What Not to Do When Separating Employment

In my 32 years as an employment lawyer, I have written a slew of articles on silly or uninformed actions by employers that resulted in large verdicts. This article analyzes a different situation — behavior by a separating employee so objectionable that it resulted in a large verdict, including exemplary damages. The decision in this case places value on an employer's protectable trade secrets and upholds an employment agreement, including nonsolicitation and noncompetition provisions.[1]

Tammy Keymon worked for more than 14 years for Hamilton-Ryker, a firm that provided labor services to its clients. Keymon was subject to an employment agreement that prevented her from soliciting the company's customers or employees after the termination of her employment. The agreement also required her to keep all of the company's confidential information and trade secrets private. Keymon worked as the primary contact for Hamilton-Ryker with its client Oasis Incorporated, which in turn had a large contract with Verizon Communications Inc. to distribute its telephone directories. While the Verizon work was filtered to Hamilton-Ryker through Oasis, Hamilton-Ryker invoiced Verizon directly for its services.

Hamilton-Ryker re-organized in 2004 and eliminated Keymon's position, but because she was a valued employee, the company offered her a new position at equal salary. Keymon rejected the new position, but the company continued to pursue finding a position that would interest her in order to maintain her employment. Keymon and the company agreed that she would be temporarily laid off for a period of three months while the company attempted to locate a new position for her. Keymon's last day of work before her temporary lay-off was July 9, 2004.

On Saturday, July 10, 2004,   Keymon called her contact at Oasis and stated that she had been laid off. She and Oasis agreed that she would begin performing Verizon's telephone directory work, and Verizon's contact agreed shortly thereafter. Later that day, Keymon accessed her company e-mail address and e-mailed at least 56 documents related to Hamilton-Ryker's work for Verizon to her home e-mail address. The documents included a production schedule, profit/loss statements, and the Verizon mailing address listings, which had already been converted into a usable format by Hamilton-Ryker's software to immediately allow Keymon to mail the directories to Verizon's customers. She began billing Oasis for the Verizon work, and Verizon notified Hamilton-Ryker that it would not be using the company for its directory work any longer.

Eventually, Verizon assigned Keymon additional tasks. To complete the work, she hired employees to assist her, including some employees of Hamilton-Ryker who had previously assisted her with the Verizon work.

At the end of the three-month temporary lay-off, no new positions were available for Keymon at Hamilton-Ryker. Hamilton-Ryker paid her severance of $6,000 in exchange for her signature on a Severance Agreement, which included a commitment to any restrictive covenants she had previously entered. The Severance Agreement also required Keymon to participate in any investigation the company launched into a breach of an employment agreement with any employee, including herself (an interesting and advisable provision).

After Hamilton-Ryker made its first periodic severance payment, the company heard rumblings that Keymon might be doing the Verizon work. Despite a letter from Hamilton-Ryker's attorney requesting her cooperation in its investigation and specifically requesting copies of her cell phone bills, she did not produce all of the requested information. Instead, she returned the first installment payment Hamilton-Ryker had made toward her severance. Soon after, Hamilton-Ryker sued Keymon for breaching her non-competition covenants, including the confidential information disclosure provision; for violating the Tennessee Uniform Trade Secrets Act, Tenn. Code Ann.  § 47-25-1701 et seq.; and on common law claims including inducement to breach of contract, intentional interference with business relationships, breach of trust, breach of the duty of loyalty, breach of fiduciary duty, conversion, breach of the duty against self dealing or corporate opportunity doctrine, and unjust enrichment.

The trial court found that Keymon was liable on all claims. Hamilton-Ryker was awarded actual damages of $477,178, but the court doubled that amount as exemplary damages under the Trade Secrets Act based on Keymon's willful and malicious conduct. The total award was $954,356, a staggering victory for the employer and its interests. Naturally, she appealed the decision.

