Employment Agreements:
Recent Connecticut
Decisions Concerning
Trade Secrets
and Confidentiality
Part 2
Joseph J. Blyskal is
an associate in the
Insurance and Bad
Faith, Commercial Litigation, and Employment Law practice
groups at Gordon &
Rees LLP in Glastonbury. His practice focuses on insurance coverage
disputes, commercial disputes,
including professional liability and
fiduciary litigation, and contractual
and non-contractual employment
matters. He is the past chair of
the CBA-YLS Labor and Employment Committee and the incoming
co-chair of the CBA Insurance Law
Committee.
By Joseph J. Blyskal
20
Connecticut Lawyer
September 2014
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Introduction
This is the second part in a series of two
articles concerning restrictive covenants
and trade secrets and confidentiality in
employment agreements. Similar to recent decisions concerning restrictive covenants, the state appellate courts and the
Court of Appeals for the Second Circuit
have not addressed controlling issues on
trade secret protection or confidentiality in employment agreements within
the prior year. While the United States
Court of Appeals for the Second Circuit
did address standing to bring a misappropriation claim, the ruling was not a
landmark decision.1 There have been a
series of decisions by the Connecticut
Superior Court, and one particularly instructive opinion by Judge Arterton of
the United States District Court for the
District of Connecticut. As with restrictive covenants, none of the decisions outlined here change the well-established
standards relating to trade secrets. The
test for what warrants trade secret protection is still highly fact-specific and depends primarily on the requirements set
forth in the statute.2
Confidentiality and Trade
Secret Protection
Specialized knowledge, confidential information, or trade secrets “acquired
by an employee during his employment
cannot be used for his own advantage
to the injury of the [former] employer
during [future] employment.”3 “Trade
secrets are the property of the employer
and cannot be used by the employee for
his own benefit. The lack of any express
agreement on the part of the employee
not to disclose a trade secret is not significant.”4 Thus, trade secret protection
does not dissipate once the employee
leaves an employer, and the employee remains bound to not use such information
to the detriment of his former employer.
The same rule applies to information
that does not rise to the level of a trade
secret but is nonetheless gained by the
employee during his employment and is
confidential or proprietary.5 Confidential
or proprietary information is broader
than trade secrets and is usually defined
by the terms of the employment contract.
The standard for determining whether
information is a trade secret still remains
that set forth in Town & Country House &
Homes Service, Inc. v. Evans6 and Elm City
Cheese Co. v. Federico7 and their progeny. Specifically, under the statute itself a
trade secret is:
information, including a formula, pattern, compilation, program, device,
method, technique, process, drawing, cost data or customer list that:
(1) 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.8
In addition to meeting the requirements
of subparts (1) and (2) of the Connecticut
Uniform Trade Secret Act (CUTSA),9 the
information must be “of the kind enumerated” in subsection (d), that is, “a formula, pattern, compilation, program, device,
method, technique, process, drawing,
cost data or customer list.”10
Litigation often concerns the efforts used
to maintain the secrecy of the purported
trade secret, and often arises over customer and contact lists. “A list of customers, if their trade and patronage have
been secured by years of business effort
and advertising and the expenditure of
time and money, constitutes an important part of a business and is in the nature of a trade secret.”11
Whether information is a trade secret is a
question of fact:12
Some of the factors to be considered in
determining whether given information is a trade secret are (1) the extent
to which the information is known
outside the business; (2) the extent to
which it is known by employees and
others involved in the business; (3)
the extent of measures taken by the
employer to guard the secrecy of the
information; (4) the value of the information to the employer and to his
competitors; (5) the amount of effort
or money expended by the employer
in developing the information; (6) the
ease or difficulty with which the infor-
mation could be properly acquired or
duplicated by others.13
While none of the recent Connecticut decisions alter these basic governing standards, there have been a series of written
decisions by trial courts on dispositive
motions, and more importantly from a
factual perspective, on applications for
preliminary injunctions and following
court trials.
