Statements made in a press release, if based on attorney work product information, may waive work product as to the subject matter of the statements. In E.I. DuPont de Nemours and Company v. Kolon Industries, Inc. (E.D. Va. July 30, 2010), click here, the court found that the plaintiff, E.I DuPont de Nemours and Company ("DuPont") waived information that was otherwise non-discoverable work product because DuPont relied upon that information to support a statement in its press release.
The case involves allegations by DuPont that the defendant Kolon Industries, Inc. ("Kolon") misappropriated DuPont’s secret processes and technologies for manufacturing Kevlar. In addition to the civil litigation filed by DuPont, the F.B.I. had previously conducted a criminal investigation of a Kolon employee. During that criminal investigation, DuPont's general counsel office had worked closely with government officials. In a previous opinion, the Court held that work product was not waived by Dupont's sharing of documents with law enforcement agencies that were investigating the alleged misconduct. E.I. DuPont de Nemours and Company v. Kolon Industries, Inc., (E.D. Va. Apr. 13, 2010).
However, DuPont's issuance of the press release was another story. The controversial statement read: "FBI investigation has revealed that, in August 2008, three Kolon managers flew to Richmond, the location of our global Kevlar technology and business headquarters, expressly for the purpose of obtaining confidential DuPont process technology." DuPont was distributing the press release to DuPont’s customers, presumably in an attempt to gain a competitive advantage. Press releases are, of course, a common tactic used by companies to protect and bolster public opinion and brand name.
Kolon sought discovery of work product information, contending that DuPont had waived its work product relating to the subject matter of the statement because the information relating to manager’s intent could have only be based on protected information. DuPont responded that the press release was based solely on publicly available information.
The court found that the press release statement relied on more than just public information. The court based its finding, in part, on its conclusion that the in-house counsel who drafted the statement had reviewed multiple rources of information relating to the meeting, and in drafting the statement in question, he could not possibly have "segregated the various categories of [publicly available and protected] information." Therefore, the press release was not based solely on public information. Rather, the statement about Kolon's purpose in attending the meeting was most likely based at least partly on privileged information that the in-house counsel had been exposed to throughout the course of his work with the government investigation.
The court also addressed the scope of the waived subject matter. Kolon sought production of "all communications in DuPont's possession relating to the Government's investigation of [Kolon's employee] and Kolon." The Court, however, more narrowly defined the scope of the waived subject matter to be those documents that "provide the factual basis for the statement in the press release that, in arranging for and attending . . . the meeting, Kolon had the purpose stated in the press release."
The Court also limited the waiver to fact work product and refused Kolon's request for opinion work product to be produced, finding that opinion work product is only discoverable in extreme circumstances. And the court found that an issuance of a press release is a common, not an extraordinary, circumstance in business.
This case serves as another warning to companies in litigation to carefully monitor the process of drafting press releases and what statements to include in them because press releases can lead to sanctions, waiver of work product and privileged information, and increase litigation costs. At the same time, companies in litigation often feel compelled to try to shape the public's perception of the litigation and the companies themselves. This is particularly true in cases involving unfair business practices or competition when the survival of a company's business model can be at stake. But, in doing so, they need to carefully weigh the risks of what they are saying publicly.
Friday, February 25, 2011
Tuesday, September 7, 2010
Court Recognizes Federal Claim for Employees' Theft of Electronic Documents
Some time ago (March 27, 2009), we wrote a post describing the applicability of the federal Computer Crimes and Abuse Act, 18 U. S. C. § 1030, (the “CFAA” or the “Act”) to unfair business practices cases. The Act provides a federal remedy for anyone who intentionally accesses a protected computer without authorization, or exceeds authorized access, and obtains information or who knowingly and with intent to defraud and in furtherance of the fraud, obtains something of value, unless the only thing obtained is the use of the computer and that use is not valued at more than $5000 in a one year period. An employer owned computer is “protected” under the statute.
