(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in
the interests of brevity, portions of any opinion may not have been summarized).
Argued March 12, 2001 -- Decided May 14, 2001
LaVECCHIA, J., writing for a unanimous Court.
This appeal concerns a grant of summary judgment on tort claims filed against two former employees of a
company for their activities in establishing a business to compete directly with the company that had employed
them. The company, Lamorte Burns & Co., Inc. (Lamorte) has been in the business of investigating and adjusting
claims for marine and nonmarine liability insurers, their associations, and owners since 1938. Lamorte's office in
Clark, New Jersey, which opened in 1986, handled mainly marine protection and indemnity claims (P&I claims).
The two Lamorte employees, Michael Walters and Nancy Nixon, worked at the Clark office. Walters, an attorney
who had P&I and admiralty experience, had been recruited by Lamorte to manage the Clark office, handle P&I
claims, and to supervise employees.
About one month after he arrived at Lamorte in 1990, Walters signed an employment agreement that
provided, among other things, that he would maintain in confidence all proprietary and confidential information
about Lamorte, its clients, and their cases and that were he to leave Lamorte, for a one-year period he would not
solicit or accept any claims or matters being handled by Lamorte. Although he signed the agreement, Walters did
not believe it was enforceable against him.
In the Spring of 1996, after Lamorte announced a plan to scale back its P&I business, Walters first thought
about leaving Lamorte to start a competing business. Walters approached Nixon and another employee, John
Treubig, about starting a competing business with him. Shortly after Walters lost interest in Treubig as a business
partner, Walters was told to fire Treubig because of allegations that Treubig had tried to solicit a Lamorte client for
his private benefit.
Walters and Nixon proceeded with their plan, incorporating the new business as the Walters Nixon Group
(WNG) and secretly compiling a target solicitation list consisting of approximately thirty Lamorte clients, all but
one or two of the P&I clients. Client data, including names, telephone numbers, and information about claim
incidents, was taken from Lamorte's records and transferred to Walters's home computer. By October 1997,
Walters and Nixon had signed a three-year lease for office space, purchased office equipment, leased computers and
arranged for phone and fax lines.
In accordance with their plan, Walters and Nixon cleaned out their offices and faxed their resignations to
the private Connecticut office of Lamorte's president on Saturday, December 20, 1997. Their departure left
Lamorte without a P&I adjuster in the Clark office. The next morning, Walters and Nixon began to fax solicitation
letters and transfer authorization forms to all but one of Lamorte's thirty-four clients. By January 7, 1998, all thirty-
three of the solicited clients had moved to WNG. Ultimately, 153 of Lamorte's 350 active P&I claim files were
transferred to WNG.
Lamorte filed suit against Walters, Nixon, and WNG, charging that Walters had breached the restrictive
covenants in the employment agreement, and that both Walters and Nixon had breached their duty of loyalty,
tortiously interfered with Lamorte's economic advantage, misappropriated confidential and proprietary
information, and competed unfairly.
The trial court granted summary judgment in favor of Lamorte on liability on each ground asserted,
concluding that the information taken by Walters and Nixon was confidential and that they were not at liberty to
take it for their own business purposes. Compensatory and punitive damages were awarded.
On appeal, the Appellate Division affirmed the judgment as to Walters's breach of his employment
agreement, but reversed the part of the decision that granted judgment to Lamorte on its tort claims. The court
perceived there to be facts in dispute about whether the information taken and used was confidential and proprietary
and issues about whether defendants' conduct was acceptable competitive behavior or malicious and in violation of
the “rules of the game” in that business.
The Supreme Court granted Lamorte's petition for certification.
HELD: By secretly collecting confidential and proprietary client information while employed by Lamorte Burns &
Co., Inc. and using the data to solicit and take away Lamorte's clients immediately after resigning, Michael
Walters and Nancy Nixon breached their duty of loyalty, tortiously interfered with Lamorte's economic advantage,
misappropriated confidential and proprietary information, and competed unfairly.
1. The client information gathered from Lamorte's files by Walters and Nixon was not generally available to the
public, would not have been known to defendants but for their employment by Lamorte, went beyond mere client
names, and gave defendants an advantage in soliciting clients after they resigned. Walters and Nixon knew Lamorte
had an interest in protecting the information. The client information was confidential and proprietary. ( pp.14-20 )
2. An employee may prepare to start a competing business while employed by the entity he will compete with, but
may not breach the undivided duty of loyalty owed the employer while still employed by soliciting the employer's
customers or engaging in other acts of secret competition. Walters and Nixon breached the duty of loyalty by
collecting protected information while employed by Lamorte for the sole purpose of gaining an advantage over
Lamorte as soon as they resigned. ( pp. 20-25 )
3. Walters and Nixon acted with malice and in a manner contrary to the notion of free and fair competition by using
the secretly gathered confidential client data to effect a weekend coup, knowing that the delay in Lamorte's
discovery of their resignation and solicitation would work to their economic advantage. ( pp. 25-31 )
Judgment of the Superior Court, Appellate Division, is REVERSED IN PART and the judgment of the
Chancery Division sustaining plaintiff's tort claims is REINSTATED.
CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO, and
ZAZZALI join in JUSTICE LA VECCHIA's opinion.
SUPREME COURT OF NEW JERSEY
A-
26 September Term 2000
LAMORTE BURNS & CO., INC., a
Delaware corporation,
Plaintiff-Appellant,
v.
MICHAEL A. WALTERS, NANCY
NIXON and THE WALTERS NIXON
GROUP, INC., a New Jersey
corporation,
Defendants-Respondents.
_____________________________
Argued March 12, 2001 -- Decided May 14,
2001
On certification to the Superior Court,
Appellate Division.
Stephen H. Roth argued the cause for
appellant (Mr. Roth, attorney; Mr. Roth and
Michele M. DeSantis, on the briefs).
Bruce D. Greenberg argued the cause for
respondents (Lite DePalma Greenberg &
Rivas, attorneys).
The opinion of the Court was delivered by
LaVECCHIA, J.
In this case, we consider whether an employee has incurred
liability for activities undertaken to plan and prepare for
future employment in a newly created business entity
established by the employee to compete directly with his
current employer. Plaintiff, Lamorte Burns & Co. (Lamorte),
filed suit against two of its former employees, Michael Walters
and Nancy Nixon, in connection with their conduct in
establishing a competing business. Plaintiff's complaint
charged that Walters breached the restrictive covenant clauses
of his employment agreement, and that both Walters and Nixon
breached their duty of loyalty, tortiously interfered with
Lamorte's economic advantage, misappropriated its confidential
and proprietary information, and competed unfairly.
The trial court granted plaintiff's motion for summary
judgment as to liability only. After a hearing, the trial
court awarded $232,684 in compensatory damages and an
additional $62,816.23 in punitive damages covering counsel fees
and costs. In an unpublished opinion, the Appellate Division
agreed that Walters had breached his employment contract, but
reversed that part of the decision that granted plaintiff
summary judgment on its tort claims. The court reasoned that
there were disputed facts concerning the confidential and
proprietary nature of the information defendants had taken from
plaintiff, as well as issues concerning whether defendants'
conduct was acceptable competitive behavior or malicious and in
violation of the “rules of the game” of the parties' business.
We granted certification,
165 N.J. 605 (2000), and now reverse,
in part, and reinstate the trial court's judgment sustaining
plaintiff's tort claims.
We regard the facts as not significantly in dispute. Where they are, we accord all inferences in favor of defendant as this matter is before us on an appeal from a motion for summary judgment. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520 (1995). Lamorte has been in the business of investigating and adjusting claims for both marine and nonmarine liability insurers, their associations, and owners, in the United States and abroad since 1938. Incorporated in Delaware, Lamorte has its principal place of business in Wilton, Connecticut, and maintains a New Jersey office in Clark. The Clark office opened in 1986 chiefly to handle two types of marine insurance claims: protection and indemnity claims (P & I claims) consisting essentially of personal injury claims and federal longshore and harbor workers' compensation claims.
Walters met Nixon in the Clark office, where they both worked on P & I claims. When Walters arrived at Lamorte in 1990, Nixon had already established herself at the company. Walters, on the other hand, was recruited from out of state by Lamorte's President, Harold J. Halpin, to manage the Clark office, handle P & I claims, and supervise other employees, including Nixon. Walters, an attorney, had experience in the field. He previously had been employed in the P & I division of St. Paul Fire & Marine Insurance Company in Ohio, and before that, in the admiralty department of a Florida law firm.
Lamorte entrusted Walters with substantial responsibility. Lamorte introduced Walters to many of its existing clients, but expected him to locate, establish, and maintain new clients. Because of his prior work, Walters knew many insurance carriers and P & I associations that offered P & I coverage. As it turned out, Walters proved successful at soliciting and establishing new business; he claims to have brought in thirty new clients to Lamorte.
Approximately one month after Walters's arrival at Lamorte, Halpin asked him to sign an employment agreement. The relevant paragraphs of that agreement stated as follows:
2. You agree to devote your full time and best
efforts to the performance of your duties for the Company and not to engage in any other business activities without the prior written consent of the Company.
