A look at statutory trade secret misappropriation and breach of employee common law duty of loyalty.
Please assume the following hypothetical facts: Zachary has been employed by Baca’s Landscaping Company, a local momand-pop residential yard maintenance business, for 23 years. About 10 years ago, Mr. Baca semi-retired and has since allowed Zachary to manage the day-to-day operations of the business. Unfortunately, Zach and Mr. Baca have not gotten along for the past few years. Zach feels that he is underpaid and under-appreciated. After all, he works long hours, manages all of the company’s 35 field employees, and all of the customers of Baca Landscaping know Zach, not Mr. Baca. Mr. Baca feels that Zachary has become disrespectful and insubordinate and often flagrantly ignores Mr. Baca’s instructions.
Zach heard that a regional landscaping company, Southwest Yard & Garden, was opening an Albuquerque office. A friend in Phoenix who works for Southwest Yard & Garden put Zach in touch with the company’s owner, who offered Zach the job of operations manager for the Albuquerque office.
One Friday morning, Mr. and Mrs. Baca arrive at the office and find a letter from Zach saying that he has resigned effective immediately. Mr. Baca instantly begins calling his customers, but each one tells Mr. Baca that they are following Zach and taking their business to Southwest Yard & Garden. One month later, Baca’s Landscaping Company has lost 80 percent of its business and is forced to close its doors. Mr. and Mrs. Baca are devastated because the sale of their family business was supposed to fund their retirement.
Mr. and Mrs. Baca feel that Zachary and Southwest Yard & Garden stole their retirement from them. Zach and Baca Landscaping had no employment contract and no non-compete agreement. Do the Bacas have a cause of action against Zachary and Southwest Yard & Garden?
Depending on the conduct of Zachary and Southwest both before and after Zach left Baca’s, the Bacas may have at least two causes of action. One is statutory trade secret misappropriation and the other is breach of the employee common law duty of loyalty.
The New Mexico Uniform Trade Secrets Act An owner of a trade secret is entitled to recover damages for misappropriation by another person of the trade secret. NMSA 1978, § 57-3A-1 to -7 (1989). A “trade secret” is information By Gina T. Constant and Jeffrey L. Lowry that (1) derives economic value by virtue of not being known by competitors, and (2) is subject to reasonable efforts to maintain its secrecy. “Misappropriation” is the acquisition by improper means and disclosure or use without consent. “Improper means” includes theft and a breach, or inducement to breach, a duty to maintain secrecy. Damages for misappropriation of a trade secret can include both the actual loss caused by misappropriation and the unjust enrichment of the misappropriator. If willful and malicious misappropriation exists, the court may award double damages and reasonable attorneys’ fees.
In our hypothetical situation, Baca’s Landscaping probably had trade secrets, such as:
- Customer lists, customer preferences and purchasing history. Whether customer lists are a trade secret is always a fact issue. Taking a handful of business cards would be different from downloading a database of thousands of customers along with detailed profiles for each one.
- Pricing for goods and services. If this information is publicly available on the web or contained in customer contracts, then it might not be considered trade secret. In addition, general “ballpark” prices for goods or services that are well-known in the industry are not trade secrets. But specific pricing, especially for individual customers, might well be a trade secret if there is an expectation within the company and within the customer contracts that pricing is to be kept confidential.
- Procedures, techniques and formulas. For example, if Mr. and Mrs. Baca had an old family recipe for feeding rose bushes in the mountain desert climate, the recipe was kept locked in a safe, and only employees with a need to know had access to the recipe, then the recipe would be a trade secret.
It is probably easy to see that if Zachary took the above information and gave it to Southwest Yard & Garden, he may be liable for trade secret misappropriation. However, it is important to note that Southwest is probably on the hook as well because the definition of “misappropriation” includes not only disclosure of a trade secret but also its “use without consent.” This is important because a new employer generally has deeper pockets than the rogue employee and so the likelihood of collecting on a judgment is greater against the new employer
Do trade secrets need to be written or on some kind of physical media, or can an employee have trade secret knowledge in his or her head? The general rule is that a former employee may use the general knowledge, skills, and experience acquired during prior employment without violating the Trade Secrets Act.1 But the employee may not take and use proprietary information such as information that is not publicly available or readily ascertainable by independent investigation. A person’s knowledge itself can be a trade secret if it fits the statutory definition. As a practical matter, it can be difficult to prove that an employee has taken and used trade secrets without some physical evidence of the trade secret misappropriation. Most trade secret lawsuits involve employees who take files or records, download proprietary information or send secret information by email or other means to their personal accounts or their new employers.
Common Law Employee Duty of Loyalty The second cause of action that the Bacas may have is the breach of the employee’s duty of loyalty. In New Mexico, every employee owes a duty of loyalty to his or her current employer, and this is true regardless of whether the employee is at will or under contract.2 What does “loyalty” mean? There are nuances and gray areas, but two categories of action are clearly prohibited: sabotage and competition.3 The interpretation of “competition” will usually depend on the employee’s position and the employer’s business. Upper level managers and key employees are more likely to be “competing” than receptionists and burger-flippers. This duty of loyalty only applies during employment and does not apply after the employment relationship is terminated. Rather than the duty of loyalty, future (post-employment) competition is governed by non-compete agreements.
In our hypothetical case, Zachary breached his duty of loyalty to Baca’s Landscaping if he did any of the following before his resignation:
- Met with Baca’s customers to solicit their business for Southwest Yard & Garden.
