Employment Law & Employee Benefits

N.H. Supreme Court Decision Demonstrates the Importance of Contracts in Protecting Business Secrets

September 2006

By Michael R. Callahan*

It has been recently reported that the average time American employees stay with their employers is three years. This trend of many of the most energetic and imaginative employees leaving one business for another places every employer at increasing peril. The confidential and proprietary information known to those employees is often critical to the continued success of their former employer's business.

Customer lists, customer needs and customer relationships are readily transferable assets traveling with the former employee to a new entity. These assets may be obtained by one's competitors without payment or concern, unless thoughtful steps are taken to protect them.

This summer the N.H. Supreme Court provided important guidance for any employer seeking to protect such assets. Two loan originators left one mortgage company for others taking with them customer lists and the interest rates paid by those customers. They then contacted the former customers and, in some cases, obtained their business.

The employer sued claiming that such conduct (1) violated the N.H. Uniform Trade Secrets Act (NHUTSA), (2) converted business assets, (3) was a tortious interference with advantageous business relations, and (4) was a violation of the New Hampshire Consumer Protection Act. The defendants moved to dismiss all claims except those alleging violations of the NHUTSA. The argument was based on language of the statute providing that the "statute preempts (provides the sole remedy) claims that are based on the unauthorized use of information, regardless of whether that information meets the statutory definition of a trade secret." The N.H. Supreme Court agreed, except for those circumstances in which the first employer can prove additional misconduct beyond the mere misappropriation of the secrets.

The employees then argued that the customer lists and interest rates were not trade secrets. In essence, the NHUTSA only recognizes two kinds of information protected "trade secrets" and unprotected "general information." In order to qualify as a "trade secret" such information must, among other things, be the subject of reasonable efforts to maintain its secrecy.

The list of reasons used to sustain the jury's verdict in favor of the employees provides a useful primer for every employer concerned with the protection of key information. The Court observed:

1) Upon hiring, the employees were not asked to sign a non-disclosure or confidentiality agreement.

2) The employees were not told that documents or customer information was confidential or constituted trade secrets.

3) There was no written policy or employee handbook regarding confidentiality or document destruction.

4) No one was told customer information belonged to the employer.

5) The employees were not prohibited from copying or maintaining copies of such information.

6) Employees were not asked to return or destroy such information before leaving the company.

7) The lists of potential repeat customers were not marked as trade secrets or as confidential.

The conduct described above illustrates the types of evidence a jury considers when determining whether or not the employer took reasonable steps to maintains its secrecy.

Such matters need not always be left in the jury's hands. The NHUTSA does not affect contractual remedies whether or not based on the misappropriation of a "trade secret." Simply stated the use of contracts covering issues of confidentiality, non-disclosure and covenants not to compete provides the safer protection.

Even express contracts are sometimes deemed unenforceable. They must be tailored to the circumstances. Should they be regarded as too burdensome or unreasonable in scope as to time or distance then courts will not enforce them.

Contracts provide surer protection not only because they limit the issues to be litigated, but also because they make less ambiguous the future employer's interference. First, the contract itself may require the employee to provide it to future employers. Failure to do so becomes its own breach and an arguable admission of its importance. Secondly, they may be sent to the second employer, laying a firmer groundwork for a malicious interference claim.

A well drafted contract may prevent its signatories from even risking its breach. Should they disdain those risks, their defenses will be limited and enforcement far more likely.

* Michael R. Callahan is admitted in New Hampshire.

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