4. You agree to maintain in confidence all
proprietary data and other confidential information
(whether concerning the Company, or any of its
affiliated companies, or any of their respective
clients or cases being handled for clients) obtained or
developed by you in the course of your employment with
the Company. Such information and data shall include,
but not be limited to, all information covering clients
and cases being handled for clients. All such
information and data is and shall remain the exclusive
property of the Company and/or affiliated companies.
In addition you assign to the Company all right, title,
and interest in and to any and all ideas, inventions,
discoveries, trademarks, trade names, copyrights,
patents and all other information and data of any kind
developed by you during the entire period of your
employment with the Company and related to the work
performed by you for the Company.
You covenant and agree that upon termination of this
Agreement for whatever reason, you will immediately
return to the Company any and all files, documents,
records, books, agreements or other written material
belonging to or relating to the Company or its
affiliated companies and any of their respective
clients, together with all copies thereof in your
possession or control . . . .
Your obligation under this paragraph shall survive any
termination of your employment.
5. Employee agrees that so long as you are an
employee of the Company, and for a period of twelve
(12) month after your termination, whether voluntary or
involuntary, you will not solicit or accept any claim,
case or dispute which is being handled or directed by
the Company or any of its affiliated companies during
the term of your employment with the Company. You
agree that you will not solicit or accept any such
claim, case or dispute directly in your individual
capacity, nor indirectly as a partner of a partnership,
and as an employee of any other entity nor as an
officer, director, or stockholder of a corporation, a
joint venturer, a principal or in any other capacity.
You further agree not to solicit or induce any
employee of the Company or any of its affiliated
companies to leave its employ, nor to hire or attempt
to hire any such employee . . . .
Walters signed the contract, but he never believed it was
enforceable against him. He reasoned that because he was an
at-will employee, the employment contract lacked consideration
for its restrictive covenant clauses. Also, the agreement was
never signed by Lamorte. A Florida attorney privately
corroborated his view. Walters never expressed his beliefs to
anyone at Lamorte, however, out of fear that he would be fired.
In the Spring of 1996, Walters quietly began entertaining
the idea of resigning and starting a competing business. By
that time, Halpin had informed defendants that Lamorte would be
de-emphasizing P & I work and increasing the workers'
compensation area of the practice. For Walters, that
constituted the impetus for his decision to start a competing
business. Also about that time, two other employees departed
the P & I department because there was not enough work to
support the staff.
Walters spoke only with co-employees Nixon and John
Treubig about his idea of starting a competing business.
Walters showed Nixon some financial estimates he had developed,
suggesting that she would improve her position if she were to
join in his enterprise. Eventually, Walters lost interest in
Treubig. Soon after, Halpin directed Walters to fire Treubig
based on allegations that Treubig had tried to solicit a
Lamorte client for his private benefit.
On July 17, 1996, Walters incorporated the new business,
“The Walters Nixon Group” (WNG). Thereafter, even while
Walters and Nixon attended to their duties at Lamorte, they
secretly worked on the commencement of their new business
venture. Each time they worked on a Lamorte P & I claim file,
they added to a target solicitation list they were compiling
using information from their employer's client files. That
information included client names, addresses, phone and fax
numbers, file numbers, claim incident dates, claim contact
information, and names of the injured persons. In total, the
list included approximately thirty of Lamorte's clients, all
but one or two of the company's P & I clients. As that
information was gathered, it was transferred to Walters's home
computer.
Walters testified that he did not believe the names of
Lamorte's clients and information concerning pending claims was
Lamorte's proprietary and confidential information. He
reasoned that the information, although not generally available
to the public, was not secret. He asserted that the discrete
information could be obtained by calling directly and inquiring
of insurance companies and vessel owners. Further, other than
the reference to “confidential and proprietary information” in
his employment agreement that Walters believed was
unenforceable, he never had been told by Lamorte that any of
the specific information he was gathering in connection with
his P & I work was confidential and proprietary. Halpin,
himself, never discussed the confidentiality of the
information. During Walters's deposition, however, he answered
“No” to the following question:
Would you have given that information to a competitor
if he walked in the door and said, I want to go after
your customers [?] Give me a complete listing of their
files, reference numbers, adjusters and fax numbers and
I will use that to solicit them. You would have given
that information to them?
In September 1996, Halpin confronted defendants concerning
rumors that they were thinking of leaving to start a competing
business. They reassured Halpin the rumors were untrue.
Walters testified that he feared he would be fired if Halpin
knew the truth. The truth was that Walters and Nixon were well
on their way to establishing a competing business. By October
1997, they signed a three-year lease to commence December 1,
1997 for office space in Cranford, New Jersey. As December
approached, they purchased office equipment, leased computers,
and obtained telephone and fax lines for the new WNG office.
