4 minute read | March.25.2019
Consider this: a former employee has just left his or her employer and may have taken trade secrets to a competitor. Can the employer log in to that former employee’s personal social media account to search for potentially incriminating evidence? For most employers, the answer may be “no,” as doing so may be unlawful or at a minimum, may constitute “unclean hands” (a doctrine barring equitable relief when the party seeking the relief has committed misconduct related to the claims at issue) possibly jeopardizing the employer’s trade secret misappropriation (and other claims) against the former employee.
Well, you may be shocked to hear the answer is not necessarily, “no” at least according to a divided panel of the Third Circuit. On February 25, 2019, Third Circuit held in Scherer Design Group v. Ahead Engineering LLC, that the unclean hands doctrine did not bar an employer’s claims against its former employee for inter alia, trade secret misappropriation even though the employer had installed and used software that surreptitiously monitored its former employee’s Facebook activity. The Third Circuit affirmed U.S. District Court for the District New Jersey’s decision granting a preliminary injunction. One must now consider how far an employer can go to protect their trade secrets and when does it cross the line into impermissible conduct.
The dispute arose when defendant Chad Schwartz, a senior director of engineering, left Scherer Design Group (“Scherer”) (an engineering firm specializing in wireless communications), after plans for him to take an ownership interest in the company didn’t materialize. Schwartz had allegedly told Scherer during negotiations that if he was not made an owner in the business, he would start a competing engineering firm. In response, Scherer asked Schwartz to sign a noncompete agreement, and Schwartz declined. Shortly after leaving, Schwartz started two businesses that competed with Scherer — Ahead Engineering LLC and Far Field Telecom LLC — and hired co-defendants Daniel Hernandez, Kyle McGinley, and Ryan Waldron away from Scherer to work at his new companies.
Following the departure of these employees, Scherer’s network administrator inspected Hernandez’s company-issued laptop and gained access to his Facebook account (according to Scherer) because his Hernandez had left his computer logged into Facebook. The parties disputed whether “whether Hernandez truly logged out of his Facebook account such that it should have been inaccessible to [Scherer’s network administrator].” Notwithstanding, the network administrator then installed software that allowed the company to monitor Hernandez’s Facebook activity without being detected, something the administrator did “very often.” Hernandez’s Facebook activity apparently revealed communications among the defendants concerning their alleged plans to take Scherer’s client information and intellectual property for the benefit of their new endeavor.
Scherer sued, asserting, among other things, claims for trade secret misappropriation under state and federal law. In response to Scherer’s request for a preliminary injunction, the defendants argued that injunctive relief was inappropriate based on the doctrine of unclean hands. Specifically, they argued that Scherer’s conduct had violated Hernandez’s privacy.
The U.S. District Court for the District of New Jersey disagreed, granting the preliminary injunction against defendants, preventing them from contacting Scherer’s clients. The Third Circuit affirmed. In so doing, the Third Circuit recognized that the party seeking to invoke unclean hands must establish that the opposing party committed an unconscionable act, and that the act is related to the claim upon which equitable relief is sought. It further noted that application of the doctrine to bar injunctive relief was not “automatic or absolute.” Rather, the unclean hands doctrine is just one of the factors a court must consider in deciding whether to grant injunctive relief. Apply that standard here, the Third Circuit held that “on balance” it was not convinced that the unclean hands should bar Scherer’s right to pursue injunctive relief.
The dissent stands in stark contrast to the court’s decision and raises some worthwhile questions regarding privacy for employers to consider. In a vigorous dissent, Judge Ambro cited what he believed was a clear violation of New Jersey privacy law, arguing that Scherer “went on an external fishing expedition rather than merely conducting a review of activity on its own physical assets” and that the district court and the majority failed to take this into account in their unclean hands analysis.
This is surely not the last time that an employer will avail itself of access to a departing employee’s social media account as an investigative tool in a trade secrets case. And because the law in this area is far from settled, employers may want to treat any arguably personal communications involving current or former employees with extreme caution and should loop in counsel for advice on privacy laws, which vary significantly across jurisdiction.