It is becoming increasingly common for plaintiffs to use this Act as a vehicle for obtaining access to federal courts where diversity jurisdiction does not exist. As might be expected, a split of authority exists as to whether this statute may be so used, or whether it is intended only to address actions by computer hackers. At the present time, three federal Circuit Courts of Appeals (1st, 5th and 7th), as well as a number of District courts, have adopted a broad view of the statute and allow claims where an employee permissively accesses an employer’s computer system for an improper purpose. A common example is where an employee, who has accepted a job with a competitor or who intends to start a competitive company, copies proprietary electronic data from his employer’s system for use in his new job with the competitive company.
Those courts adopting the broader view reason that once an employee decides to join a competing company or has made arrangements to form one, his loyalty is divided between his existing employer and the new one. In that circumstance, by accessing the employer’s network and copying files, the employee violates his fiduciary duty of loyalty to his employer. Such conduct satisfies the CFAA requirement that the defendant “exceeds authorized access” to the computer system.
In a recent case, the federal district court for the Southern District of New York, Starwood Hotels & Resorts Worldwide, Inc. v. Hilton Hotels Corporation et al., 09-cv-3862 (June 16, 2010) joined those courts adopting the broader view. Click here for the opinion. The facts of the case, as alleged, are extreme. But they should serve as a cautionary tale to employees who are considering joining a competitive firm and as a roadmap for employers who have been victimized by departing employees.
In this case, two of Starwood’s executive officers who worked on its luxury hotel brands were recruited to join Hilton and accepted offers of employment. Both had access to Starwood’s most confidential data and both were subject to confidentiality agreements requiring that they safeguard Starwood’s confidential information and, once their employment ended, return all such information to Starwood and not disclose it to anyone.
After signing an employment agreement with Hilton but before notifying Starwood of his intent to resign, one of the executives asked his staff to compile a significant amount of confidential information for him that he then forwarded to his personal email account. This included digital images of thousands of documents that Starwood used in designing and branding its luxury hotels. As alleged, he forwarded this information to Hilton. He also copied electronic documents to his personal laptop computer and used that information to benefit Hilton. In addition, once he joined Hilton he solicited additional confidential information from other Starwood employees who used their personal email accounts to convey Starwood’s proprietary information to their former superior.
The other executive, while still at Starwood and after engaging in discussions with Hilton representatives, allegedly acted as a corporate spy for Hilton and collected and forwarded to Hilton confidential information related to Starwood’s business and development opportunities.
Starwood knew nothing of the extent of this piracy until, in discovery, Hilton produced eight large boxes of computer hard drives, thumb and zip drives and paper records containing large quantities of Starwood documents. Indeed, the computer drives contained over 100,000 downloaded files.
At issue in the recent opinion was Hilton’s motion to dismiss the count for a violation of the CFAA because the Act was not intended to cover such conduct. The court noted at the outset that this case did not involve an employee who accessed his employer’s computer in the ordinary course of his duties and then, at some later time, used some of that information to benefit a competitor. Rather, here the information was obtained with the specific intent to use it against the employer through “trickery and deceit.” The court concluded that once the executives accepted employment with Hilton, they “no longer had Starwood’s authorization to access this information. Thus, even construing the statute narrowly to prohibit only accessing computer information without permission, Starwood’s complaint adequately alleges a claim under the CFAA.”
The court also held that Hilton could potentially be liable under the Act because, as alleged, it used one of the executives, as well as others, as corporate spies to steal Starwood’s confidential information. Finally, the court found that Starwood’s expenditure of sums to investigate the damage sustained as a result of the former employees’ actions, which exceeded $5000, met the damages requirement of the statute. Thus, Hilton’s motion to dismiss the claim was denied.