They agreed that they would resign on the weekend of December
20-21, 1997, a date selected so that each would be eligible to
collect Christmas bonuses from Lamorte. They planned that over
the same weekend they would send to Lamorte's clients
solicitation letters and forms directing the transfer of claim
files.
Just prior to resigning, Walters was asked by Halpin to
sign a new and more restrictive employment agreement. The
proposed agreement included a clause prohibiting him from
working for any of plaintiff's customers for a full year, no
longer just prohibiting him from working on claim files with
which he was actively involved at Lamorte. Nixon also was
asked to sign a corresponding employment agreement. Defendants
avoided signing those agreements before their resignations.
On Thursday and Friday, December 18 and 19, 1997, Walters
called in sick. In fact, Walters was at WNG's office
installing computers, setting up furniture, and preparing to
activate the business solicitation plan over the coming
weekend. Telephone records showed that on December 19, 1997,
calls were placed to several of Lamorte's clients from WNG's
office. Walters, however, denies that during those
conversations he informed Lamorte's clients that he was about
to resign and denies that he attempted to solicit any of them.
At 9 a.m. on Saturday, December 20, Walters and Nixon
telephoned Lamorte's Clark office and received no answer. They
then drove to that empty office and spent two or three hours
“putting away files and removing their personal belongings.”
At 2:56 p.m., Walters and Nixon faxed their respective
resignation letters to Halpin's private office in Wilton,
Connecticut. Because they thought that Halpin often worked
Saturdays, they believed there was a possibility that the
letters would be received that day. They also knew that once
they resigned, Lamorte would be without a P & I claims adjuster
in its Clark office.
On Sunday morning, December 21, Walters and Nixon began to
fax solicitation letters and transfer authorization forms to
all but one of Lamorte's P & I clients, thirty-three in all.
On that first day, defendants exclusively targeted Lamorte's
clients from whose files they had taken the client information
noted earlier. A typical letter notified the client that
defendants, who had been handling that client's claim file, had
resigned from Lamorte and started a new business. It stated
“Our fee structure will be less than Lamorte Burns' fee
structure for 1998.” The client was told that it had absolute
discretion in deciding whether to continue with Lamorte or to
have its claim files in progress transferred to WNG or to any
other firm. The letter was accompanied by a transfer request
form. The form included “a list of open files we have been
handling for you.” (emphasis added). In addition to the
client's file number, the transfer form included the client's
name, the name of the injured person, and the accident date.
The client was instructed simply to mark an “X” next to each
listed file that it wished to have transferred from Lamorte to
WNG.
By Monday, December 22, 1997, ten of Lamorte's clients
returned to WNG signed transfer authorization forms instructing
Lamorte to transfer their active P & I claims to WNG. By
January 7, 1998, all forms were returned and all thirty-three
of Lamorte's P & I clients requested transfer of their active
claim files to WNG, totaling a transfer of 116 individual
Lamorte P & I claims. By the time the summary judgment motion
was heard, 153 of Lamorte's 350 active P & I claim files had
been transferred to WNG. According to Walters, the clients
that had requested a transfer included clients he had brought
into Lamorte, as well as clients that had been existing Lamorte
clients when he arrived at the company. Walters conceded that
“[he] had people faxing from up and down the Eastern Seaboard
and from overseas within an hour or less of getting his sudden
announcement.” Customers were sending their congratulations.
The court also addressed the specific manner in which defendants proceeded to use the information in connection with their newly created, competitive business:
In this instance, the solicitation was not limited to such things as, look, we're a new company, we're going to now compete with Lamorte, we'd be interested in your business. The solicitation was far more specific than that; and, admittedly, based upon information that was confidential . . . . If you examine the solicitation, you will see that they didn't just ask generally for a customer's business. They asked for the work that was specifically being handled by the plaintiff, and on a case-by-case basis specifically mentioning the name of the claimant . . . . Effectively, what they said to the customer that they were soliciting is, look, we're dealing with the following cases right now for Lamorte, and we want them . . . [T]his was information [defendants] would not have generally known but for their employment with plaintiff. They wouldn't have known the specific file, the accident date . . . . And there isn't any dispute that that information came from the plaintiff.
The court noted that Walters admitted that the information
gave him an advantage in soliciting the clients, that Halpin
would not have authorized him to give the information to a
competitor, and that he himself would fire any of his employees
for divulging such information to a competitor. The court's
conclusion that the information was confidential and
proprietary led to its decision that defendants' use of it
amounted to a breach of the duty of loyalty and tortious
interference with plaintiff's economic advantage.
Specifically, the court found that
there was a deliberate plan on the part of defendants
to cause damage to plaintiff through the diversion of
its customers, through stealth and deceit, at a time
when defendants caused plaintiff to be most vulnerable,
by soliciting plaintiff's customers over the weekend,
while plaintiff had no idea that defendants had
resigned until, at the very earliest, the following
Monday morning . . . In furtherance of that plan,
defendants then systematically and admittedly took
detailed information known only to plaintiff's company,
which this court has deemed proprietary for such
purposes.
