Consider Liquidated Damages to Deter Employees From Misappropriating Company Information

It is not unusual for employment agreements to mandate that when an employee leaves a company, whether voluntarily or by termination, he or she must return all company information. As the employer in EventMonitor v. Leness recently learned, however, relying on the courts to enforce such an obligation is risky, at best.

In 2001, EventMonitor hired Anthony Leness, and the two entered into an employment agreement. Under the terms of that agreement, Leness was entitled to one year’s worth of salary and benefits if he was terminated without cause. The agreement also provided that upon his termination, Leness would return “all items containing or embodying Proprietary Information (including all copies).”

More than six years later, EventMonitor terminated Leness without cause and began paying him his severance. Thereafter, a forensic analysis of Leness’s laptop appeared to indicate that two months prior to his termination, Leness had uploaded to a private Carbonite site data that included information that met the definition of “proprietary” under the employment agreement. Further, it appeared that Leness had downloaded a computer cleaning program onto his laptop that was designed to erase evidence of the Carbonite account.

Once EventMonitor learned all of this, it retroactively changed Leness’s termination to “for cause” and ceased making additional severance payments. After Leness threatened to sue if EventMonitor did not reinstitute the post termination payments, EventMonitor beat him to the punch by filing a claim for breach of contract in the superior court.

The key legal issue in the case was not whether Leness had breached the employment agreement, but whether such breach was material. In this regard, and as the Supreme Judicial Court later noted:

A breach of a contract is a material breach when it involves “an essential and inducing feature of the contract.”

In addressing this issue, the SJC noted that while the trial judge did not believe Leness’s justification for uploading the confidential information to the Carbonite site (i.e., that Leness felt that the company had inadequate backup procedures), there was no evidence that Leness had disclosed EventMonitor’s confidential information to anyone. As such, the SJC ultimately ruled that because Carbonite was a secure site, “Leness’s breach did not endanger the confidentiality of the EventMonitor’s information, [and] the breach was not material.”

While the decision is not entirely clear, it appears that EventMonitor either did not attempt to or could not prove any damages based on the mere failure to return the proprietary information. As a result, a judgment in Leness’s favor was entered on EventMonintor’s breach of contract claim, and that judgment was affirmed by the SJC.

In hindsight, there are a variety of ways that EventMonitor might have avoided the negative result it obtained. One of the simplest ways would have been by inserting into the employment agreement a provision that Leness was obligated to pay liquidated damages if he failed to return all of the company’s proprietary information. While, as I have written previously, such a clause would not automatically be enforceable, even if it were not, the specter of liquidated damages might very well have deterred Leness from uploading any company information to Carbonite.

So next time you are trying to protect your company’s confidential information, do not forget to consider using a liquidated damages clause as a way to do so.

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