Non-Competes, Unfair Competition & Trade Secrets

NuScience Corporation is a California corporation that researches, develops and distributes health and beauty products, including nutritional supplements. In 2009, NuScience obtained by default a permanent injunction in a California federal court against Robert and Michael Henkel, the nephew of a woman from whom NuScience purchased the formula for a nutritional supplement, prohibiting them from selling or marketing NuScience’s trade secrets.  Before the federal court injunction was entered, NuScience terminated the employment of David McKinney, NuScience Vice President of sales and marketing.  McKinney signed a separation agreement wherein he agreed to maintain the confidentiality of certain NuScience-related matters.  What followed might be good book material.

In June 2010, NuScience received an email from a third-party which included an email string between Robert Henkel and McKinney that caused NuScience to conclude Robert Henkel was violating the federal court injunction. Based on the emails, NuScience sued McKinney and Robert Henkel in California Superior Court for misappropriation of trade secrets, among other claims.  (“NuScience I”)  Robert Henkel again did not appear and the court entered a default against him in March 2011.

McKinney appeared in the state court action and was represented by Stephen E. Abraham.  McKinney filed a motion to compel further discovery responses from NuScience and a motion for sanctions against NuScience which NuScience initially opposed.  But before the motion was heard, NuScience filed a request for dismissal without prejudice. McKinney responded to the NuScience voluntary dismissal with a motion for attorney’s fees and costs under the Uniform Trade Secrets Act, California Civil Code Section 3426 et seq. (“UTSA”).  The trial court granted the motion for attorney’s fees, concluded the record showed subjective bad faith on NuScience’s part, and awarded McKinney the $32,842.81 he requested.

NuScience moved for reconsideration contending that after it took Henkel’s default, Henkel called NuScience’s attorney and said NuScience “better back off and leave [them] alone” and that Henkels thereafter began posting threats to publish NuScience’s trade secret formula on the Internet. NuScience’s attorney reported the threat to the FBI, which informed him that it had assigned an agent to investigate and the pending investigation should remain confidential.  NuScience asserted that Henkel then told NuScience’s attorney that he “would release NuScience’s formula to the world unless [NuScience] dismissed this lawsuit” and “cease all enforcement of the federal judgment against the Henkels.”  NuScience asserted that only later did the FBI “reluctantly acquiesce[ ]” and allowed NuScience to discuss the investigation.

The court denied the motion for reconsideration.

NuScience appealed the attorney’s fees award and the Court of Appeal reversed the decision of the lower court. The Appellate Court found that the email exchange between McKinney and Henkel on which NuScience I was premised was evidence that they were engaged in internal experimentation with NuScience’s trade secret formula and further stated McKinney had been using the samples. The court found this was sufficient evidence of actual or threatened misappropriation under the UTSA.  The court further found that the email exchange was evidence that McKinney intended to use the NuScience customer list to market to buyers in Asia and that since McKinney was unlikely to have derived information about customers interested in the formula other than through his employment with NuScience, a trier of fact could conclude McKinney intended to use the information he derived from NuScience’s customer list to compete.

The day after the trial court awarded fees under the UTSA in NuScience I, McKinney filed a malicious prosecution action against NuScience and was represented again by Stephen Abraham (“NuScience II”). NuScience filed a motion to strike under California’s Anti-SLAPP (Strategic Litigation Against Public Policy) statute.  The trial court granted the motion, and rejected McKinney’s claim that the dismissal prior to the hearing on the discovery motion was a favorable determination on the merits, noting “undisputed evidence… that the case was dismissed in response to extortionist threats.”  The court awarded NuScience attorney’s fees of $129,938.75.  The order was affirmed on appeal.

NuScience then filed an action against McKinney, Abraham and his law firm, and two other individuals in March 2014 alleging malicious prosecution and intentional interference with contractual relations against Abraham. Abraham responded with special motions to strike the causes of action.

Abraham attacked the intentional interference cause of action under the California Anti-SLAPP statute on the grounds that the conduct Abraham was alleged to have engaged in – the filing of declarations in federal and state court lawsuits that were signed by McKinney – is protected conduct. The trial court, and subsequently the Court of Appeal, concluded there could be no breach of contract absent a disclosure or public disparagement and the disclosure/disparagement NuScience alleged was Abraham’s public filing of McKinney’s declarations. As such, it was protected activity.