Keymon found little relief from the appellate court. She first argued that since there was no geographic limitation in her noncompete clause, it was unenforceable. The court disagreed, stating that as long as the prohibited actions were reasonable and clear, no territorial limitation was necessary. Here, since the agreement prohibited her from doing business with Hamilton-Ryker's clients, the class of people for whom she would have been prevented from performing work was clear and the covenant not to compete was enforceable without a geographic limitation.

The court saved the bulk of its discussion for Keymon's violation of the Trade Secrets Act. After analyzing the history of Tennessee's common law on trade secret protection, the court made clear that the definition of trade secret under the Trade Secrets Act was intended to be less restrictive than both the former common law and the multi-state Uniform Trade Secrets Act. Indeed, "the definition of 'trade secret' under the act is sufficiently broad to include information which at common law would have been considered confidential information. In contrast to the common law, for the information to be protectable under the Trade Secrets Act, the business need only show 'reasonable' efforts to maintain the secrecy of the information."[2] In a discussion that foreshadowed the court's conclusion on Keymon's defenses, it stated that damages recoverable for misappropriating trade secrets can include both actual loss and unjust enrichment damages and added that exemplary (double) damages are available if the misappropriation was willful and malicious.

Keymon argued that she did not misappropriate any trade secrets of Hamilton-Ryker since the files she sent to herself contained information she could have easily obtained from Verizon or that constituted "general knowledge" not subject to trade secret protection. The court quickly dismissed that argument after reviewing the list of items Keymon e-mailed to herself, including the profit analysis, recent Hamilton-Ryker invoices to Verizon, and the mailing addresses from Verizon that had already been formatted into a usable format by Hamilton-Ryker's software. Indeed, the court found that even if the information could have been acquired elsewhere, the aggregate of that information constituted a trade secret under Tennessee law. Keymon's decision to e-mail the information and use it to compete so quickly after her departure from Hamilton-Ryker foreclosed Keymon's argument that those documents did not have economic value.

The Court of Appeals further upheld the trial court's calculation of damages. The court applied Hamilton-Ryker's profit margin on the Verizon work (ironically, a figure computed by Keymon during her employment) to the total amount she had billed on the same work since her departure. The court supported its decision to calculate damages over a period of close to four years by stating that even if Hamilton-Ryker had not continued doing the Verizon work for that length of time, that same measure of damages would be a reasonable calculation of the unjust enrichment to her for misappropriating the trade secrets. Thus, the damage calculation was $477,178 and, with a final dagger to Keymon, the court doubled that amount to $954,356 as exemplary damages after finding that she acted willfully and maliciously in her misappropriation of Hamilton-Ryker's trade secrets. Although it was likely of little consolation, the court gave Keymon a $6,000 credit for the severance pay she would have received but for her actions. The court rested the exemplary damages ruling primarily on the timeline of her actions (which allowed immediate work on the Verizon contract) and her duplicity in accepting unemployment and severance benefits while usurping the Verizon contract.

This decision arms employers with a powerful weapon against former employees who take or retain confidential information for use in arguably unfair competition. The court broadly defined confidential information subject to the Trade Secrets Act, well beyond the traditional common law definition of a trade secret, and allowed the confidential information taken or retained to be considered in the aggregate. The court also applied a standard for malice that was favorable to the former employer. While this concept is not new, counsel for a departing employee would be well served to emphasize the importance of not taking confidential information for use in competing with the former employer and returning all work-related materials contemporaneously with the termination of employment.

Notes

  1. The Hamilton-Ryker Group LLC v. Tammy Keymon, Case No. W2008-00936-COA-R3-CV, 2010 Tenn. App. LEXIS 55 (Tenn. Ct. App. Jan. 28, 2010).
  2. 2010 Tenn. App. LEXIS 55 at **39-40.

Edward G. Phillips EDWARD G. PHILLIPS is a lawyer with Kramer Rayson LLC in Knoxville, where his primary areas of practice are labor and employment law. He graduated with honors from East Tennessee State University and received his law degree from the University of Tennessee College of Law in 1978 with honors, and as a member of The Order of the Coif. He is a former chair of the Tennessee Bar Association’s Labor and Employment Law Section.