EMC Outdoor v Stuart

CXO REVIEW

Two ex-EMC Outdoor employees were hired by Grandesign

EMC Outdoor filed a breach of contact, trade secret misappropriation and breach of fiduciary duty suit after Grandesign began offering competitive products

District Court found that the non-disclosure and non-compete obligations did not extend past the term of their employment, therefore the breach of contract and trade misappropriation claims could not stand

District Court found that there was not enough evidence to support a breach of fiduciary duty claim either

CHIEF EXECUTIVE OFFICER & BOARD REVIEW

Bottom Line
If your employment contracts are not clear and unambiguous, there is no guarantee they will be interpreted in your favour in court.

Overview
EMC Outdoor is a marketing and advertising agency with 26 employees and $8 million in annual revenue. Grandesign is an advertising agency with $14 million in annual revenue and 71 employees. Two employees left EMC Outdoor and, subsequently, worked for Grandesign. One employee quit EMC Outdoor on their own and the other was fired.

Round 1
Plaintiff EMC Outdoor sued the former employees and Grandesign for breaching the restrictive covenants in their employment agreements, particularly, as related to confidential information or trade secrets.

Round 2
The ex-employees asked the Court to dismiss all of EMC’s claims against them and they were successful. The Court found that the ex-employee that was fired did not breach his contract by using confidential information while working for Grandesign because the Court understood his employment contract with EMC Outdoor to say that, if he was fired, his non-disclosure and non-compete obligations ended. Because the non-disclosure obligation was no longer in force, the court also found that he could not be sued for misappropriation of trade secrets. In addition, EMC Outdoor was unable to produce enough evidence to support a claim of breach of fiduciary duty. Grandesign was able to continue competing with EMC Outdoor.

Analysis
This is a case where a company’s employment agreement did not adequately protect its trade secrets. EMC Outdoor should have ensured that there was no ambiguity in its employment agreement because this left the door open for the Court to interpret the agreement in a way that was unfavourable to the company.

FOR THE CHIEF TECHNOLOGY OFFICER

Security is key
In this case, employees obtained EMC’s confidential trade secrets through the normal course of their employment with EMC. Once their employment and confidentiality obligations ended, they were able to share that information because they had not obtained the information through wrongful means. If you can minimize the amount of people who have access to trade secrets in the first place, you can minimize the risk of ending up in this situation.

FOR THE CHIEF PEOPLE OFFICER

Understand your own employment agreements
In this case, EMC Outdoor did not anticipate that their employee’s confidentiality obligations ended if the employee was fired, however that ended up being the effect of the contract they had in place.

Document and monitor employees with fiduciary duties
In this case, EMC Outdoor was not able to provide sufficient evidence that their employees had fiduciary duties to EMC Outdoor or that those duties had been breached. All evidence of fiduciary relationships and breaches should be carefully documented; however, it should be noted that mere correspondence with a competing company does not constitute a breach of fiduciary duty.

Training matters
Training could have alleviated risk on both sides of this case.

GENERAL COUNSEL REVIEW

Defendant’s motion for summary judgement was granted. No breach of contract, misappropriation of trade secrets or fiduciary duty found.

Date of filing
November 16, 2017
District court
United States District Court, E.D. Pennsylvania
Claim
Counterclaim against claims of Breach of Contract, Trade Secret Misappropriation and Breach of Fiduciary Duty.
Date of decision
March 31, 2021
Presiding judge
Nitza I. Quiñones Alejandro
Relief sought
Summary Judgement

BACKGROUND

The plaintiff alleged that a defendant ex-employee breached the non-compete and non-solicitation clause of their employment contract after being fired. The District Court used a plain meaning approach to interpret the employment contract and found that, in situations where the employee is fired instead of leaving the company by choice, the non-disclosure and non-compete provisions were not intended to extend beyond the period of employment. As a result, the court granted a summary judgement stating that there was no breach of contract because the restrictive covenants were not in effect when the defendant engaged in conduct that might otherwise breach those covenants.

The plaintiff also alleged that the defendant ex-employee used the plaintiff’s secret client information working for a competing company. The Court found that there was no evidence that the defendant improperly obtained the trade secrets or used the information through unlawful means. The defendant acquired the information over the normal course of their employment at the plaintiff’s company and did not breach a duty to maintain the secrecy of the trade secrets because, as noted above, their duty did not continue after the term of employment. Because the trade secret information was not improperly acquired or used, the Court found that the defendant ex-employee’s new employer was also shielded from misappropriated trade secret claims.

Finally, the plaintiffs asserted that both defendant ex-employees breached their fiduciary duty to the company. In support of this, the plaintiffs offered evidence that the employees had met and exchanged emails with the competing company that they would eventually go on to work for, while still employed with the plaintiff, and that the plaintiff had once accused them of wrongful conduct. The Court found that a fiduciary duty may arise from a confidential relationship, but that this evidence fell short of establishing a breach of any fiduciary duty that might exist.

KEY PRECEDENTS CITED

• Steuart v. McChesney, 498 Pa. 45, 51-52 (1982): Outlines the Plain Meaning Rule
• Hill v. Best. Med. Int’l, Inc., 2011 U.S. Dist. LEXIS 123845: “to establish misappropriation of a trade secret [under the Pennsylvania Uniform Trade Secret Act], the plaintiff must show that the defendant used or disclosed information that it knew or had reason to know was a trade secret and that the defendant acquired such information by improper means.”
• Parks Miller v Ctny. Of Ctr., 702 F. App’x 69, 72 (3rd Cir. 2017): “A fiduciary duty may arise from a confidential relationship between two parties.”

LEGAL SIGNIFICANCE

This is a cautionary tale reminding us that restrictive covenants should be drafted with clear and plain language so as to protect trade secrets in all possible circumstances. Under Pennsylvania law, Courts will apply the Plain Meaning Rule to interpreting contracts, meaning that they look at the words that are clearly expressed.