On appeal, the Appellate Division determined that there
were material facts in dispute and reversed. The court
emphasized the fact-sensitive nature of evaluating whether an
employee's conduct in planning and preparing for future
employment constitutes a breach of the duty of loyalty and
whether the client claim information taken by defendant from
Lamorte was confidential and proprietary. The Appellate
Division's conclusion was founded on defendants' assertions
that they were never told that the information was confidential
and proprietary, and that although the information was not
generally available, it could have been obtained simply by
sending out letters of solicitation to all of Lamorte's clients
asking permission to have all files transferred, not just those
files defendants were working on. The Appellate Division panel
thus concluded that a more fully developed record was needed to
determine whether the information was proprietary, “whether
their manual copying of the customer account information while
still employed was a violation of their duty or 'mere
preparation,' and whether the manner in which they resigned and
immediately undertook to solicit their employer's customers was
impermissible competition in our current economic environment
of 'free enterprise.'”
A threshold issue common to our analysis of plaintiff's tort claims concerns whether the client claim information taken from Lamorte by defendants was legally protectable. Defendants admit to gathering, while employed, information from plaintiff's P & I claim files, including clients' names, addresses, phone and fax numbers, claimant names, accident dates, details concerning the accidents, and file numbers, for the sole purpose of soliciting, once they resigned, those very clients they had been handling for plaintiff. With respect to Walters, the gathering and use of that information was directly contrary to the terms of his employment agreement. Even in the absence of an agreement, however, the law protects confidential and proprietary information.
In New Jersey, customer lists of service businesses have been afforded protection as trade secrets. See AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 504 (App. Div. 1993) (“Where a service company is concerned, the names and addresses of its customers 'are not open to and ascertainable by everyone; they are private information and property' of the company.”) (quoting Abalene Exterminating Co. v. Oser, 125 N.J. Eq. 329, 332 (Ch. 1939)); see also 1 Milgrim, Milgrim on Trade Secrets § 2.09 (1995) (stating that information relating to customers, merchandising, costs, and pricing may be considered trade secrets); 30 C.J.S. Employer- Employee § 126b (1992) (stating that customer list may be protected if treated in confidential manner, and time and money have been used in creating list); K.H. Larsen, Annotation, Former Employee's Duty, in the Absence of Express Contract, Not to Solicit Former Employer's Customers or to Otherwise Use His Knowledge of Customer Lists Acquired in Earlier Employment, 28 A.L.R.3d 7, 185 (1969) (listing cases in which insurance companies' customer lists have been held confidential and proprietary). In all instances, a substantial measure of secrecy must exist in order for information to be treated as a trade secret. See Ingersoll Rand Co. v. Ciavetta, 110 N.J. 609, 636 (1988) (listing factors for determining whether information is a trade secret).
Importantly, however, information need not rise to the level of a trade secret to be protected. In Platinum Management, Inc. v. Dahms, 285 N.J. Super. 274, 295 (Law Div. 1995), the court held that to be legally protected, the information need not constitute a trade secret, and indeed, may otherwise be publicly available. The key to determining the misuse of information is the relationship of the parties at the time of disclosure and the intended use of the information. Ibid. (citing Zippertubing Co. v. Teleflex, Inc., 757 F.2d 1401, 1407-10 (3d Cir. 1985) (citing Kamm v. Flink, 113 N.J.L. 582 (E & A 1934)). In Platinum, plaintiff sued its former employee for breach of the duty of loyalty, claiming that its former employee discussed its customers with his new employer. Defendant argued that the information was not protectable because it was publicly available. Ibid. The court disagreed, and found that the information the plaintiff sought to protect went beyond mere names, but also included buying habits, mark- up structure, merchandising plans, projections, and product strategies. Ibid. The court stated that the customer's names may have been listed in readily obtainable trade directories, but the fact that they were the plaintiff's customers was not. Ibid. The court concluded that the identity of the customers is “entitled to protection when divulged in confidence to a key employee . . . where [defendant] is a party to a covenant not to compete.” Ibid.