Rulings on Pre-trial Motions
The case of Precision Computer Services,
Inc. v. Zones, Inc.14 is notable for several
reasons. The plaintiff, the former employer of one of the defendants, brought
claims against its former employee and
his/her new employer for breach of
contract, tortious interference with contractual relations and business expectancies, unjust enrichment, and violations
of the Connecticut Unfair Trade Practices
Act (CUTPA).15 The former employee
was subject to a “Non-compete/Nonsolicitation/Non-interference”
agreement. In ruling on a motion to strike, the
court struck the breach of contract claim
against the new employer because it was
not a party to that contract. However, the
court allowed the CUTPA claims against
the former employee and his new employer. While the court recognized that
the employer-employee relationship
does not constitute “trade or commerce”
under CUTPA, the employee’s acts of
using confidential information and encouraging other employees to defect
to the new employer brought the claim
under CUTPA. As to the new employer,
even though they were not a party to the
agreement, their alleged encouragement
of employees to violate their agreement
with their former employer and to misappropriate trade secrets sufficiently stated
a CUTPA claim. The court also found that
the same conduct supported the tortious
interference claims. Notably, the court
found the unjust enrichment claim to be
supported by the taking of the “plaintiff’s
confidential information, employees, and
business contacts.”16
In Complete Energy v. Fox, the court struck
the special defenses of lack of privity and
the statute of limitations for contract actions because the plaintiff’s claims arose
under CUTSA, not under a contract beConnecticut Lawyer
September 2014 21
tween the parties.17 The agreement to not
divulge confidential information was between the plaintiff and a non-party. The
defendant was not a party to the agreement, but was allegedly receiving referrals from the non-party in violation of the
plaintiff’s agreement with the non-party.
Because there was no privity, the contractual defenses were not appropriate.
Also of note, the court struck the special
defense of failure to allege an inadequate
remedy at law because both CUTPA and
CUTSA provide for equitable relief without a showing of inadequate remedy at
law.
The opinion of Judge Arterton in Garden
Catering-Hamilton Avenue, LLC v. Wally’s
Chicken Coop, LLC18 contains an excellent
discussion of the fiduciary employment
relationship and the rules governing the
use of confidential information by employees absent a contract. Recognizing
that “Connecticut courts have read Town
& Country House & Home Serv. to establish that by virtue of an employment relationship an employee owes his or her
employer a fiduciary duty,”19 Judge Arterton denied summary judgment to the
defendants on the plaintiffs’ breach of fiduciary duty claim because factual issues
remained as to the scope of the fiduciary
relationship. The court also found factual issues as to whether any duty was
breached.
22
The court engaged in a helpful analysis
of the three primary bases of plaintiffs’
claim: (1) that the defendant-employee’s
preparations to open a competing restaurant by signing a lease and incorporating the new business was impermissible
competition; (2) that the defendant-employee’s preparation of a business plan
based on the same concept, pricing, and
recipes of plaintiffs was a breach of fiduciary duties; and (3) that the defendantemployee impermissibly and in violation
of the duty of loyalty solicited other employees to leave plaintiffs’ employ and
work for the new business while the
defendant-employee was still working for the plaintiffs. The court granted
summary judgment as to the first basis,
noting that an employee may prepare to
compete prior to terminating employment. However, the court denied summary judgment as to the second and
Connecticut Lawyer
September 2014
third bases, finding that the “process by
which a food product is made combined
with “certain financial information—including its product pricing structure, and
list of supplies and the prices paid for its
supplies—can qualify as a trade secret.”20
Notably, the court recognized that a claim
for breach of fiduciary duty can be based
on misappropriation of information that
does not qualify as a trade secret.21 In
finding factual issues existed as to the
third basis, the court acknowledged that
it is a violation of the duty of loyalty to
“encourage or arrange for fellow employees to work for a competitor or rival business one intends to establish while still
working for a company that will be subjected to the competition.”22 The court
denied summary judgment on the CUTPA
count, finding that conduct that violates
a fiduciary duty could also form the basis
of such a claim. Finally, the court denied
summary judgment on the plaintiffs’ unjust enrichment claim because wrongful
appropriation of confidential business
information could be a basis of such a
claim.
In Wentworth DeAngelis & Kaufman, Inc.
v. Nims23 the superior court struck claims
for misappropriation of trade secrets because the complaint failed to allege reasonable efforts to preserve the secrecy of
the information.24 The court noted that
“reasonable efforts to preserve the secrecy of the alleged trade secrets” are an
“essential element” of a CUTSA claim.25
The court declined to strike a tortious
interference count, however, because the
plaintiff alleged that in addition to the
unauthorized use of trade secrets, the defendant used other confidential information to the benefit of his current employer, a competitor with the plaintiff. Even
though there was no trade secret, the
court found the misuse of confidential
information that fell short of trade secret
protection was still sufficient to support
the claim because it was an “improper
means to interfere” with plaintiff’s contracts.
