Wayman Fire Protection, Inc. v. Premium Fire & Security, LLC, C.A. No. 7866-VCP (March 5, 2014).

Why is this decision important?  In this post-trial opinion, the Court found that a former employee and his current employer were liable under the Delaware Misuse of Computer Information Act, as well as claims for conversion and breach of fiduciary duty of loyalty.  This opinion is noteworthy for the discussion of damages and in particular the creative remedies the Court implemented for the wrongful conduct.  A previous discussion of this case can be found here.

Background

This is a theft of corporate property action arising from the alleged possession and misuse of a fire alarm and fire protection company’s proprietary information by certain of its former employees.  When plaintiff, Wayman Fire & Protection, Inc. terminated the employment of defendant Robert Weitzel, Weitzel began working for Jeff Donnelly, who formed defendant Premium Fire, also a fire alarm and fire protection system business and made Weitzel President of Premium Fire.  Weitzel’s severance agreement from Wayman did not contain either a noncompetition or non-solicitation provision.  Weitzel then hired defendants Robert White, Craig Fox and Ryan Williams, whom Weitzel had worked with while he was employed at Wayman.  Those individuals, without authorization, deleted files from Wayman’s computers, and copied proprietary information and trade secrets for the purpose of bringing that information to Premium Fire.

Wayman had installed a fire control system at Doylestown Hospital.  When Weitzel went to work for Premium Fire in August 2011, Weitzel solicited Doylestown for upgrade work Doylestown needed on behalf of Premium Fire.  While Wayman and Premium Fire both bid for the Doylestown upgrade project, Premium Fire was hired over Wayman.  In 2012, Craig Fox, who also worked at Wayman before he came to Premium, uploaded information from his Wayman computer and took it with him to Premium Fire.

While he was employed at Wayman, Fox used an external hard drive to back up the files on his Wayman laptop.  Although Fox was instructed not to bring any information from Wayman with him to Premium Fire, within a week of starting at Premium Fire, Fox uploaded the contents of the external hard drive onto his Premium Fire laptop.  Shortly after the upload was complete, Fox told Weitzel what he had done, and in response, Weitzel asked Fox if he had any information related to another Wayman client for which Premium Fire was preparing an inspection bid. Of the approximately 17,000 documents that Fox copied while at Wayman and uploaded onto his Premium Fire laptop, two categories were the focus of this dispute: (1) a contacts report, and (2) a sales opportunity report, both of which were generated by Salesforce.com a “customer relations management tool” that Wayman used to store data such as contact information, sales information, and proposal information for each of its customers.  The “contacts report” contained the names, addresses, and phone numbers for Wayman’s “point person” at each of its clients.  The “opportunities  report” contained information regarding Wayman’s potential business prospects, including the location and nature of the job and Wayman’s assessment of how likely it is to secure the project.

Access to the contacts report and the sales opportunity report on the Salesforce website was password protected on the Salesforce side.  Wayman Salesforce users were required to change their password every 30–60 days.  These security measures were a part of the Salesforce service itself and were not implemented specifically by Wayman.  Apparently, Wayman took no additional steps to protect the information it inputted into Salesforce beyond the security that was built into the software.  After Wayman lost the bid for the Doylestown work, it filed an action for tortious interference, misappropriation, conversion, breach of fiduciary duty, conspiracy and a violation of the Delaware Misuse of Computer System Information Act.

Tortious Interference Claim Rejected

The Court rejected Wayman’s tortious interference claim because Wayman failed to prove either: (1) that it had a reasonable probability of a business opportunity or prospective contractual relationship; or (2) the existence of proximate cause.  The Court noted evidence of Wayman’s inability to meet the project’s most basic requirement (i.e., demonstrating an adequate understanding of the scope of work being sought) was fatal to its assertion that its expectation of procuring the upgrade project was reasonable.

Delaware Uniform Trade Secrets Act

Under the Delaware Uniform Trade Secrets Act (“DUTSA”), Wayman had to prove, among other things, that a trade secret existed, i.e., that there was commercial utility or value arising from secrecy and that there were reasonable steps taken to maintain secrecy.  The Court analyzed whether either of the “contacts report” or the “opportunities report” derived independent economic value by virtue of the information not being generally known to and not being readily ascertainable by proper means by others.  The Court found that while Wayman had established that the opportunities report satisfied that criterion, it found that Wayman had not shown that the contact list did.  In particular, the “opportunities report” identified both the company’s prospective business opportunities as well as projects that the company has secured.  It also included valuable information including how much Wayman had bid on certain projects and how Wayman became aware of the opportunity. The Court also noted that “it does not appear that these opportunities are generally known [or] that a potential competitor to Wayman could produce the same list of opportunities without spending significant time and money to develop an existing customer base and solicit new business.”