The trial court also granted Abraham’s SLAPP back action in the malicious prosecution claim. The Court of Appeal agreed, finding that NuScience had not demonstrated that the underlying malicious prosecution claim was initiated with malice because, in part, the malicious prosecution was alleged against a former adversary’s attorney, and not the former adversary.  The court held that malice harbored by an adversary may not be attributed to its attorney.  NuScience tried to identify additional evidence of Abraham’s own malice on appeal asserting, in part, that Abraham “told NuScience that he intends to destroy NuScience,” but the court pointed out that the actual evidence stated “NuScience will be out of business in six months” and “NuScience will be done in six months,” which the court stated suggested, at most, that Abraham believed that litigation would be successful and that NuScience’s demise was imminent, “not that he intended to cause its demise.”  The Court of Appeal affirmed the order dismissing the claims against Abraham and affirmed the award of Abraham’s attorney’s fees of $99,595.00.

While the initial trade secret dispute between the parties here was relatively straightforward, this case is worth highlighting because of the extensive litigation that followed. Despite the company’s legitimate interest in protecting its threatened trade secrets, there were certainly unintended consequences as a result of the company’s vigorous advocacy to protect its interests.  NuScience became embroiled in litigation spanning the course of the next eight years, itself even becoming the defendant to a lawsuit.  This serves as a cautionary tale and a reminder of the inherent risk to engaging in litigation.

The case is NuScience Corp. v. Abraham, B264334 (Ca. Ct. of App. 2/1/17).

Employers Under the Microscope: Is Change on the Horizon?

When: Tuesday, October 18, 2016 8:00 a.m. – 4:00 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce. Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

By James P. Flynn

In February 2013, the Justice Department announced a federal trade secret enforcement initiative that rested in large part on encouraging American businesses to adopt best practices in the area and diligent pursuit of civil remedies, and on parallel criminal law enforcement.  As noted in the initiative outline, “The Department of Justice has made the investigation and prosecution of corporate and state sponsored trade secret theft a top priority.”

Over the last ten days, events unfolded in New Jersey that showed this new policy initiative to be one involving real action.  Those events began with a timely filed civil action by Epstein Becker Green (“EBG”) on behalf of Becton, Dickinson & Company (“BD”) that led to a May 31, 2013, restraining order against Ketankumar Maniar, a former BD employee planning to leave the country in days with BD trade secrets in his possession. The facts developed by BD and EBG, along with the civil court filings, were provided to federal law enforcement officials.

Realizing that the material Maniar had taken amounted to a “tool kit” for manufacturing a soon-to-be-released disposable pre-filled pen injector in which BD had invested substantial time and money, federal agents opened a investigation.  They later executed a search warrant to retrieve from Maniar a number of storage devices and, on June 5, 2013, arrested him for criminal violation of 18 USC section 1832. The arrest was widely reported locally, nationally, and internationally after it was announced by the US Attorney for District of New Jersey and the FBI.

Such publicity is itself consistent with the initiative, which makes public awareness of the effort a foundational concept: “Highlighting [such cases and issues] can help mitigate the theft of trade secrets by encouraging all stakeholders, including the general public, to be aware of the detrimental effects of misappropriation on trade secret owners and the U.S. economy in general.”

Employers in the health care industry can take some comfort in knowing that the Justice Department’s initiative is more than theoretical. But they must remain vigilant and prepare to respond quickly when a threat arises.

By: James P. Flynn

The New Jersey Legislature was overwhelmingly in favor of a measure that would have barred employers from obtaining social media IDs and other social media related information from employees and applicants. Click here for A2878 as passed.  But Governor Chris Christie vetoed A-2878 because it would frustrate a business’s ability “to safeguard its business assets and proprietary information” and potentially conflict with regulatory requirements on businesses in regulated industries such as finance and healthcare. Click here for the Governor’s Veto Statement. While the Governor thought the bill well-intentioned, he conditionally vetoed it for painting “with too broad a brush,” citing the trade secrets/proprietary information concern as a primary motivation: “In view of the over-breadth of this well-intentioned bill, I return it with my recommendations that it be more properly balanced between protecting the privacy of employees and job candidates, while ensuring that employers may appropriately screen job candidates, manage their personnel, and protect their business assets and proprietary information.”

