Employee Misuse of Confidential Information
The Arizona Supreme Court’s ruling in Orca v. Noder opens the door for employers to make
claims of unfair competition against employees who misuse the company’s confidential information.
In our January 2014 article, Restrictive
Covenants in Employment Agreements, we wrote about the Arizona Court of
Appeals ruling in Orca v. Noder. That case made its way to the Arizona
Supreme Court, which last month issued its own opinion.
Although this new opinion did not affect the lower
courts reasoning regarding restrictive covenants, the Supreme Court did insert
its own reasoning with respect to an issue of increasing importance in disputes
between business owners and their former employees: unfair competition based on
What the Supreme Court Has Taught Us in Orca
The Orca case involved an ex-employee (Noder) of
a public-relations firm (Orca Communications). Orca alleged that Noder left with
knowledge of confidential information (e.g., financial information, customer
information, vendor information), set up a competing business, and used that
confidential information to Orcas detriment. The trial court dismissed all of
Orcas claims, including claims based on the use of confidential information,
which the court held were displaced by Arizonas Uniform Trade Secrets Act.
In light of the Arizona Supreme Courts Orca
opinion, we now know that the trial court erred by dismissing Orcas claims that
relied on allegations that its former employee misused confidential information.
Those claims claims for breach of fiduciary duty, tortious interference with
business expectancies, and unfair competition should have survived.
The Supreme Court opinion affirms that, even if
confidential information is not a trade secret as defined by Arizonas Uniform
Trade Secrets Act, it could still be confidential information protected by
Arizona law. The Act controls only confidential information that rises to the
level of a trade secret; other kinds of confidential information will be
governed by other statutes or by Arizona common law.
The Supreme Court refused to declare whether Orca
actually had a viable common-law unfair competition claim, explaining that
discovery and further litigation would be needed to ascertain all the facts.
However, by citing several sources that Arizona courts use as common-law guides
(namely, the Restatement of Torts and the Restatement of Agency), the Supreme
Court seems to suggest that it is possible, depending on the facts of the case,
to bring a common-law unfair competition claim based on an employees alleged
misuse of confidential information.
For employers, Supreme Courts Orca opinion means that,
at the very least, employers that have been injured by a former employees use
of confidential information are not without recourse, even if that confidential
information is not technically a trade secret. In such cases, employers should
consult with a litigation attorney to discuss the facts and explore what claims
may be available.