Unquestionably, these actions were extreme. But apart from the volume of electronic documents that were pilfered, the story line is not that unusual. Departing employees often take confidential information belonging to their employer for use in their new employment, thinking that it will make them more valuable to the new employer. And it is not unusual for them to contact former colleagues, once at the new employer, and ask for information they “forgot” to take with them. This case adds to the growing line of authorities that recognize that, under such circumstances, the CFAA provides a potential remedy to the former employer. Moreover, unlike in Starwood, where confidentiality agreements existed, such agreements are not an essential predicate to applicability of the statute. The common law duty of loyalty prohibits employees from using confidential information to benefit a new employer.
It is becoming increasingly common for plaintiffs to use this Act as a vehicle for obtaining access to federal courts where diversity jurisdiction does not exist. As might be expected, a split of authority exists as to whether this statute may be so used, or whether it is intended only to address actions by computer hackers. At the present time, three federal Circuit Courts of Appeals (1st, 5th and 7th), as well as a number of District courts, have adopted a broad view of the statute and allow claims where an employee permissively accesses an employer’s computer system for an improper purpose. A common example is where an employee, who has accepted a job with a competitor or who intends to start a competitive company, copies proprietary electronic data from his employer’s system for use in his new job with the competitive company.
Those courts adopting the broader view reason that once an employee decides to join a competing company or has made arrangements to form one, his loyalty is divided between his existing employer and the new one. In that circumstance, by accessing the employer’s network and copying files, the employee violates his fiduciary duty of loyalty to his employer. Such conduct satisfies the CFAA requirement that the defendant “exceeds authorized access” to the computer system.
In a recent case, the federal district court for the Southern District of New York, Starwood Hotels & Resorts Worldwide, Inc. v. Hilton Hotels Corporation et al., 09-cv-3862 (June 16, 2010) joined those courts adopting the broader view. Click here for the opinion. The facts of the case, as alleged, are extreme. But they should serve as a cautionary tale to employees who are considering joining a competitive firm and as a roadmap for employers who have been victimized by departing employees.
In this case, two of Starwood’s executive officers who worked on its luxury hotel brands were recruited to join Hilton and accepted offers of employment. Both had access to Starwood’s most confidential data and both were subject to confidentiality agreements requiring that they safeguard Starwood’s confidential information and, once their employment ended, return all such information to Starwood and not disclose it to anyone.
After signing an employment agreement with Hilton but before notifying Starwood of his intent to resign, one of the executives asked his staff to compile a significant amount of confidential information for him that he then forwarded to his personal email account. This included digital images of thousands of documents that Starwood used in designing and branding its luxury hotels. As alleged, he forwarded this information to Hilton. He also copied electronic documents to his personal laptop computer and used that information to benefit Hilton. In addition, once he joined Hilton he solicited additional confidential information from other Starwood employees who used their personal email accounts to convey Starwood’s proprietary information to their former superior.
The other executive, while still at Starwood and after engaging in discussions with Hilton representatives, allegedly acted as a corporate spy for Hilton and collected and forwarded to Hilton confidential information related to Starwood’s business and development opportunities.
Starwood knew nothing of the extent of this piracy until, in discovery, Hilton produced eight large boxes of computer hard drives, thumb and zip drives and paper records containing large quantities of Starwood documents. Indeed, the computer drives contained over 100,000 downloaded files.
At issue in the recent opinion was Hilton’s motion to dismiss the count for a violation of the CFAA because the Act was not intended to cover such conduct. The court noted at the outset that this case did not involve an employee who accessed his employer’s computer in the ordinary course of his duties and then, at some later time, used some of that information to benefit a competitor. Rather, here the information was obtained with the specific intent to use it against the employer through “trickery and deceit.” The court concluded that once the executives accepted employment with Hilton, they “no longer had Starwood’s authorization to access this information. Thus, even construing the statute narrowly to prohibit only accessing computer information without permission, Starwood’s complaint adequately alleges a claim under the CFAA.”
The court also held that Hilton could potentially be liable under the Act because, as alleged, it used one of the executives, as well as others, as corporate spies to steal Starwood’s confidential information. Finally, the court found that Starwood’s expenditure of sums to investigate the damage sustained as a result of the former employees’ actions, which exceeded $5000, met the damages requirement of the statute. Thus, Hilton’s motion to dismiss the claim was denied.