The Governor specifically recommended the bill be revised to:

  • Create an exception to allow investigation of work place misconduct or unauthorized transfer of confidential or proprietary data to a personal account;
  • Add language confirming that an employer may view, access, or utilize information about a current or prospective employee that can be obtained in the public domain;
  • Carve out of the definition of “personal account” any account, service or profile created, maintained, used or accessed by a current or prospective employee for business purposes of the employer or to engage in business related communications;
  • Eliminate provisions that would create a civil cause of action for affected employees or applicants;
  • Add a proviso stating that nothing in the act shall prevent an employer from implementing and enforcing a policy pertaining to the use of an employer issued electronic communications device or any accounts or services provided by the employer or that the employee uses for business purposes; and
  • Add a proviso stating that nothing in the act should be construed to prevent an employer from complying with the requirements of State or federal statutes, rules or regulations, case law or rules of self-regulatory organizations.

Click here for the bill as revised after the Governor’s veto statement.

These last two provisos are important ones, especially for the financial services industry and the healthcare industry. They are important because FINRA, for example, has laid out certain monitoring and record keeping requirements concerning social media used to communicate with clients and prospective clients concerning potential financial transactions. See, e.g., FINRA Guidance here.

There are likewise data security requirements emerging out of HIPAA and other bodies of law that may require security and monitoring of social media. Click here for a discussion of such issues by Dan Goldman (@danielg280), legal counsel at Mayo Clinic and Advisory Board member to the Mayo Clinic Center for Social Media. In an age of BYOD (Bring Your Own Device) and the consolidation of business and personal activity to a single mobile device, failure to include such exceptions would force employers into hard choices between required monitoring and desired seamlessness of the business/personal transition.

While many states have in the last year adopted such statutes, the interplay between the Governor and the Legislature in New Jersey plays out the competing interests nicely, and hopefully starts a trend toward a more measured approach to such questions. Accommodating these competing interests is not only a legislative challenge, but is one faced by employers and businesses every day.

Typically, when we blog about physician employment arrangements, we focus on major areas of negotiation, such as compensation, professional liability insurance and termination.  However, when the employment arrangement involves the physician, as employee, and a hospital, as employer, such as when the hospital acquires the physician’s medical practice, some unique additional issues arise.  (Indeed, in a November, 2012 press release, the AMA noted that a survey of final-year residents found nearly 1/3 listed hospital employment as their first choice of practice setting.)  As a result, the House of Delegates of the American Medical Association (AMA), at its 2012 Interim Meeting, adopted the AMA Principles for Physician Employment (.PDF) (the “Principles”), in an effort to “identify and address some of the unique challenges to professionalism and the practice of medicine arising in the face of physician employment.”    In particular, it was the AMA’s desire that the “Principles, in addressing select, potentially problematic aspects of the employer-employee relationship, … provide broad guidance for employed physicians and their employers as they collaborate to provide safe, high-quality, and cost effective patient care.”  These problematic areas, discussed in more detail below, are:  (i) conflicts of interest, (ii) patient advocacy, (iii) contracting, (iv) hospital medical staff relations, (v) peer review and performance evaluations, and (vi) payment agreements.

  • Conflicts of Interest –The Principles recognize that an employed physician has a duty of loyalty to the hospital employer.  That duty, however, cannot trump the physician’s “paramount responsibility” to patients.  Typically, a physician employment agreement might document that the physician must exercise his or her independent professional judgment on behalf of the patient, and that the hospital employer will not interfere with the exercise of that judgment.  However, the Principles go further, suggesting that other contract provisions  be included to reinforce this concept.  For example, “(e)mployed physicians should not be deemed to be in breach of their employment agreements, nor be retaliated against by their employers,” for speaking or advocating on patient care issues or otherwise exercising their independent professional judgment.  Similarly, given that patient welfare must come first, the Principles suggest that any “agreements or understandings (explicit or implicit) restricting, discouraging, or encouraging particular treatment or referral options are disclosed to patients.”
  • Patient Advocacy – According to the Principles, employed physicians should be free to engage in volunteer work or teach, outside of their duties as employees, so long as it does not interfere with their job responsibilities.  This is sometimes a hotly negotiated aspect of the employer/physician relationship, but the AMA believes that a physician’s patient advocacy obligations, including volunteer work and teaching, should not be sacrificed when the physician becomes an employee of the hospital.
  • Contracting – Most of the AMA’s contracting principles are fairly benign and should not cause any heartburn for hospital employers; examples would include the observation that employment agreements should be negotiated in good faith, with the factors upon which compensation will be based clearly established.  Conversely, the Principles discourage employed physicians from “entering into agreements that restrict the physician’s right to practice medicine for a specified period of time or in a specific area upon termination of employment.”  This is consistent with Section 9.02 of the Code of Medical Ethics adopted by the AMA Council on Ethical and Judicial Affairs, which provides:

 “Covenants not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.  The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment … agreement.  Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”

While this is the AMA’s stated position, it should be noted that virtually all hospital/physician employment agreements will contain a typical set of covenants (covenant not to compete, non-solicitation of payments, no pirating of employees, confidentiality and nondisclosure provisions), which are designed to meet the legitimate business needs of the hospital.