- Emailed Baca’s customer lists to Southwest Yard & Garden (even if he did it at night and from his personal computer).
- Texted the ingredients for Baca’s secret rose food recipe to a Southwest Yard & Garden employee so that they could preorder the ingredients. • Got paid by both employers for the same timeframe.
- Deleted key documents and communications from Baca’s computers.
New Mexico also recognizes tort liability for aiding and abetting a breach of a fiduciary duty.4 Thus it would be possible to bring this cause of action against the new employer, Southwest Yard & Garden (although it is not clear whether the employee duty of loyalty is a “fiduciary” duty).
The damages for both of these torts include compensatory as well as punitive damages. The former employer will generally have to elect which damages it will seek. While the Uniform Trade Secret Act allows double damages and reasonable attorneys’ fees, common law tort punitive damages can be as high as nine times the compensatory damages.
What Employers Can Do To Protect Themselves Employers are encouraged to remind their employees that they owe a duty of loyalty and that business records belong to the business, not the employee. They should also monitor what their employees are doing, especially if misconduct is suspected. Also, they should check in regularly with customers who may be more loyal to a key employee than to the business.
It is also very important that key employees have written non-compete agreements. To be enforceable, a non-compete agreement must be “reasonable” as to the activities restricted, the geographic scope and the length of time.6 Of course, what is reasonable depends on the circumstances. In our hypothetical case, a non-compete clause that prohibited Zachary from working for a competitor of Baca’s Landscaping within the greater Albuquerque area for one year would likely be enforceable.
Additionally, there must be legally sufficient consideration for a non-compete agreement to be enforceable. Piano v. Premier Distributing held that continued at-will employment is not sufficient consideration.7 Therefore, if you ask an existing employee to sign a non-compete with no consideration other than continued at-will employment, the noncompete will not be enforceable. The better practice is to give the at-will employee a bonus or more vacation time in exchange for signing a non-compete agreement. Although New Mexico In addition to non-compete agreements, non-solicitation agreements are also important as they prevent departing employees from soliciting other of your employees and from soliciting your customers. If this solicitation happens during employment, it would constitute a breach of the duty of loyalty. Non-solicitation agreements govern this conduct post-employment. Make Solicitation a No-No Baca’s Landscaping Company has lost 80 percent of its business and is forced to close its doors. Mr. and Mrs. Baca are devastated because the sale of their family business was supposed to fund their retirement. New Mexico Lawyer – May 2015 7 GTC@RoCoLaw.com • (505) 242-0811 7400 Hancock Court, Suite C • Albuquerque, NM 87109 RoCoLaw.com Romero & Constant PC Patent • Copyright • Trademark • Trade Secrets Intellectual Property is a specialized field. Refer your client’s intellectual property matters to a specialist who is experienced in IP prosecution, infringement, and civil litigation. Gina T. Constant is a registered Patent Attorney with the US Patent and Trademark Office. courts have not expressly ruled on the point, the language in Piano implies that a non-compete in exchange for initial employment is probably enforceable.
Employers can protect their trade secrets in two ways. First, by identifying them by asking, “What does the business have that competitors would love to know?” This could be customer-specific information, business methods, formulas, recipes, manufacturing specifications and the like. Second, they should take reasonable efforts to maintain the secrecy of the information. This could include having a written policy regarding trade secrets, marking documents as “confidential,” “proprietary,” or “trade secret,” keeping them in a secure location and making the trade secrets accessible to only those with a need to know.
Employment agreements can also contain intellectual property assignment provisions, in which the employee would be informed that he or she will have access to the company’s trade secrets, whether so marked or not, and the employee agrees to never disclose the trade secrets to anyone. It should be very clear that anything the employee creates at work belongs to the business. For instance, if the employee creates a copyrightable work, then the employee agrees that the work is a “Work for Hire” and is owned by the employer upon creation. Similarly, the employee would assign all right, title and interest to any patentable inventions to the employer.
When hiring new employees away from a competitor, make sure that they do not give you valuable information that they could only know if they worked for the competitor. And take care that they are not working for you at the same time they are working for the competitor. It is best to educate new employees at the time that offers are extended about their duty of loyalty to their current employer and that they are not to bring their current employer’s trade secrets to the new job.
So keep in mind that what might initially look like normal competition between businesses may actually be illegal in New Mexico and result in unanticipated litigation and liability.
- Numed, Inc. v. McNutt, 724 S.W.2d 432 (Tex. App. 1987)
- Cent. Sec. & Alarm Co. v. Mehler, 1996-NMCA-060, 121 N.M. 840, 918 P.2d 1340
- Restatement (Second) of Agency § 393
- Rael v. Page, 2009-NMCA-123, 28, 147 N.M. 306, 222 P.3d 678.
- State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003) (“Single-digit multipliers are more likely to comport with due process.”)
- Insure N.M., LLC v. McGonigle, 2000-NMCA-018, 128 N.M. 611, 995 P.2d 1053 7 2005-NMCA-018, 137 N.M. 57, 107 P.3d 11 (examining adequate consideration in the context of employment arbitration agreements)
Gina Constant is a director at Romero & Constant PC. She practices primarily in the areas of Intellectual Property and litigation. Constant is a registered patent attorney with the US Patent and Trademark Office.
Jeff Lowry is a Rodey Law Firm shareholder and director and the leader of the firm’s Labor and Employment Law Group. He has tried numerous employment cases in both state and federal court and is listed in Southwest Super Lawyers for his expertise and experience in employment and labor law.