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Lamorte Burns & Co., Inc. v. Walters

167 N.J. 285, 770 A.2d 1158 (2001)

EMPLOYER-EMPLOYEE; NON-COMPETITION—While the court respects the principles of free competition, an employee’s taking of an employer’s confidential and proprietary information and then using it to target the employer’s clients is contrary to the notion of free competition that is fair.

Two employees of an insurance investigation and adjustment firm, during their employment at the company, secretly incorporated a new business that would directly compete with their employer. They also compiled a list of the company’s clients together with contact information and information related to specific pending matters. On a Saturday morning, the two individuals cleaned out their offices and faxed their resignation letters to the company’s president. The next morning, they began to send out solicitation letters to their former employer’s clients. In less than three weeks, all of the solicited clients had transferred their business from the former employer to the newly formed company. The former employer filed suit against one of the individuals for breach of his employment agreement and against both individuals under various tort theories (breach of duty of loyalty, tortious interference with economic advantage, misappropriation of confidential and proprietary information, and unfair competition). The lower court granted summary judgment to the former employer on both the contract claim and on each of the tort claims. On appeal, the Appellate Division affirmed the breach of contract claim but reversed the lower court’s decision with respect to the tort claims. The Appellate Division reasoned that there were material facts in dispute, that is, that the two individuals were never told that the information they were taking was confidential and proprietary. The former employer appealed, arguing that the information taken from the former employer was confidential and proprietary and the behavior of the two individuals was unacceptable business competition. The Supreme Court first reviewed whether the information taken (e.g., the client lists and case information) was legally protectable information. The taking of the information was in direct contravention of the terms of the one employee’s employment agreement. The Court also recognized that “information need not rise to the level of a trade secret to be protected.” In fact, the Court recognized that certain information may nonetheless be protectable even when it may be publically available. On these bases, the Court held that “the specific information provided to the [two individuals] by their employer, in the course of employment, and for the sole purpose of servicing [the employer’s customers], [was] legally protectable as confidential and proprietary information.” Having concluded that the information taken was legally protectable, the Court then looked to resolve the breach of loyalty claim. It recognized that “although an employee has the right to make preparations to start a competing business, the employee may not breach the undivided duty of loyalty he or she owes to his or her employer while still employed by soliciting the employer’s customers or engaging in other acts of secret competition.” Based on the record, the Supreme Court agreed with the lower court that the two individuals had breached their duty of loyalty to their employer. Here, the two individuals “purloined protected information from [employer’s] . . . claim files while still employed, for the sole purpose of effecting an advantage in competing with [employer] immediately upon their resignation and the commencement of their new competitive business.” With respect to the tortious interference claim, the Court recognized that in order for a plaintiff to prove its claim, “plaintiff must show that it had a reasonable expectation of economic advantage that was lost as a direct result of defendant’s malicious interference, and that it suffered losses thereby.” Here, the two individuals used their employer’s “protected information to effect a surprise weekend coup, secretly soliciting [their employer’s] clients at a time when [their employer’s] knowledge of their competition was delayed, to put a best light on the tactic.” On these facts, the Court held that “we respect the principles of free competition, but defendant’s taking of [employer’s] confidential and proprietary property and then using it effectively to target plaintiff’s clients, is contrary to the notion of free competition that is fair.”

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