Other jurisdictions also have held that information not technically meeting the strict requirements of trade secrets may be protected as “confidential information” and may serve as the basis for a tort action. See Roboserve, Ltd. v. Tom's Foods, Inc., 940 F.2d 1441, 1456 (11th Cir. 1991)(“[I]tem may be considered confidential in the context of a business relationship without rising to the level of a trade secret. A confidential relationship is distinguished by the expectations of the parties involved, while a trade secret is identified through rigorous examination of the information sought to be protected.”); Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 466-67 (9th Cir. 1990) (quoting Faris v. Enberg, 158 Cal. Rptr. 704, 712 (Cal. Ct. App. 1979) (stating that idea, whether or not protectable, offered to another in confidence is not to be used by offeree for purposes beyond limits of confidence without offeror's permission); Sandlin v. Johnson, 152 F.2d 8, 11 (8th Cir. 1945) (stating that business information not technically trade secret can be protected); Crocan Corp. v. Sheller-Globe Corp., 385 F. Supp. 251, 254 (N.D. Ill. 1974) (same); see generally Robert Unikel, Bridging the 'Trade Secret' Gap: Protecting 'Confidential Information' Not Rising to the Level of Trade Secrets, 29 Loy. U. Chi. L.J. 841 (1998) (surveying ways employers protect information that does not constitute trade secrets, including claims for breach of duty of loyalty and unfair competition).
Those cases follow the philosophy expressed in the Restatement (Second) on Agency, which states that “[u]nless otherwise agreed, an agent is subject to a duty to the principal not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency or in violation of his duties as agent, in competition with or to the injury of the principal . . . .” Restatement (Second) of Agency § 395 (1958). The comment to the Restatement adds that an agent must not take “unfair advantage of his position in the use of information or things acquired by him because of his position as agent or because of the opportunities which his position affords.” Id. § 387 comment b.
We disagree with the Appellate Division's conclusion that a trial is needed to determine whether the information secretly gathered by defendants was legally protected. Although we are persuaded that the facts show that plaintiff's information should be entitled to trade secret protection, certainty in that regard is not essential to our decision. The specific information provided to defendants by their employer, in the course of employment, and for the sole purpose of servicing plaintiff's customers, is legally protectable as confidential and proprietary information.
The information surreptitiously gathered by defendants from plaintiff was not generally available to the public, but was shared between plaintiff and its clients. Defendants would not have been aware of that information but for their employment. The information went beyond the mere names of plaintiff's clients. It included specific information concerning the clients' claims, such as the name of the injured party, and the type and date of injury. Defendants admitted that that information gave them an advantage in soliciting plaintiff's clients once they resigned. But, the information was available to defendants for their use in servicing clients on behalf of Lamorte only.
The record is clear that defendants also knew that Lamorte had an interest in protecting that information. Walters signed an agreement that so stated, and both Walters and Nixon declined to sign a later agreement that sought to afford further protection to the information. Walters acknowledged that he would not have given such information to a competitor if requested, and he would not have permitted a Lamorte employee to do so. Also, Walters and Nixon both were aware that their co-employee John Treubig had been fired because of his attempt to privately solicit Lamorte's customers. We conclude, therefore, that the client claim file information taken by defendants was confidential and proprietary information belonging to plaintiff.
Having concluded that plaintiff's client claim file information is legally protectable, resolution of plaintiff's breach of the duty of loyalty claim is relatively straightforward. Loyalty from an employee to an employer consists of certain very basic and common sense obligations. An employee must not while employed act contrary to the employer's interest. Chernow v. Reyes, 239 N.J. Super. 201, 204 (App. Div.), certif. denied, 122 N.J. 184 (1990) (citing Auxton Computer Enters., Inc. v. Parker, 174 N.J. Super. 418, 425 (App. Div. 1980). And, during that period of employment, an employee has a duty not to compete with his or her employer. Cameco, Inc. v. Gedicke, 157 N.J. 504, 517-18 (1999); Subcarrier Communications, Inc. v. Day, 299 N.J. Super. 634, 644-45 (App. Div. 1997); United Bd. & Carton Corp. v. Britting, 63 N.J. Super. 517, 524 (Ch. Div.), aff'd, 61 N.J. Super. 340 (App. Div. 1959), certif. denied, 33 N.J. 326 (1960). Consistent with our approach to this common-law duty, the Restatement (Second) Agency provides that “[u]nless otherwise agreed, an agent is subject to a duty not to compete with the principal concerning the subject matter of his agency.” Restatement (Second) of Agency, § 393 (1958). Comment e to that section further states:
[B]efore the end of his employment, [the employee] can properly purchase a rival business and upon termination of employment immediately compete. He is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's business.
In Cameco, supra, 157 N.J. at 517, the Court held that an employer may prove a prima facie case of an employee's breach of the duty of loyalty not only by showing that the employee directly competed with the employer while employed, but also by showing that the employee while employed assisted the employer's competitor. In evaluating an employee's conduct under the breach of the duty of loyalty standard, the employee's level of trust and confidence, the existence of an anti-competition contractual provision, and the egregiousness of the conduct are important factors to consider in the analysis. Id. at 516-18, 521. The analysis is not susceptible to “mechanical applications of abstract principles of law.” Id. at 516. We commented on the varied contexts that give rise to claims of employee disloyalty and emphasized the fact- sensitive nature of their resolution. Id. at 516 (“In general, the adjudication of such claims summons rules of reason and fairness.”).
