New Jersey Supreme Court Decision Restricts Employees' Use of Employer's Customer List To Set Up Competing Business
The New Jersey Supreme Court recently issued a decision that limits the ability of employees to use of an employer's customer list to set up a competing business, ruling that customer information may be protectible regardless of whether the information is entitled to trade secret protection. Lamorte Burns & Co. Inc. v. Walters, (2001 N.J. LEXIS 508).
The case arose when a company filed suit against two former employees in connection with their conduct in establishing a competing business. The employees, two maritime insurance claims adjusters, admitted that during their employment they had copied client information -- including clients' names, addresses, accident dates, and details concerning accidents -- for the sole purpose of soliciting business from those clients, once they resigned, on behalf of their new company. The employees faxed in their resignations on a Saturday afternoon, and the following day began soliciting some of Lamorte's clients, using the information they had secretly gathered. The company then brought suit, alleging claims for breach of the duty of loyalty, tortious interference with economic advantage, misappropriation of confidential and proprietary information, and unfair competition.
The trial court granted the company's motion for summary judgment on its tort claims. However, the Appellate Division reversed, holding that a trial was needed to determine whether the client information was, in fact, confidential and proprietary. The Appellate Division emphasized the fact-sensitive nature of evaluating whether an employee's conduct in planning and preparing for future employment constitutes a breach of the duty of loyalty and whether the client claim information was entitled to protection against use by a former employee.
On appeal, the Supreme Court reversed the Appellate Division and reinstated summary judgment for the employer, ruling that "the specific information provided to defendants by their employer, in the course of employment, and for the sole purpose of servicing [the employer's] customers, is legally protectible as confidential and proprietary information."
Significantly, the Court rejected a "trade secret" standard, under which an employer could prevail only if it proved that the information taken was sufficiently secret so that the company may or does derive a competitive advantage from it being kept secret, and that the company has made reasonable efforts to maintain its secrecy. The Court emphasized that while it was persuaded that the particular client claim information at issue should be entitled to trade secret protection, certainty on that question was not essential to its decision. Rather, the Court adopted a more flexible standard, stating that the key to determining whether information has been misused is "the relationship of the parties at the time of the disclosures and the intended use of the information."
Applying this standard, the Court readily found that Lamorte's client claim information was legally protectible. In reaching its conclusion, the Court noted that the defendants would not have been aware of the information but for their employment, that the defendants admitted that the information gave them an advantage in soliciting Lamorte's clients, and that the defendants knew that Lamorte had an interest in protecting the information.
Having found that Lamorte's client information was legally protectible the Court went on to rule that the company was entitled to summary judgment on all of its tort claims. The Court rejected the employees' argument that they were not liable because they had not actually solicited clients until the day after they transmitted their resignations, holding that the employees' duty of loyalty "goes beyond refraining from privately soliciting the employer's customers while still employed." The Court noted that while an employee has the right to make preparations to start a competing business, the defendants in this case had "purloined protected information from plaintiff's files…while still employed for the sole purpose of effecting an advantage in competing with plaintiff immediately upon their resignation and the commencement of their new competitive business," thereby breaching their duty of loyalty.
The Lamorte decision clarifies that, under New Jersey law, employers are entitled to relief for an employee's use of proprietary information to set up a competing business even if that information does not qualify as a trade secret. Since cases involving an employee's use of employer information frequently turn on whether the information used is legally protectible, this decision should make it easier for New Jersey employers to successfully bring claims for injunctive relief and/or damages against former employees who engage in such conduct.