Unquestionably, these actions were extreme. But apart from the volume of electronic documents that were pilfered, the story line is not that unusual. Departing employees often take confidential information belonging to their employer for use in their new employment, thinking that it will make them more valuable to the new employer. And it is not unusual for them to contact former colleagues, once at the new employer, and ask for information they “forgot” to take with them. This case adds to the growing line of authorities that recognize that, under such circumstances, the CFAA provides a potential remedy to the former employer. Moreover, unlike in Starwood, where confidentiality agreements existed, such agreements are not an essential predicate to applicability of the statute. The common law duty of loyalty prohibits employees from using confidential information to benefit a new employer.
Monday, July 12, 2010
A Virginia Court Redefines a LLC's Unanimous Consent Requirement to Permit the LLC to Sue One of Its Members
A circuit court in Virginia was faced with the question of whether a Limited Liability Company can sue one of its three Members when, under the LLC’s Operating Agreement, the decision to file a law suit required that all three Members agree, including the Member being sued. For obvious reasons, no Member would vote to be sued. The case is Infinite Design Electric Assoc. LLC, et al. v. Donald R. Hague, 2010 Va. Cir. LEXIS 27 (Fairfax Cir. Ct. 2010).
The question presented the court with a classic legal dilemma by arguably pitting a just outcome against a technical legal interpretation that would deprive the aggrieved party of a remedy.
The LLC member being sued in the Infinite Design case allegedly engaged in the unfair business practices of forming a competing company, courting the existing LLC's clients using that LLC's "client lists, estimate strategies, and proposal forms to out maneuver [the existing LLC] and steal its clients."
In reaching its decision, the court could have framed the legal question in a number of different ways, but chose to ask: "Should a manager of an LLC be able to hold the entity hostage when it is the bad acts of that manager that the LLC seeks to redress?" The problem for the court in answering that question is that it found "no Virginia statutory or case law directly on point with this situation . . . ." Thus, the court looked to “analogous authority from Virginia and other states."
But the court looked to more than just analogous statutes, relying instead on other states' statutes that have no parallel in the Virginia Code; finding that "Pennsylvania does not allow interested managers to vote to sue if that manager has 'an interest in the outcome of the suit that is adverse to the interest of the company.' 15 Pa.C.S. § 8992(2) (2009). New York's LLC act precludes managers of LLCs from transacting with the LLC when that manager has a 'substantial financial interest' in the transaction. NY CLS LLC § 411 (2010)." The decisions of the Pennsylvania and New York legislative bodies, however, may have no bearing on how Virginia's General Assembly might address that issue in the future.
The court also relied upon a 1937 Virginia Supreme Court case that "suggests that the vote of a director of a corporation who has a personal interest in a matter is not to be counted in relation to that matter," citing Crump v. Bronson, 168 Va. 527, 537, 191 S.E. 663 (1937). The court's use of the word "suggests" is apt because the Court in Crump faced the question of whether an interested director could be used to constitute a quorum under the old Code requirement that every corporation have at least three directors. Now, however, there are many single member LLCs where the member is necessarily an interested director for any vote pertaining to the member’s compensation and rights.
The third leg supporting the Court's decision was the LLC's incorporation of Virginia Code § 13.1-1024.1 that "requires managers to carry out their duties with 'good faith business judgment [that is in] the best interest of the [LLC].'" The incorporation of this section, according to the court, was a clear reflection of the LLC’s "intention to hold managers' actions to a certain standard. A manager would never vote to authorize a suit against himself, but bringing suit is the only course of action an LLC ca[n] take in the case of manager misconduct."
For those reasons, the court held that the LLC "did not need unanimous approval of the managers to bring suit when the suit was intended to be brought against one of its managers. Such a reading of the Operating Agreement would amount to a situation of 'suicide by operating agreement', and would paralyze the LLC from remedying any suspected malfeasance by one of its managers."