With respect to the “contacts list,” the Court stated that:

The market of the product or service involved is the main factor in determining whether a client list constitutes a compilation deriving independent economic value from not being generally known by other persons who can obtain economic value from its disclosure or use. If the buyers are easily identified, it is unlikely that their identities will hold independent economic value even when the identities are considered confidential.

In determining whether Wayman “would lose value and market share” if Premium Fire could thus “enter the market without substantial development expense,” the Court found that Wayman had not carried its burden of proving that the identities of its customers cannot be easily determined because “[t]he majority of Wayman’s clients, such as hospitals, commercial buildings, hotels, and multi-family residential structures, are obvious potential clients to a competitor in that same industry.”

Reasonable Efforts to Maintain Secrecy Not Met

The Court also noted that neither the contacts report nor the opportunities report constituted a protectable trade secret under DUTSA because Wayman had not shown that the reports were the “subject of efforts that are reasonable under the circumstances to maintain [their] secrecy.”  Wayman argued that access to the Salesforce documents was password protected, only a limited number of employees were given Salesforce passwords, and those with passwords were required to change their passwords every 30–60 days.  However, the Court rejected that argument noting that in prior trade secrets cases, the Court had found that reasonable efforts were taken to preserve confidentiality when a company had implemented specific policies (such as a provision in the employee handbook notifying employees of the sensitive nature of the proprietary information and prohibiting them from disclosing that information while employed or after employment was terminated), to prevent disclosure of information to outsiders or that the company was in an industry where custom dictated that certain information be kept confidential.  In short, the Court found that Wayman had not shown that, in terms of the Salesforce documents, it had used any reasonable measures to protect the confidentiality of such documents in a meaningful way, except for password protecting the Salesforce portal.

Wayman Succeeds on Claim for Misuse of Computer System Information Act

Under Delaware Misuse of Computer System Information Act, 11 Del. C. § 935, a person is liable for misuse of computer system information when:

(1)  As a result of accessing or causing to be accessed a computer system, the person intentionally makes or causes to be made an unauthorized display, use, disclosure or copy, in any form, of data residing in, communicated by or produced by a computer system;

(2)  That person intentionally or recklessly and without authorization:

a.  Alters, deletes, tampers with, damages, destroys, or takes data intended for use by a computer system; or

b.  Interrupts or adds data to data residing within a computer system;

(3)  That person knowingly receives or retains data obtained in violation of paragraph (1) or (2) of this section; or

(4)  That person uses or discloses any data which that person knows or believes was obtained in violation of paragraph (1) or (2) of this section.

 The Court found that White was liable for computer misuse under Section 935(1) because White was in possession of unauthorized copies of certain of Wayman’s files when he resigned from the company.  White intentionally copied files from Wayman’s computer system, and uploaded those files onto his Premium Fire laptop. Wayman never authorized White to make copies of its files for such use. White deleted the 390 files from the Wayman laptop he used on his last day of employment on November 30, 2011.  Many of the files that were deleted from the Wayman laptop also were found on White’s Premium Fire laptop and White’s flash drives.  The Court found that it was more likely than not that White deleted those files from the Wayman laptop, without authorization, in contravention of Section 935(2)(a).

In that regard, the Court also noted that Cinquanto testified that White was in possession of Doylestown files that had been modified, which further supports inference of use.  The Court did not conclude that White deleted those files with an intent to injure Wayman, or was motivated by ill-will or hatred towards the company.

 The Court found that Premium Fire was liable for computer misuse under Section 935(3) and 935(4).  Both White and Fox uploaded Wayman’s files onto their Premium Fire laptops. Weitzel, Premium Fire’s President, became aware that Fox uploaded Wayman information onto his computer shortly after Fox began working for Premium Fire in February 2012, and became aware that White was in possession of those files shortly after this lawsuit was commenced in September 2012.  Weitzel did not ask either Fox or White to destroy, delete, or return the Wayman files they had brought with them. Therefore, Premium Fire has knowingly “retained” Wayman’s files in contravention of Section 935(3).

