuit Court judgment against a former employee who: (a) had established a competing company, (b) solicited other employees and contractors of the employer to work for the competing company, (c) used the employer’s business plan as a model for the competing company, and (d) used the employer’s business phone book (which contained valuable and confidential contact information for Mario's customers, vendors, and sales representatives) as a resource for the competing company. The evidence in that case also demonstrated that the employee diverted valuable contracts from the employer to his new company. The employer was able to obtain a judgment for lost profits and punitive damages, despite the fact that the employee did not have a non-compete agreement.

These cases demonstrate the ease with which an employee can convert an employer’s confidential information following the termination of his/her employment. If the employee is not bound by an enforceable non-compete agreement, he/she is free to work for a competing business. In most cases, the employer will not know for certain whether or not the employee is actually using confidential information to the detriment of the employer. The employer may be forced to file a lawsuit to ascertain the scope of the misappropriation, to enjoin the use of confidential information and to recover compensatory damages. Without a good non-compete agreement, the employer will have to prove that it has suffered actual damages as a result of the misappropriation, which may not be easy to do. In any event, the employer’s business may have suffered irreparable injury (e.g. loss of customers) by the end of the expensive court process.

Therefore, it is important for employers to take preemptive steps to protect against an employee’s unauthorized taking of confidential information. The employer can utilize various protection measures, including but not limited to the following:


a. limit employee access to proprietary information and documents
b. monitor employee use of computers and files
c. restrict employees from taking laptop computer off-site
d. limit use of smart phones at the office
e. restrict employee sending business e-mails to personal accounts


a. warn employees that there is no expectation of privacy for data on company computers
b. have employees sign confidentiality agreements
c. have employees sign non-compete provisions
d. include liquidated damages provisions within confidentiality/non-compete agreements to avoid having to prove losses in Court
e. adopt and distribute an employee handbook with clear restrictions on use of documents and other protections for the company
f. in the event of a breach of confidentiality or non-compete agreement, take immediate legal action such as obtaining a restraining order and an order allowing search of ex-employee’s computers/phones
g. take aggressive legal action against offending ex-employee based upon use of trade secrets, conspiracy to harm business, tortious interference, conversion, etc.

Proper Termination Procedures

a. Create termination procedure guidelines
b. Supervise employee use of computers following termination/resignation
c. Check computer logs for downloads and printing
d. Check e-mails that are sent by terminated employee
e. Immediately retrieve all company computers, phones and files
f. Contact your lawyer