Significantly, the court struck counts for
conversion and statutory theft because
“Connecticut has not yet expanded the
[torts] to include such intangible interests” as information not associated with
a tangible document—such as client
contact information and preferences—
learned of by the defendant during his
employment with the plaintiff.26 Finally,
and most significantly, the court permitted a claim for breach of fiduciary duty to
proceed where the basis of the fiduciary
relationship was that the defendant “had
a high degree of control over [the plaintiff’s] trade secrets, policies, policy information and other written materials [and
the] plaintiff placed its trust and confidences [in the defendant].”27 That case
involved a niche market—insurance for
armored transport companies—which
appears to have played some role in the
court’s conclusion that the complaint
stated sufficient facts to establish a fiduciary duty.28
Preliminary Injunctions and
Post-trial Rulings
Many of the trial court decisions within
the last year concern whether the information qualifies as a trade secret. In examining this issue, courts often engage in
a helpful, fact-sensitive inquiry. Such decisions usually concern motions for preliminary injunctive relief or follow trial.
Courts Denying Injunctive
or Other Relief
In Charter Oak Lending Group, Inc. v. August, judgment entered for the defendant
employees on all counts of the complaint
following a retrial to the court.29 There,
the operative complaint alleged breach
of fiduciary duty and violations of CUTPA
and CUTSA. The defendants were former employees of a mortgage originator
and their new employer. There were no
employment agreements. However, the
plaintiff kept a database that contained
contact information for clients and potential clients. The information about
each employee’s clients was put into
the database by each of the employees
themselves. When the defendants left the
plaintiff’s firm, they took the client information with them to their new firm.
The court entered judgment in favor of
the defendants on the CUTSA claims,
finding that the information was not a
trade secret. In addition to the plaintiff’s
customers, the contacts contained in the
computer system included friends, family, business and social acquaintances, and
referral sources, which the court conVisit www.ctbar.org
sidered to be readily accessible through
other means—such as the defendants’
memories or the Internet. Beyond that,
the court found inadequate efforts to
maintain the secrecy of the information.
The plaintiff’s system was password protected and access to the system was monitored by the plaintiff. Only the sales employees that input the information into
the system could access that information.
Despite these measures, the court stated:
“the evidence is overwhelming in terms
of the measures the plaintiff did not take
to identify this information as proprietary, confidential, a trade secret or to
otherwise maintain its secrecy.”30
The court gave specific examples of
things that it would have considered as
reasonable measures:
The plaintiff did not advise originators that once they input the contact
information gathered over the course
of their careers, prior to and during
their employment with [the plaintiff],
into Loan Manager, the information
became the property of [the plaintiff]
and could not be further disclosed.
Plaintiff did not advise or require the
originators to destroy or delete the information contained on other media,
i.e. rolodexes, note pads, cell phones,
home computers, business cards, etc.
Indeed, plaintiff assisted at least one
defendant with the transfer of her database to her home computer. The defendants often worked at home which
required the alleged “trade secrets”
to be available at their homes, either
through access to Loan Manager or by
reference to the other media on which
the information may have been stored.
Plaintiff’s employee handbook, while
identifying and discussing confidential information does not identify the
referral, customer or contact information input into Loan Manager as falling within its scope. During marketing
events such as an open house, the customers’ completed satisfaction surveys
were displayed for guests to review.
Customer information was regularly
disseminated with paychecks and on
funding reports, a practice which continued even after the individual defendants were no longer working for [the
plaintiff].31
Perhaps most significantly, the plaintiff
had given permission to each of the defendants to take the information with
them when they left.32 The court also
placed great weight on the fact that the
mortgage loan industry is heavily dependent on referral and contact networks,
and as a matter of industry practice, loan
officers have contacts that “follow them
throughout their careers.”33 The court
concluded that the “mere act of inputting
the information into the [computer program] did not transform the information
into [the plaintiff’s] property or trade secret.”34
The basis of the CUTPA claims was that
there was allegedly a concerted effort by
the defendant company to steal employees from the plaintiff. However, having
found the CUTSA claim unsupported,
the court also found the CUTPA claim
unsupported. The court found that the
defendant company made independent
hiring decisions as to each of the employees that left the plaintiff’s company, and
did not engage in an unfair trade practice. Instead, the movement of loan officers between companies is “consistent
with widely accepted industry practice,
a practice the plaintiff was both aware of
and had participated in previously.”35 The
court entered judgment for the defendants on the CUTPA claim.
The court finally declined to find that the
employees had impermissibly competed
with the plaintiff while still employed.