  • Hospital Medical Staff Relations – The Principles state that hospitals “should seek the input of the medical staff prior to the initiation, renewal, or termination of exclusive employment contracts.”  While most heady hospital CEOs know that obtaining input from the medical staff often represents an expedient way to make decisions which will not alienate the physicians on the staff, it is unusual for the hospital employer to agree to document in the employment agreement a process providing for medical staff involvement in decisions such as terminating a physician employment agreement.
  • Peer Review and Performance Evaluations – The Principles advocate that “peer review of employed physicians should be conducted independently of and without interference from any human resources activities of the employer.” While this is a noble goal, it may not jive with the manner in which most hospital employers carry out physician employee evaluations.  Similarly, the suggestion in the Principles that the employed physicians should be provided with “regular performance evaluations, which should be presented in writing and accompanied by an oral discussion with the employed physician,” may be a best practice, but not necessarily in line with the current structure of most hospital/employed physician relationships.
  • Payment Agreements – The Principles recommend that employed physicians “be prospectively involved” in the hospital’s contract and fee negotiations, and be informed about the actual payment amount allocated to the professional fee component.  This may or not happen in practice, but should not be highly controversial.  What may be much more hotly debated, however, is the recommendation that “(e)mployers should indemnify and defend, and save harmless, employed physicians with respect to any violation of law or regulation or breach of contract in connection with the employer’s billing for physician services, which violation is not the fault of the employee.”  Most hospital/physician employment agreements contain the mirror provision, where the physician indemnifies the hospital for coding and billing errors resulting from the physician’s actions or omissions, but it is rare to see a provision such as the one suggested by the Principles included.

The Principles state in the preface that they are not intended to be a comprehensive listing of all of the professional and ethical issues arising out of the relationship between the hospital, as employer, and the physician, as employee.  Nonetheless, the Principles do provide a good starting place, in terms of understanding that the employment relationship between hospital and physician is a unique one, requiring care in dealing not only with the traditional terms of employment, such as compensation, benefits and the like, but also in terms of the difficult professional and ethical issues involved.

For a physician who has spent his or her whole professional life developing and growing a medical practice, the process of selling that practice can be a traumatic experience.  Typically, the physician may focus on the short term, attempting to maximize the price at which the practice will be purchased and the applicable payment terms.  However, the long term happiness of the selling physician may depend less on the size of the purchase price at which the practice is sold, and more on how well the physician negotiates the terms and conditions of employment following the acquisition, most notably where the physician is moving from a smaller medical practice setting to a larger institutional setting, such as being employed by a hospital system or large, multi-specialty medical practice.  [NOTE:  While this blog focuses on physicians, the same issues would also apply to other health care practitioners, such as dentists and oral surgeons, podiatrists, chiropractors and the like.]  

This blog takes a closer look at the issues which may be of critical importance to the selling physician, as he or she enters into the new, post-acquisition employment arrangement with the purchasing hospital or medical practice.  Unlike most of our blogs, which provide answers, this blog is designed primarily to provide questions – – questions that should be answered as part of negotiating the final employment agreement.

