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Bar News - September 8, 2006


Business Law: Confidentiality Agreements Protect Clients’ Customer Information

By:

A recent NH Supreme Court decision involving a case of alleged misconduct by two former employees competing against their prior employer through the use of information obtained while they were working at the company emphasizes how we, as attorneys, can provide substantial value to our business clients when counseling them on how to protect confidential and proprietary information as well as on what actions they can take when a misappropriation has occurred.

           

After approximately four years of legal disputes, the net result of Mortgage Specialists, Inc. v. Joseph C. Davey IV, et al, Docket No.: 2005-067, (NH Supreme Ct., July 26, 2006) is that the parties—while having resolved certain claims—still have related claims which have been remanded to the trial court.

           

If Mortgage Specialists had a clear confidentiality policy in place, had implemented that policy, and had each employee sign a comprehensive confidentiality agreement, then the two former employees would have had a much more difficult defense. In all likelihood, this case would also have been resolved much faster.

 

Case Background

           

Upon leaving Mortgage Specialists in July 2002, two loan originators took and used copies of customer information retained during the course of their work. The information included customers’ current interest rates from which a competitor could learn whether refinancing would benefit the customer. The two thereafter closed loans for customers with whom they had previously worked at their former employer.

           

Mortgage Specialists did not have a confidentiality agreement signed by the former employees nor did it have a policy prohibiting workers or former workers from using the company’s confidential proprietary information to its disadvantage. The company sued the two employees, relying on a variety of statutory and common law claims, including: violation of the Trade Secret Act, RSA 350-B; tortuous interference with advantageous relations; violation of the New Hampshire Consumer Protection Act, RSA 358-A; conversion; and breach of fiduciary duty.

           

The conversion and breach of fiduciary claims arose solely out of the misappropriation of trade secrets claim and were preempted pursuant to RSA 350-B:7 because they were requests for non-contractual civil remedies. The claims of tortuous interference with advantageous relations and of violation of the Consumer Protection Act, while first dismissed by the trial court prior to jury trial, were remanded back to the trial court. The Court found there were allegations in addition to the misappropriation of trade secrets which, if true, supported those claims. This included allegations that one of the defendants improperly informed mortgage customers that Mortgage Specialists was not properly licensed in New Hampshire and that workers at the company were specifically being solicited.

           

The trade secret claim was resolved by a jury with a defendants’ verdict. The Court found that a reasonable jury could find that Mortgage Specialists had not taken the steps necessary to treat customer information as confidential for its own protection. The Court noted that the company did take certain steps which were presumed to protect its customers, yet a reasonable jury could find that there were insufficient measures taken to protect customers’ information as a trade secret of Mortgage Specialists.

 

Non-competition v. Confidentiality Agreements

           

Non-competition agreements may be difficult to get signed by workers and—as shown by the Merrimack Valley Wood Prods. v. Near, 152 N.H. 192 (2005) decision and prior legal precedent—these agreements relating to employment are narrowly construed.

           

For those who are seeking to protect the good will of the company, a non-competition agreement, which is broader than prohibiting workers from soliciting customers with whom they have had contact while employed by the company, may be unenforceable in that the courts may find that it does not protect the legitimate business interest of the former employer.

           

In contrast, forcing a worker to sign a confidentiality agreement requires the worker to: use confidential information of the company only for the benefit of the company; turn over any documents or other items containing confidential information at the end of his/her employment; and, not use the confidential information learned during employment.

           

In some circumstances, an employee might have a legitimate objection to a non-competition agreement. Also, an employer might lose good employees by trying to force them to sign a broad non-competition agreement which prohibits them from competing in the area of their job expertise for a specified geographical area and period of time after leaving the company.

           

A worker is generally hard pressed to object to not using confidential information of the employer as long as the definitions within the agreement narrowly define truly confidential and proprietary information of the company. And, if applicable, the agreement should also clarify when the worker’s inventions are the property of the employer. The agreement may also contain provisions prohibiting the solicitation of workers from the company for a period of time and the solicitation of customers with whom the worker had contact.

           

Another potential provision within the confidentiality agreement can be that in any injunction seeking to enforce the agreement, that the worker acknowledges that there is an inadequate remedy at law and that any injunction bond requirement would be waived.

           

Some trial judges may enforce such a provision, making it easier to get an injunction. Yet other judges may rule that placing such limitations on the procedural rules for injunctions would inappropriately broaden the court’s equitable rules and require the court to provide an equity remedy as a result of a contractual provision rather than equity rules and principles. A confidentiality agreement may also have a provision in which the worker agrees to pay the attorney’s fees and employer’s expenses in enforcing the confidentiality agreement if the employer is successful. Such a provision might deter a worker who otherwise would consider misappropriating the company’s confidential information.

 

Protecting Your Client’s Interests

           

In counseling companies on how to protect confidential and proprietary information, an attorney first has to analyze the nature of the client’s business. Protection methods include, but are not limited to, signed confidentiality agreements; locked file cabinets; password-protected electronic files; a comprehensive policy defining what is confidential information and requiring such information to be provided only on a need-to-know basis; and management’s periodic monitoring of workers to ensure compliance with the company’s policies. If a former employee misappropriates protected information, the employer should act immediately in seeking an injunction prohibiting the use of the information and requiring its return.

           

An important lesson learned from Mortgage Specialists is how a clear confidential/proprietary information policy that is regularly enforced and is in conjunction with signed, comprehensive confidentiality and non-disclosure agreements can go a long way in protecting a company’s confidential information from being misused. Another lesson is that the absence of such an agreement does not leave a company defenseless from the unfair or deceptive competitive tactics of its former workers.

 

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan. His legal practice includes counseling business owners and professionals on a variety of legal issues and advocating on their behalf. He is a member of both the New Hampshire and Massachusetts bars.

 

 

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