The act of providing to their new company the contact lists while they were
still employed by the plaintiff was permissible preparation to compete. Absent
use of the information for marketing purposes before they left the plaintiff’s employ, the sharing of this information was
not an impermissible effort to compete.36
Accordingly, the court entered judgment
for the defendants on the fiduciary duty
claims.
Courts Awarding Injunctive
or Other Relief
In Morgan Stanley Smith Barney, LLC v.
O’Brien, the one federal case in the prior
year addressing restrictive covenants,
Judge Bryant for the United States District Court for the District of Connecticut
issued an injunction.37 The defendant
was a financial advisor and had signed
an agreement limiting his ability to solicit
clients and use confidential information
after separation. The agreement included
client information in the definition of
protected information. The agreement
also provided for arbitration of disputes
with the Financial Industry Regulatory
Authority (FINRA). The plaintiff sought
injunctive relief pending the FINRA arbitration.
Both the plaintiff and the new firm that
the defendant began employment with
were also parties to the Protocol for Broker Recruiting (“Protocol”). That Protocol
permits registered representatives to utilize their client contacts when they leave
a brokerage so long as both brokerages
are signatories to the Protocol, and the
transitioning representative makes the
client contact information available to
their former employer as well. The Protocol is designed to foster client privacy
and client choice between brokerage
firms—presumably because by limiting
access to information to only the prior
broker and the transitioning agent there
will be no one else that can use the information to contact the client.
In purported compliance with the Protocol, the defendant left a printout of
his client list with his former employer,
but spent two hours changing the phone
numbers of his contacts in the electronic
database. As a result, the former employer was unable to reach many of the clients due to the wrong numbers left in the
electronic database. The parties agreed
that if the Protocol is complied with it
governs, but where the Protocol is violated then the restrictive covenants in the
employment agreement govern. Based
on his calculated conduct in violation of
the spirit of the Protocol, the court entered an injunction, consistent with the
restrictive covenants of the employment
agreement, requiring that the defendant
return to the plaintiff all client information, forbidding him from using any of
the information to solicit clients, and preventing him from soliciting the plaintiff’s
clients that the defendant served or came
to learn of while employed by the plaintiff. The court found the restrictive covenants reasonable, and that it was likely
that the defendant had violated the covConnecticut Lawyer
September 2014 23
enants because he admitted to using the
confidential client information to contact
former clients and obtain their business
at his new employer.
Of note, the court found that even though
the Protocol permits sharing of client information, such limited disclosure does
not destroy the confidential nature of the
information. The court looked to CUTSA
for support, finding that sharing of information under the Protocol is not akin to
obtaining trade secrets through “improper means” under the statute. Instead, the
court found that the Protocol itself was a
reasonable measure to keep information
confidential under CUTSA’s definition
of trade secret. Thus, defendant’s violation of the Protocol in taking the client
information to his new firm constituted
an improper means under CUTSA, further supporting the court’s finding that
the plaintiff demonstrated a likelihood of
success on the claim that the defendant
misappropriated trade secrets.38
Finally, the court found that the loss of
goodwill and inability to contact its clients due to the incorrect, altered phone
numbers was sufficient to support a finding of irreparable harm and no adequate
relief at law. “The Court thus holds that a
violation that compromises a company’s
goodwill, as here, is irreparable and continuing.”39 The court further found that
“preliminary injunctive relief would mitigate the unfair advantage [the defendant]
created for himself when he violated the
terms of [the Protocol] by allowing [the
plaintiff] to attempt to salvage its relationships with customers.”40 Interestingly, the court gave the plaintiff leave to file
a further motion seeking relief as to the
clients that had already transitioned with
the defendant to his new firm by virtue
of his unfettered access to them due to
the altered phone numbers. However, it
is not clear what relief would be available
to the plaintiff in the circumstances, and
it does not appear that a follow-up order
was ever sought by the plaintiff.
In McIntire Company v. Trent, Co. the court
found a violation of CUTSA following a
bench trial.41 There, the defendant was a
sales representative for the plaintiff. The
parties had a non-compete agreement
restraining the defendant from acting as
24 Connecticut Lawyer
September 2014
a sales representative for any companies
with similar products. The defendant
also agreed that the client and product
information was confidential. While acting as a sales agent for the plaintiff, the
defendant also began making sales to the
plaintiff’s customers on behalf of another
supplier. The plaintiff claimed breach of
contract, violations of CUTPA and CUTSA, and tortious interference. The court
found in favor of the plaintiff on the
breach of contract, CUTPA, and tortious
interference counts, and awarded punitive damages and attorneys’ fees. The
court specifically found that the deceptive conduct of selling to customers on
behalf of one company while acting for
another was unethical and unscrupulous.