  • Term – What is the initial term of the employment agreement?  Are there automatic renewal terms, or can the physician get out at the end of the initial term?  Negotiating the term of the new employment agreement may be complicated by the nature of the physician group being acquired.  For example, the more senior physicians may not be willing to make a long-term commitment to the new employer (e.g., 5-10 years), while the more junior physicians may be looking for that exact type of job security.  It is also important to keep in mind how the term of the employment agreement can be impacted by the other items discussed below.  (A five-year agreement that can be terminated without cause at any time on 30-days written notice by either party is not a five-year agreement; practically speaking, it is a rolling 30-day agreement.)  Similarly, while the agreement may have a term of five years, compensation adjustments may occur more frequently.
  • Duties – Negotiating the duties for the employed physician generally does not get intense, but there are some critical issues on which the physician should focus.  Can the physician be relocated to one or more other offices during the term of the agreement, without his or her consent?  What are the call coverage obligations?  Will the physician be authorized to moonlight, or take on medico-administrative responsibilities, such as medical or service line director positions?  In the end, the physician and the employer group should have a clear, mutual understanding of the employee’s day-to-day duties on behalf of the group.
  • Compensation – Even something as simple as a guaranteed base salary can be complicated in fact, so particular attention should be paid to all aspects of the compensation arrangement.  Beyond base salary, as we have previously described, it is critical to understand fully how compensation may be calculated, such as where compensation is based on wRVUs.  It is also important to understand how other aspects of compensation may work, such as bonus calculations (e.g., are bonuses prorated for partial years?), medical or service line director fees, speaking fees or honoraria, expert witness fees, royalties, etc.
  • Benefits – For the most part, employee benefits will not be controversial, as the employer is likely to have a standard package of benefits (health, dental, disability and perhaps group life insurance, pension/profit-sharing plan, etc.) for all physician employees.  However, benefits may also encompass non-standard items, and it is important for the employee to make sure that all promises made by the employer are included in the written employment agreement; this could include items such as use of a company car (or, alternatively, an automobile allowance), purchase and/or use of a smart phone (including monthly service fees), support services (e.g., physician extenders), etc.  Maternity/family leave may also be an important issue to pin down, during negotiations.
  • Restrictive Covenants – Typically, the post-acquisition physician employment agreement will contain several types of covenants – – (i) a covenant not to compete, which would keep the physician from practicing medicine within a certain geographical area for a certain period of time, following termination of employment; (ii) a no-pirating covenant, which would keep the physician from soliciting or employing the practice’s other employees following termination; (iii) a non-solicitation covenant, which might be aimed at post-termination solicitation of patients, or referral sources, or both; and (iv) confidentiality and non-disclosure covenants, which might also deal with access to patient medical records following termination of employment.  Each of these covenants should be understood fully by the physician, so that there are no surprises down the road, should the employment arrangement not work out as planned.  Also, any necessary exceptions to the covenants (e.g., maintaining privileges at a particular hospital or surgery center) should be hammered out up front.  [NOTE:  Some states prohibit the use of non-compete agreements as applied to physicians, primarily for public policy reasons, although this is less common where the non-compete agreement is made in conjunction with the sale of the medical practice.]
  • Termination – We have previously discussed the importance of the termination provisions in a physician employment agreement.  On the front end, the physician should be clear on the different types of terminations (with cause, without cause, non-renewal), and, related specifically to termination for cause, the objective (e.g., loss of license or DEA number) or subject (e.g., engaging in any act detrimental to the best interest of the employer) nature of the specific grounds for termination.   The physician should also understand precisely what consequences attach to each type of termination:  Will accrued but unpaid bonuses be forfeited if the physician resigns or is fired for cause?  Who pays for tail coverage?  Will all of the restrictive covenants apply, if the physician is terminated without cause by the employer?
  • Dispute Resolution – Many physician employment agreements contain an arbitration, mediation or other form of dispute resolution, which may restrict the parties’ ability to go directly to court, should a contract dispute occur.  While there is typically not a lot of back and forth concerning these dispute resolution provisions, it is important for the physician to understand the dispute resolution process:  Which issues require arbitration or mediation?  Who pays the costs?  Where does the arbitration or mediation take place?  What rules apply?  Is the arbitration or mediation binding on the parties, or just a preliminary step before a suit is filed?
  • Post-Termination – Dealing with obvious post-termination issues is better done prior to the start of the employment arrangement, rather than in real time at the end of that relationship, when emotions can run high and the “practice acquisition euphoria” has worn off.  So, it pays to negotiate the basics into the employment agreement up front:  What degree of cooperation is required between the parties, following termination?  What happens if the employer is hit with a recoupment action by a payor, based on the coding practices of the employee prior to termination?  Who pays for tail coverage?  how are medical records handled?

The Bottom Line:  While it is certainly important to focus on the purchase price and payment terms, where the physician is selling his or her medical practice, it is just as important for the physician to focus on the post-acquisition employment relationship, so that, in the years following the acquisition, the physician can enjoy both the proceeds of the sale of the practice and the post-acquisition employment arrangement.