The Court also found that Premium Fire was liable for computer misuse under Section 935(4) because its employee and agent, White, improperly used Wayman’s computer information.  In addition, Weitzel was individually liable under the misuse statute because he knew about Fox and White’s possession of Wayman’s property and failed to ensure it was returned to Wayman and not used.  However, the Court did not find that that Weitzel acted maliciously by failing to take any curative actions once he learned that White also was in possession of Wayman property.

Breach of Fiduciary Duty of Loyalty

While White was not a “key managerial employee” of Wayman such that he would have owed general corporate fiduciary duties to the company, the Court found that White was Wayman’s agent and he owed duties to Wayman under principles of agency law. Under Delaware law, the relationship of agent to principal does not itself give rise to fiduciary duties.  However, where an agent represents a principal in a matter where the agent is provided with confidential information to be used for the purposes of the principal, a fiduciary relationship may arise.

A key point of disagreement between the parties in this case was who “owned” the files that White copied from Wayman and used during the course of his job at Premium Fire. Wayman argued that it owned the files that it developed for its customers to make their fire control systems operational.  Defendants argued that the files were owned by the customer for which they were designed.  The Court agreed with Wayman finding that it was Wayman who owned the program files at issue.  In addition, because over the course of his tenure at Wayman, White was exposed to, helped create, and was often responsible for, a number of such program files, the Court found that White owed Wayman a duty of loyalty with respect to the confidential information that Wayman entrusted to him.

The Court also found that White copied files from Wayman’s Dropbox account on November 27 and 28, 2011, less than a week before he left the company and he continued to back up his Wayman files on his flash drive after he accepted a position with Premium Fire and after he gave Wayman notice that he would be resigning.  Not only did White continue to back up the files on his flash drive, but his purpose in doing so was to have those files available to him when he began working for Premium Fire. Therefore, the Court found that White misused Wayman’s confidential information, in breach of his duty of loyalty, when he, at a minimum, backed up Wayman files on his flash drive for the purpose of having them at his disposal when he began to work for Premium Fire, a direct competitor of Wayman.  In addition, the Court found  that White actually used the confidential information he copied near the end of his employment at Wayman while he was working for Premium Fire.

Conversion

Wayman asserted that White converted its program files by copying and deleting files from his Wayman laptop in the last few days of his employment.  The Court found that White used at least some of the program files he had copied from Wayman and taken with him to Premium Fire during his tenure there.  White’s modification and use of some of the program files at issue also constituted a denial of Wayman’s rights to utilize its files for similar purposes.  White and his employer Premium Fire wrongly “exercise[d] dominion” over Wayman’s property in a manner that was inconsistent with Wayman’s rights over the property.  Moreover, in copying Wayman’s information, putting that information on his Premium Fire laptop, and using some of the information during the course of his employment at Premium Fire, Fox exercised dominion over Wayman’s property in a manner that was inconsistent with Wayman’s rights over that property.  Because Fox took those actions in the course of his employment with Premium Fire, and because Weitzel likely was aware that Fox was in possession of some of Wayman’s property, the Court found that Premium Fire was liable for the tortious actions of its employee.

Civil Conspiracy

Wayman also asserted that Premium Fire and Weitzel conspired with White and Fox to steal computer files from Wayman and to retain and use those files improperly for the purpose of competing unfairly with Wayman.  However, the Court found that there was no “meeting of the minds” in terms of a conspiracy and that “[d]efendants, and in particular Weitzel,  may  have  been careless in how they handled the arrival of former Wayman employees at Premium Fire.  However, the Court did find that Wayman proved the existence of a civil conspiracy claim against Fox.  When Weitzel became aware of Fox’s possession of Wayman property and he asked Fox if he had any information regarding an entity that Premium Fire was going to pitch, the Court found that there was a “meeting of the minds” between Fox and Weitzel.

Defendants’ Violation of the Preliminary Injunction

On November 19, 2012, the Court  granted a preliminary injunction, enjoining the defendants from soliciting Wayman’s customers and “further misappropriating, using, or disclosing” any of Wayman’s proprietary or confidential information.  At trial, the defendants conceded that they repeatedly violated the terms of the preliminary injunction.  The Court characterized the defendants’ behavior as “reckless,” “self-serving,” and “contumacious,” and found that Wayman was entitled to recover the attorneys’ fees and expert expenses it incurred in connection with obtaining and trying to enforce the preliminary injunction.  The Court noted that the absence of consequential, competitive damages incurred by Wayman did not preclude the Court from using its powers to enforce the orders that it issued or from imposing meaningful sanctions by way of fine, for example, on Defendants for violating the preliminary injunction.  The Court also found Defendants in contempt for their repeated violations of the preliminary injunction.

