A recent decision by the New Jersey Supreme Court has sent a clear message both to employers and to employees who decide to depart in order to compete with their former employers. In Lamorte Burns & Co. v. Walters, et al., which was decided on May 14, 2001, the New Jersey Supreme Court considered the actions of two employees who worked as maritime insurance claims adjusters for a company in the business of investigating and adjusting claims for liability insurers. The employees went into their office on a Saturday afternoon and proceeded to copy client lists and other information, including information about specific pending claims, and, on that same Saturday afternoon, faxed their letters of resignation to the company president’s private office. The two former employees then spent Sunday faxing solicitation letters to their former employer’s clients, requesting that the clients sign forms authorizing the transfer of the clients’ claim files to their new firm, which then opened its doors on Monday morning in direct competition with the former employer, and with as many as 33 of its former clients.

In reversing a decision which had been rendered by the Appellate Court, which had raised a question as to whether the information which had been taken was legally protectable as confidential and proprietary information, the Supreme Court held that information, although otherwise publicly available or independently obtainable (by, for example, calling insurance companies or property owners, as the former employees argued could be done in this case) need not rise to the level of a trade secret in order to be protectable. Rather, the Supreme Court held that the key to determining whether information has been misused is the nature of the parties’ relationship at the time of the disclosure of information and the intended use of the information. The Court found that the information which had been provided to the former employees during the course of their employment had been provided to them for the sole purpose of servicing the company’s customers and was thus legally protectable as confidential and proprietary information, even in the absence of an enforceable signed employment agreement mandating that proprietary data and other confidential information obtained during the course of employment is the exclusive property of the company and is to be maintained in confidence. The Court also held that while an employee has the right to make appropriate preparations to start a competing business, while he is still employed he may not breach the duty of undivided loyalty which he owes to his employer by, for example, soliciting the employer’s customers or by engaging in other acts of "secret competition." Based upon a finding of the breach of that duty of loyalty, and the Court’s further holding that the former employees’ conduct had tortuously and maliciously interfered with the employer’s prospective business relations and economic advantage, the Supreme Court reinstated the trial court’s judgment which had awarded the employer the sum of $232,684.00 in compensatory damages and $52,816.00 in punitive damages.

If you have any questions about these or any other employment-related matters, call any of the attorneys in our Employment Law Group at (201) 487-3800.