The court, however, did not address several countervailing Virginia Code sections and legal principles. First, Virginia Code § 13.1-1002 defines an "Operating agreement" as “an agreement of the members as to the affairs of a limited liability company and the conduct of its business . . . ." Second, § 13.1-1001.1.C. provides that the Virginia Code sections governing LLCs "shall be construed in furtherance of the policies of giving maximum effect to the principle of freedom of contract and of enforcing operating agreements." (Emphasis added.) Third, § 13.1021.A.1. states that "A limited liability company is bound by its operating agreement whether or not the limited liability company executes the operating agreement. An operating agreement may contain any provisions regarding the affairs of a limited liability company and the conduct of its business to the extent that such provisions are not inconsistent with the laws of the Commonwealth or the articles of organization."
In addition, a significant body of Virginia case law arguably dictates a different result. In a decirion also coming out of Fairfax County Circuit Court, Coker v. State Farm Fire & Cas. Co., 45 Va. Cir. 510 (Fairfax Cir. Ct. 1998), the court explained that it was "precluded from rewriting a contract between two parties, quoting a series of Virginia Supreme Court cases that state: "It is not the province of this Court to rewrite contractual language. Rather, it is incumbent upon courts to construe the language drafted by the parties."; "It is the function of the court to construe the contract made by the parties, not to make a contract for them."; "Courts will not rewrite contracts; parties to a contract will be held to the terms upon which they agreed."; "A court is not at liberty to rewrite a contract simply because the contract may appear to reach an unfair result." (Citations omitted.)
Finally, there are economic consequences to the LLC and the member being sued. Both the LLC and the member hired their respective attorneys. The member being sued, however, has to pay his pro rata share for both the LLC’s lawyer and his own lawyer, even if the member prevails at trial.
The Infinite Design court's decision to rewrite the operating agreement, if followed, presents future courts with the question of which circumstances justify rewriting operating agreements or other corporate documents. Although courts will invariably try to limit those circumstances, those attempts will be more difficult if courts frame the question like the Infinite Design court and ask: "Should a manager of an LLC be able to hold the entity hostage when it is the bad acts of that manager that the LLC seeks to redress?" For instance, the member being sued might vote against the LLC entering into profitable contracts to starve the LLC, thereby making it impossible for the LLC to pay for its attorneys. Would the court then waive the unanimous consent requirement and contractually bind the LLC against one member’s interests?
It will be interesting to track whether the Infinite Design decision gets appealed to the Virginia Supreme Court, or whether other Virginia Circuit Courts follow or extend it.
The question presented the court with a classic legal dilemma by arguably pitting a just outcome against a technical legal interpretation that would deprive the aggrieved party of a remedy.
The LLC member being sued in the Infinite Design case allegedly engaged in the unfair business practices of forming a competing company, courting the existing LLC's clients using that LLC's "client lists, estimate strategies, and proposal forms to out maneuver [the existing LLC] and steal its clients."
In reaching its decision, the court could have framed the legal question in a number of different ways, but chose to ask: "Should a manager of an LLC be able to hold the entity hostage when it is the bad acts of that manager that the LLC seeks to redress?" The problem for the court in answering that question is that it found "no Virginia statutory or case law directly on point with this situation . . . ." Thus, the court looked to “analogous authority from Virginia and other states."
But the court looked to more than just analogous statutes, relying instead on other states' statutes that have no parallel in the Virginia Code; finding that "Pennsylvania does not allow interested managers to vote to sue if that manager has 'an interest in the outcome of the suit that is adverse to the interest of the company.' 15 Pa.C.S. § 8992(2) (2009). New York's LLC act precludes managers of LLCs from transacting with the LLC when that manager has a 'substantial financial interest' in the transaction. NY CLS LLC § 411 (2010)." The decisions of the Pennsylvania and New York legislative bodies, however, may have no bearing on how Virginia's General Assembly might address that issue in the future.
