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Delaware Expands Remedies for Former Employee Misconduct

March 19, 2014
Edward M. McNally
Delaware Business Court Insider

What can you do when you discover that a former employee is hurting your business by working for a competitor? If the employee never signed a noncompetition or nonsolicitation agreement, it may seem there is little you can do. However, the Delaware Court of Chancery's recent opinion in Wayman Fire Protection v. Premium Fire & Security LLC, C.A. No. 7866-VCP (Del. Ch. March 5, 2014), provides new remedies if that former employee has breached the duties the court explains in this decision.

The Wayman decision is particularly important to employers that in the past have not been able to prevent former employees from hurting their old businesses. Businesses more often than not fail to have their employees sign agreements limiting their ability to join a new firm that is a direct competitor of their employer. Those businesses then find their customers following the employee to his new firm, based on the close customer relationship that employee built up over the years with his old employer's support. Moreover, the courts have long recognized not only the employee's right to compete with his former employer, but even that employee's right to prepare to compete while he is still at his old job. Finally, contributing to this unhappy circumstance, the law has some difficult requirements to meet for a former employer to show its trade secrets have been taken by a departing employee. As a result, employers may lose a suit claiming the theft of trade secrets.

The Wayman decision may well provide real relief to employers under these circumstances. The facts involved in Wayman are fairly typical of such litigation. The Wayman company fired Robert Weitzel. Soon afterward, he joined Premium Fire and also had several Wayman employees come to his new firm. Those employees downloaded Wayman computer files and used some of those files to win a bidding war with Wayman for a lucrative customer. Wayman then had a forensic computer analysis done, discovered the downloading of Wayman files and sued Weitzel, the other former Wayman employees and Premium Fire.

After setting out its detailed findings of the facts involved, the Court of Chancery first ruled against Wayman on two issues. It held that the customer who left Wayman did so because of dissatisfaction with Wayman's past work, not because of the acts of Wayman's former employees. Hence, the court dismissed a claim for tortious interference with Wayman's customer relationship. And the court held that Wayman had failed, for a variety of reasons, to prove the technical requirements to show a violation of the Delaware version of the Uniform Trade Secrets Act. Those results are common in this type of litigation. Customers almost always will testify they had a legitimate reason to change firms and were not properly induced to do so. The requirements to prove a trade-secret claim are hard to meet.

But then, the court provided the new remedies for what the court found was wrongful conduct by the former Wayman employees. First, the court held that the employees' downloading of Wayman computer files violated the Delaware Misuse of Computer System Information Act, 11 Del.C. § 935, and their fiduciary duty to Wayman. That conclusion is particularly important because the downloaded information was protected from theft even if it was not a trade secret. Thus, this significantly broadens the ability of a business to limit the use of its internal information by a competitor. This is the first Delaware decision to hold an employee liable under the Misuse of Computer System Information Act.

Going further, the court also held that Premium Fire had conspired with one of the former employees to convert Wayman's information, making Premium Fire liable as well. That made it certain that Wayman would be able to recover damages and not just a paper award against individuals unable to pay a judgment. Note that this conspiracy holding was largely premised on the failure to stop the former Wayman employee from using its data at his new job.

Finally, the court awarded Wayman significant damages, including a substantial part of its attorney fees. The damage award was especially creative and potentially very useful for future plaintiffs. The largest part of the damages award was based on the court's calculation of the benefit Premium Fire received from using the information taken from Wayman. That type of benefit would be very hard to prove if a plaintiff were required to show the value of information that has no market to check its price or other basis to show its actual cost to create. Instead, the court calculated the amount Premium Fire saved by having Wayman's data to win a lucrative contract, using an estimate by an "experienced fire system technician." That is a liberal method in the sense it is not very exacting and is more of a "feels right" approach. Such liberality in a damage award is very favorable to plaintiffs.

For these reasons, the Wayman case may be a landmark decision for employers. It teaches that a forensic computer analysis is a good idea if you suspect that your former employees are not competing fairly. It provides effective remedies in the sense that companies that hire a competitor's former employees have a real incentive to police the information they may bring with them to their new job. Simply saying to the new employees to "be good" is not enough, and proactive policing of their actions is required. Thus, Wayman provides real remedies to the former employer and real duties on a new employer with serious consequences if those duties are ignored.