By: Kara M. Maciel and Matthew Sorensen

Social media has become an increasingly important tool for businesses to market their products and services.  As the use of social media in business continues to grow, companies will face new challenges with respect to the protection of their confidential information and business goodwill, as several recent federal district court decisions demonstrate.   

Christou v. Beatport, LLC (D. Colo. 2012),  Ardis Health, LLC v. Nankivell (S.D. N.Y. 2011), and PhoneDog v. Kravitz (N.D. Cal. 2011) each involved former employees who took the login credentials for their employers’ business social media accounts when they left their employment.  In each case, the companies alleged that the removal of the login credentials for their social media accounts by their former employees had significant negative consequences on their ability to effectively compete and market their products and services.

Earlier this year, the U.S. District Court for the District of Colorado addressed whether a nightclub owner’s MySpace page and its connections could constitute a protectable trade secret.  In Christou v. Beatport, LLC, Bradley Roulier, a former partner in a business that ran two Denver nightclubs kept the login credentials for the clubs’ MySpace pages when he left the partnership to start his own competing nightclub.  According to the complaint, the nightclubs’ MySpace pages each had over 10,000 “friends.”  After leaving to start his own competing club, Mr. Roulier used the login credentials that he had taken to post updates to his former partner’s MySpace pages promoting his new night club.  His former partner then sued him for misappropriation of its trade secrets – namely the login credentials for its MySpace pages and the “friend” connections for those pages.  On Mr. Roulier’s motion to dismiss, the court found that the MySpace login credentials and the “friend” connections could constitute protectable trade secrets.  The court concluded that the MySpace pages were password protected, that the “friend” connections for the clubs’ MySpace pages were more than just lists of potential customers, they also provided personal information about the “friends” and their preferences, and the clubs’ lists of “friends” could not be duplicated without a substantial amount of effort and expense.

In a similar case, Ardis Health a former employee effectively froze her former employer out of its business social media websites by taking the login credentials for the accounts and refusing to return them to the former employer.  The employee had formerly been responsible for creating and updating the company’s social media websites and was in sole possession of the login credentials for those websites at the time her employment was terminated.  Accordingly, when she refused to return the login credentials after her termination, the employer could no longer access or update its websites.  The employer was ultimately able to obtain a preliminary injunction requiring the former employee to return the login credentials for its social media websites based on the theory that the former employee’s unauthorized retention of that information constituted conversion.  In finding that the company owned the rights to the login credentials for its social media sites, the court noted that the former employee had entered an agreement in which she had agreed that any work she created or developed during her employment would be the property of the company.

Finally, in PhoneDog, a former employee who had been responsible for establishing and operating a Twitter account for his employer that was designed to increase traffic to his employer’s website kept the login credentials for the account after he terminated his employment with the company, renamed the account, and kept its Twitter following.  PhoneDog alleged its Twitter following was the equivalent of a proprietary customer list.  PhoneDog also alleged that, by taking the account, the employee effectively decreased the number of visitors to the company’s website and thereby reduced the number of advertisers who were willing to purchase space on its website.  On the former employee’s motion to dismiss, the U.S. District Court for the Northern District of California held that the Twitter account, its login credentials, and its followers could potentially constitute protectable trade secrets and that the unauthorized taking of the account and its login credentials constituted misappropriation. 

It should be noted that the courts in both PhoneDog and Christou did not find that the plaintiffs had established that their social media accounts were trade secrets.  Rather, the courts simply held that they had alleged sufficient facts to state a claim that those accounts were trade secrets.  The question of whether the employers will be able to prove the facts necessary to prevail on their claims was left open and both plaintiffs may very well encounter difficulties in proving the facts necessary to prevail on their trade secrets claims later in their respective cases.

These cases demonstrate the importance of careful planning to protect a company’s social media presence and its business connections.  Employers should ensure that they maintain a log of their social media account login credentials and that the log is appropriately updated.  Further, companies are well advised to require employees who establish and maintain such accounts on behalf of the company to enter agreements that provide that the accounts and their login credentials are the sole property of the company.  Departing employees should also be interviewed in connection with their exit to ensure that all company social media login credentials to which they had access have been returned.  Finally, in the event that an employee takes the login credentials for the employer’s social media accounts when he or she leaves the company, it is essential for the employer to take prompt action to recover the information.  Delay can result in the loss of legal protections for the accounts and any connections that they hold.