The court also relied upon a 1937 Virginia Supreme Court case that "suggests that the vote of a director of a corporation who has a personal interest in a matter is not to be counted in relation to that matter," citing Crump v. Bronson, 168 Va. 527, 537, 191 S.E. 663 (1937). The court's use of the word "suggests" is apt because the Court in Crump faced the question of whether an interested director could be used to constitute a quorum under the old Code requirement that every corporation have at least three directors. Now, however, there are many single member LLCs where the member is necessarily an interested director for any vote pertaining to the member’s compensation and rights.
The third leg supporting the Court's decision was the LLC's incorporation of Virginia Code § 13.1-1024.1 that "requires managers to carry out their duties with 'good faith business judgment [that is in] the best interest of the [LLC].'" The incorporation of this section, according to the court, was a clear reflection of the LLC’s "intention to hold managers' actions to a certain standard. A manager would never vote to authorize a suit against himself, but bringing suit is the only course of action an LLC ca[n] take in the case of manager misconduct."
For those reasons, the court held that the LLC "did not need unanimous approval of the managers to bring suit when the suit was intended to be brought against one of its managers. Such a reading of the Operating Agreement would amount to a situation of 'suicide by operating agreement', and would paralyze the LLC from remedying any suspected malfeasance by one of its managers."
The court, however, did not address several countervailing Virginia Code sections and legal principles. First, Virginia Code § 13.1-1002 defines an "Operating agreement" as “an agreement of the members as to the affairs of a limited liability company and the conduct of its business . . . ." Second, § 13.1-1001.1.C. provides that the Virginia Code sections governing LLCs "shall be construed in furtherance of the policies of giving maximum effect to the principle of freedom of contract and of enforcing operating agreements." (Emphasis added.) Third, § 13.1021.A.1. states that "A limited liability company is bound by its operating agreement whether or not the limited liability company executes the operating agreement. An operating agreement may contain any provisions regarding the affairs of a limited liability company and the conduct of its business to the extent that such provisions are not inconsistent with the laws of the Commonwealth or the articles of organization."
In addition, a significant body of Virginia case law arguably dictates a different result. In a decirion also coming out of Fairfax County Circuit Court, Coker v. State Farm Fire & Cas. Co., 45 Va. Cir. 510 (Fairfax Cir. Ct. 1998), the court explained that it was "precluded from rewriting a contract between two parties, quoting a series of Virginia Supreme Court cases that state: "It is not the province of this Court to rewrite contractual language. Rather, it is incumbent upon courts to construe the language drafted by the parties."; "It is the function of the court to construe the contract made by the parties, not to make a contract for them."; "Courts will not rewrite contracts; parties to a contract will be held to the terms upon which they agreed."; "A court is not at liberty to rewrite a contract simply because the contract may appear to reach an unfair result." (Citations omitted.)
Finally, there are economic consequences to the LLC and the member being sued. Both the LLC and the member hired their respective attorneys. The member being sued, however, has to pay his pro rata share for both the LLC’s lawyer and his own lawyer, even if the member prevails at trial.
The Infinite Design court's decision to rewrite the operating agreement, if followed, presents future courts with the question of which circumstances justify rewriting operating agreements or other corporate documents. Although courts will invariably try to limit those circumstances, those attempts will be more difficult if courts frame the question like the Infinite Design court and ask: "Should a manager of an LLC be able to hold the entity hostage when it is the bad acts of that manager that the LLC seeks to redress?" For instance, the member being sued might vote against the LLC entering into profitable contracts to starve the LLC, thereby making it impossible for the LLC to pay for its attorneys. Would the court then waive the unanimous consent requirement and contractually bind the LLC against one member’s interests?
It will be interesting to track whether the Infinite Design decision gets appealed to the Virginia Supreme Court, or whether other Virginia Circuit Courts follow or extend it.
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