Defendants maintain that they did not compete with Lamorte while employed essentially because no solicitations of Lamorte clients occurred until the day after they transmitted their resignations to plaintiff. They contend that they were doing no more than planning and preparing the establishment of a competing business for their future employment during the time they remained in Lamorte's employ. It is true that in New Jersey
[a]n employee who is not bound by a covenant not to compete after the termination of employment, and in the absence of any breach of trust, may anticipate the future termination of his employment and, while still employed, make arrangements for some new employment by a competitor or the establishment of his own business in competition with his employer.
[Auxton Computer Enters. Inc., supra, 174 N.J. Super. at 423.]
But, although an employee has the right to make preparations to start a competing business, the employee may not breach the undivided duty of loyalty he or she owes to his or her employer while still employed by soliciting the employer's customers or engaging in other acts of secret competition. Platinum, supra, 285 N.J. Super. at 303 (citing Auxton Computer Enters., Inc., supra, 174 N.J. Super. at 423). Many jurisdictions have held that an employee's taking of legally protected information from his or her employer, in order to seek a competitive advantage upon resignation, constitutes a breach of the duty of loyalty. See, e.g., Abbott Redmont Thinlite Corp. v. Redmont, 475 F.2d 85, 89 (2d Cir. 1973) (stating that employee cannot “utilize specific information he obtained during his employment to deprive his ex-employer of customers with whom he knows deal is in process of completion”); Tlapek v. Chevron Oil Co., 407 F.2d 1129, 1133 (8th Cir. 1969) (finding that employee has duty not to use confidential information acquired in course of employment for own benefit and to detriment of former employer); Bull v. Logetronics, Inc., 323 F. Supp. 115, 133 (E.D. Va. 1971) (stating that employee's duty “does not cease when employment ends. He has a duty not to reveal confidential information obtained through his employment, and not to use such confidential information after he has left his employment.”); United Ins. Co. of Am. v. Dienno, 248 F. Supp. 553, 557 (E.D. Pa. 1965) (stating party who develops or possesses confidential information belonging to his employer should not be allowed to terminate his association and then use information to undercut former employer); see also Unikel, supra, 29 Loy. U. Chi. L.J. at 862 (stating strict fiduciary obligations imposed on employees prohibit them from using or disclosing to detriment of employer confidential information imparted to them in course of duties).
Based on the evidence in this record, we agree with the trial court that defendants breached their duty of loyalty. Defendants' conduct while employed was clearly contrary to the interests of their employer. We recognize the right of an employee to plan and prepare for future employment, but defendants' extraordinary actions were without question outside the rubric of that right. Accord Sun Dial Corp. v. Rideout, 16 N.J. 252, 260-61 (1954) (“There is undoubtedly . . . an important policy which encourages employee [sic] to seek better jobs from other employers or to go into business for themselves . . . . But there is also a policy which is designed to protect employers against improper disclosures of information which their employees have received in confidence.”) (internal citations omitted).
An employee's duty of loyalty to his or her employer goes beyond refraining from privately soliciting the employer's customers while still employed. The duty of loyalty prohibits the employee from taking affirmative steps to injure the employer's business. Defendants purloined protected information from plaintiff's P & I claim files while still employed, for the sole purpose of effecting an advantage in competing with plaintiff immediately upon their resignation and the commencement of their new competitive business. Unlike the defendant in Auxton Computer Enterprise, Inc., supra, 174 N.J. Super. at 425, defendants here intentionally began a process of subverting their employer's business while still employed. That process included gathering by stealth plaintiff's legally protected information admittedly to seek an advantage in competing with plaintiff once they resigned. Obviously those actions were contrary to plaintiff's interest, and in the case of Walters, directly conflicted with the terms of his employment agreement as well, as the courts below held.
The tortious interference cause of action has a long history in New Jersey law. In Van Horn v. Van Horn, 56 N.J.L. 318 (1893), the Court stated that
while a trader may lawfully engage in the sharpest competition with those in like businesses by holding out extraordinary inducements, by representing his own wares to be better and cheaper than those of others, yet when he oversteps that line and commits an act with the malicious intent of inflicting injury upon his rival's business, his conduct is illegal, and, if damage results from it, the injured party is entitled to redress.
