James F. Mahoney, Attorney
Commentaries
 
     

February 2014

Steal This Customer ...

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Or ... how you may learn to protect your business against customer and employee poaching under the Fraud and Abuse Act, 18 U.S.C. § 1030, et seq. (applying to interstate or foreign commerce); state law breach of contract; misappropriation of trade secrets under the Uniform Trade Secrets Act; breach of fiduciary duty; tortious interference with a contract; back-solicitation of loads; and, generally, other nefarious conduct by people who steal your customers.

With all apologies to the dearly departed Abbie Hoffman for such a great lead-in for a title (Steal This Book, extolling the virtues of the ‘60s counter-culture, published when Nixon was so young and innocent), a vexingly frequent problem plagues our transportation clients.

How do you prevent (ex-employee, sales agent, former partner, joint venturer, co-broker) from unfairly soliciting and stealing your freight customers?

The response is rather complex, encompassing the several laws and lawsuit bases noted above.

The Uniform Trade Secrets Act [enacted everywhere except Massachusetts and New York], is interpreted either broadly or narrowly by each state, and defines a trade secret as: “…information, including a formula, pattern, compilation, program, device, method, technique, or process, that is both of the following: (1) it derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy [emphasis added].

Your agent/employee might take trade secrets. The essence of a trade secret is that it derives its value from secrecy. But to establish a trade-secrets violations claim, the aggrieved party has to establish more than the existence of generalized trade secrets and subsequent employment by a competitor of the former employee / agent, who has knowledge of these trade secrets.

Information is not necessarily a trade secret if the company does not use reasonable measures to maintain its secrecy. Reasonable measures are best if they include a written agreement between you and your employee/agent to specifically restrict or prohibit disclosure to third parties; to sign a “non-compete” clause or agreement; and for your business to institute security precautions to insure that only a limited number of authorized individuals have access to the information. For example, if your customer lists, contact and recent lane / route pricing info is available to any dispatcher, customer agent or mechanic, your claim for breach will possibly fail.

Lane pricing matrices and dedicated route cost estimates are trade secrets – and they don’t become non-secrets just because they date from last year. It’s easy for a third-person to extrapolate and update costs into something equivalent to your current pricing. Even ATRI provides a basis for costs per mile and/or hourly truck usage costs.

To win a case of misappropriation, you must prove that your competitor either acquired your trade secrets by improper means itself (proving intent that it was obtained by theft, bribery, misrepresentation, breach, or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means), or that it used or further disclosed your trade secrets knowing that a person used improper means to acquire it. That’s tougher in some states, but lawsuits are quite plentiful.

To establish a common law breach of contract claim, you must prove: (1) the existence of a valid contract, (2) the terms of the contract; (3) that defendant breached the contract, and (4) that the breach caused you injury. Company handbooks requiring ethical conduct are often too vague to be considered contracts and there’s no real quid pro quo consideration (continued employment at Acme Truck as consideration? - I don’t know). A handbook is more akin to work guidelines.

But an exit interview with signed acknowledgement of the employee / agent’s obligations to maintain the confidentiality of trade secrets and other proprietary information and obligation to return all data belonging to you immediately may be much more effective in controlling the loss if the person moves to a competitor and you wish to enforce your rights. Of course, a validly worded “non-compete” is a must-have prerequisite.

Once you learn of the agent’s new employment and you believe there has been customer solicitation, an immediate letter to both the ex-employee and the new employer stating that misappropriation of trade secrets will not be tolerated provides a basis to offer proof the competitor had knowledge that the trade secrets were misappropriated by improper means.

Claims for unfair competition and tortious interference with a contract can be also be asserted based on an allegation that your former agent and his new principal are engaging in a concerted effort to improperly compete with you in the marketplace by (a) having poached your agent and (b) procuring and utilizing your trade secrets as part of a coordinated effort to supplant you.

Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation. In lieu of damages measured by these other methods, the damages caused by misappropriation may be efficiently measured by imposition of a reasonable royalty for the lost accounts.

But getting to damages is a difficult hurdle.

Injunctive relief is sometimes appropriate to prevent further loss if you can prove the wrongful use of the confidential information, or failure to return confidential information in a thumb drive or laptop.

However, if you are not Microsoft suing Google, and your problem stems simply from an employee / agent getting to your customers, good luck. Courts are loathe to interfere with an individual’s right to pursue a living.

Can you sue a competitor for damages under 18 U.S.C. § 1030(a) (2) (C)?

1030(g) provides that "[a]ny person who suffers damage or loss by reason of a violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief." 18 U.S.C. § 1030(g). A "protected computer" means a computer "which is used in interstate or foreign commerce …"

District Judge Roslyn Silver in Arizona took a dim view of using the civil side of the Computer Fraud and Abuse Act, dismissing plaintiff’s claim because its employee once had authorization to access the plaintiff’s computer system and sending emails to himself containing trade secrets was not impermissible. Shamrock Foods Co. v. Gast and Sysco Food Services of Arizona, Inc. 535 F.Supp.2d 962 (D. Ariz., 2008).

Whereas a highly cited case in Washington State District Court, Shurgard Storage Centers v. Safeguard Self Storage, 119 F.Supp.2d 1121 (W.D. Wash., 2000), found the statute to be broader in scope, allowing a civil suit that alleged a systematic scheme to hire away key employees for the purpose of obtaining trade secrets.

In the Northern District of California, Ebay was allowed to proceed with its civil action alleging misdirection of data. Ebay Inc. v. Digital Point Solutions, Inc., 608 F.Supp.2d 1156 (N.D. Cal., 2009).

Another big unresolved question in employment law is whether a social media post can constitute a violation of a former agent / employee’s non-competition agreement. Posting a new job on social media, whether Facebook, LinkedIn or another site, which, of course, can reach a person’s thousand and one connections (I personally have six connections), can be a concern for an ex-employer. The announcement of the new position on the “post” should be looked at in relation to the non-compete agreement to see if there’s a violation. If there are “links” to personnel at your existing clients, the new posting might be an element of a violation, but only assuming you can prove detrimental action and damages.

Generally speaking, it would be good if your former sales agent stealing from you was named Sergei and had a large yacht and wasn’t just Joe Nobody with a bass boat trying to make a living by stealing clients. If the court thinks the perpetrator doesn’t “need” the money, they are more apt to prevent the theft of trade secrets.

An ounce of prevention with tight employment agreements and an exit interview will still help you.