“The use of the contact and customer information by [the defendant] to poach
customers supports the proof of tortious
interference . . . as well as the proof of a
violation of CUTPA.”42 However, the court
entered judgment in favor of the defendant on the CUTSA count because there
was no evidence that plaintiff took measures to maintain the secrecy of the client
and product information. CL
Notes
1. Faiveley Transport USA, Inc. v. Wabtec Corporation, 511 Fed. Appx. 54 (2d Cir. 2013)
(exclusive possession of trade secret as
opposed to exclusive license is all that is
required for standing to bring a misappropriation claim).
2. Elm City Cheese Co. v. Federico, 251 Conn.
59 (1999); see also Town & Country House
& Homes Service, Inc. v. Evans, 150 Conn.
314, 319 (1963) (setting forth factors).
3. Id.
4. Id. at 319.
5. Generally, Northeast Double Disc Grind,
LLC v. Pietrowicz, No. HHBCV126018053S,
2014 Conn. Super. LEXIS 1117 (D. Conn.
May 7, 2014) (“The use of confidential
contact information to poach customers during a period in which there was a
contractual prohibition on doing so can fit
either the tort or the statutory claim.”).
6. 150 Conn. 314, 319 (1963).
7. 251 Conn. 59 (1999).
8. Conn. Gen. Stat. § 35-51(d).
9. Conn. Gen. Stat. § 35-51(d).
10.Elm City Cheese Co. v. Federico, 251 Conn.
59, 70.
11.Town & Country House & Homes Service,
Inc. v. Evans, 150 Conn. 314, 319.
12.Elm City Cheese Co. v. Federico, 251 Conn.
59, 68.
13.Town & Country House & Homes Service,
Inc. v. Evans, 150 Conn. 314, 319.
14.No. CV126031688S, 2013 Conn. Super.
LEXIS 825 (April 11, 2013).
15.Conn. Gen. Stat. § 42-110g, et. seq.
16.Id. at 20-21.
17.No. TTDCV116004252S, 2013 Conn.
Super. LEXIS 255 (Jan. 25, 2013); see also
Quality Cardiovascular Care, LLC v. Casey,
No. CV106004787S, 2013 Conn. Super.
LEXIS 650 (Mar. 25, 2013) (a claim by an
employer for breach of the duty of loyalty
is based on the agency relationship and
thus not subject to contractual defense of
fraud and misrepresentation).
18.No. 3:11cv1892 (JBA), 2014 U.S. Dist.
LEXIS 26234 (D. Conn. Feb. 28, 2014).
19.Id. at 42.
20.Id. at 50.
21.Id. at 50 n.18.
22.Id. at 52 (quotations and citations omitted).
23.No. HHDCV136042633S, 2014 Conn.
Super. LEXIS 37 (Feb. 14, 2014).
24.Id. at 8-9.
25.Id.
26.Id. at 28-29.
27.Id. at 37-38.
28.Id. at 40-41.
29.No. CV054009529, 2013 Conn. Super.
LEXIS 1101 (May 7, 2013).
30.Id. at 35-36.
31.Id. at 36-37.
32.Id. at 37.
33.Id. at 40.
34.Id. at 41.
35.Id. at 43.
36.Id. at 49.
37.No. 3:13-CV-01598 (VLB), 2013 U.S. Dist.
LEXIS 159128 (D. Conn. Nov. 6, 2013).
38.Cf. Whitney v. J.M. Scott Associates, Inc.,
No. LLICV095007099S, 2013 Conn. Super.
LEXIS 2165 (Sept. 26, 2013) (denying
motion to seal allegedly sensitive financial
information, including “tax returns,
expert witness deposition transcripts,
officer’s meeting minutes and environmental expenses of middle quarter clean
up 2000-2001”, because the defendants
could not meet burden to show that any
of the information was trade secret by
merely claiming the information was
“sensitive” and “private”)
39. Id. at 24-25.
40.Id. at 25.
41.No. CV116010259, 2013 Conn. Super.
LEXIS 2647 (Nov. 20. 2013).
42.Id. at 22; see also Nxegen, LLC v. Carbone,
No. CV126034499S, 2013 Conn. Super.
LEXIS 1662 (July 23, 2013) (confirming arbitration award of $340,000.00 in
punitive damages under CUTSA where the
defendant, the former CEO of the plaintiff,
was found by arbitrator to have maliciously stolen trade secrets and violated
his fiduciary duty to the plaintiff).
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