Malice is not used here in its literal sense to mean “ill will;” rather, it means that harm was inflicted intentionally and without justification or excuse. Ideal Dairy Farms, Inc., supra, 282 N.J. Super. at 199. It is determined on an individualized basis, and the standard is flexible, viewing the defendant's actions in the context of the facts presented. Ibid. Often it is stated that the relevant inquiry is whether the conduct was sanctioned by the “rules of the game,” for where a plaintiff's loss of business is merely the incident of healthy competition, there is no compensable tort injury. Ibid. The conduct must be both “injurious and transgressive of generally accepted standards of common morality or of law.” Harper-Lawrence, Inc. v. United Merchants and Mfrs., Inc., 261 N.J. Super. 554, 568 (App. Div.), certif. denied, 134 N.J. 478 (1993) (quoting Di Cristofaro v. Laurel Grove Mem'l Park, 43 N.J. Super. 244, 255 (App. Div. 1957)). The line clearly is drawn at conduct that is fraudulent, dishonest, or illegal and thereby interferes with a competitor's economic advantage. Ideal Dairy Farms, Inc., supra, 282 N.J. Super. at 205.
Although competition may constitute a justification, a defendant claiming a business-related excuse must justify not only its motive and purpose, but also the means used. Id. at 199. Conduct admittedly spurred by spite and ill-will is not necessarily sufficient to sustain an action for tortious interference with an economic advantage. In Ideal Dairy Farms, Inc., the plaintiff, a dealer and distributor of dairy products, terminated its relationship with Farmland and started a relationship with Farmland's competitor, Tuscan. Id. at 151- 52. Farmland, upset with this new arrangement, canvassed Ideal-Tuscan's customers and offered to sell them milk at prices substantially lower than Ideal's prices. Id. at 152. As a result, Ideal lost customers, and those that it retained purchased milk at substantially lower prices. Ibid.
The Appellate Division reversed the trial court's finding that Farmland had tortiously interfered with Ideal's economic advantage. Id. at 155. The court was unpersuaded that the defendant had acted with malice even though it had been shown that Farmland had targeted Ideal's customers by setting prices so low as to be unprofitable. Ibid. The evidence showed rivalry and rank animosity between the two companies, but not conduct that transgressed the rules of the game. Ibid. The court explained:
[T]here was also a valid business justification supporting Farmland's conduct. Farmland had lost a significant amount of sales after Ideal switched suppliers to Tuscan. Faced with excess plant capacity, and a decline in sales, there was a legitimate business reason to 'target' Ideal customers and attempt to regain what Farmland lost the previous year (1985) regardless of any other motivation.
On the other hand, not all sanctioned conduct or customs of a specific industry will be immune from claims for tortious interference. In Wear-Ever Aluminum, Inc. v. Townecraft Industries, Inc., 75 N.J. Super. 135 (Ch. Div. 1962), Wear-Ever claimed that Townecraft tortiously pirated approximately thirty-five members of its sales force, and therefore interfered with Wear-Ever's contractual and advantageous relationship with its employees. Id. at 139. Townecraft had called a meeting and invited Wear-Ever's sales force in an attempt to persuade them to work for Townecraft. Id. at 141. The defendant contended that its conduct was prevalent in the trade. Id. at 146-47. In ruling for the plaintiff, the court stated that
even if the defendant had established that the custom in the trade was to pirate salesmen from competitors, this court would not permit such a custom to justify and legitimatize what otherwise would be tortious conduct. The role of the court is to raise the standard of business morality and care, not judicially to sanction tortious activities. Higher standards benefit and protect both the innocent member of the industry and the general public.
At the time of defendants' “weekend surprise,” plaintiff enjoyed a relationship with over thirty P & I clients. Those clients were obtained on Lamorte's time and at its expense. Lamorte's clients were then solicited and acquired by defendants' secretive taking of plaintiff's protected client information, and their ensuing strategically timed resignation and solicitation campaign. Those acts clearly indicate malice. Defendants' conduct was not only unethical, but also unlawful in that it constituted the wrongful taking of Lamorte's property.
We respect the principles of free competition, but defendants' taking of plaintiff's confidential and proprietary property and then using it effectively to target plaintiffs' clients, is contrary to the notion of free competition that is fair.
CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, VERNIERO and ZAZZALI join in JUSTICE LaVECCHIA's opinion.
NO. A-26 SEPTEMBER TERM 2000
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
LAMORTE BURNS & CO., INC., a
Delaware corporation,
Plaintiff-Appellant,
v.
MICHAEL A. WALTERS, NANCY
NIXON and THE WALTERS NIXON
GROUP, INC., a New Jersey
corporation,
Defendants-Respondents.
DECIDED May 14, 2001
Chief Justice Poritz PRESIDING
OPINION BY Justice LaVecchia
CONCURRING OPINION BY
DISSENTING OPINION BY