Damages And Equitable Relief

Because Wayman prevailed to at least some extent on its computer misuse, conversion, duty of loyalty, and conspiracy claims, the Court awarded  damages and equitable relief.  For the computer misuse and conspiracy claims, under Section 941(a), the Court entered an injunction prohibiting defendants  from  using  Wayman’s  electronic  files  and  the  confidential  information contained in them for one year.  Under Section 941(b), the Court awarded nominal “$1 in nominal damages for each of the 17,390 files that Wayman proved were taken by defendants. Under Section 941(c), because Wayman did not prove that any defendant acted wilfully and maliciously in violating the computer misuse statute, the Court found that Wayman was not entitled to treble damages.  However, the Court did find that Wayman was entitled to actual damages which included costs associated with the two forensic experts Wayman hired, but the Court did not award Wayman all of the costs Wayman incurred for both experts.

While the Court awarded all of the costs for one of Wayman’s forensic experts, it only awarded one-half of the costs Wayman incurred for a second expert, Digital Legal, because the Court found that:

 It is entirely unacceptable that Digital Legal was working for both sides during the discovery process without having obtained the parties informed consent in advance.  Although it is unclear when Wayman became aware of this fact, the situation is highly problematic and raises serious concerns about the integrity of the discovery process in this case while Digital Legal was working for both sides at the same time without, at least, Premium Fire’s knowledge.  I do not consider it either fair or reasonable, therefore, to require Defendants to incur the entire cost of Wayman’s Digital Legal-related fees and expenses. Therefore, Wayman  is entitled to an award of only 50% of any expenses it incurred related to its interactions with Digital Legal.

 For Wayman’s unjust enrichment claim with respect to the Doylestown upgrade project, because the Court concluded that Premium Fire did not tortiously interfere with Wayman’s expectancy in the upgrade project and that Wayman failed to prove that it would have been awarded the Doylestown contract but for Premium Fire’s use of improper means, including the use of Wayman’s SDU program files, in relation to that project, the Court found that Wayman was not entitled to actual damages in the form of lost profits from the Doylestown upgrade project.  While the Court found that even though Wayman satisfied all of  the elements of unjust enrichment: (1) an enrichment; (2) an impoverishment; (3) a relationship between the enrichment and the impoverishment; (4) lack of a justification; and (5) the absence of a remedy at law, the Court found that it was difficult to quantify the amount of the unjust enrichment under the circumstances of this case.  The Court determined that Premium Fire was unjustly enriched through its use of Wayman’s Doylestown file and that having the program file could  reduce costs 10–15%, so the Court determined that Premium Fire saved almost $70,000, so that was the amount that the Court awarded in damages for unjust enrichment based on Defendants’ misuse of Wayman’s computer information.

In addition, under Section 941(e), the Court awarded reasonable costs and reasonable attorneys’ fees to the prevailing party.  The Court found that approximately 35% of Wayman’s case was devoted to prosecuting the computer misuse claim, so it awarded Wayman 35% of the attorneys’ fees and expenses it reasonably incurred in this litigation.

For White’s breach of his duty of loyalty, the Court found that because White was jointly and severally liable for the relief the Court awarded to Wayman for its computer misuse claim, and because the relief the Court awarded Wayman on that claim addressed the same wrongdoing that serves as the basis for Wayman’s breach of loyalty claim (i.e., the unauthorized copying, use, and disclosure of Wayman’s confidential information), the Court held that Wayman was not entitled to an award of additional damages for White’s breach of his duty of loyalty.

Finally, with respect to the relief regarding the preliminary injunction, because the Court determined that defendants repeatedly violated the “letter and spirit” of the Court’s order, the Court found that defendants were jointly and severally liable to reimburse Wayman for the reasonable attorneys’ fees and expenses it incurred for: (1) the negotiation, preparation, and implementation of the Preliminary Injunction; and (2) the selection, engagement, and services of the third-party neutral.  The Court stated:

Defendants’ disregard for the Preliminary Injunction demonstrated an egregious lack of respect for the Court’s order and appreciation of the resultant imposition on the resources of the Court. In circumventing the process set forth in the Preliminary Injunction through their conduct, Defendants effectively nullified the efforts and resources expended by the Court and Wayman to establish and maintain the third-party neutral process. Therefore, because Defendants have abused the good offices of the Court and wasted valuable time and judicial resources in the process, I also order Defendants to pay a fine of $10,000 for their contempt, payable to the State of Delaware, to the Register in Chancery.