What does a New Jersey employer have to do to insulate itself from liability over a new employee’s improper use of his or her former employer’s trade secrets?  Unfortunately, the New Jersey Supreme Court failed to answer this question and provide some needed clarity in its disappointing June 20, 2012 opinion in Fox v. Millman. In this curious holding, the Supreme Court found that while there was sufficient evidence to go to a jury on this question, it still might be enough to simply ask the employee and be told “no.”  (Thanks to Eric Meyer’s The Employer Handbook Blog, whose report on the decision can be found here.)

The facts are straightforward. After she was terminated by Target Industries in 2000, salesman Jean Millman was hired by Polymer Packaging Inc. As part of its hiring process, Polymer asked Millman if she had signed either a confidentiality agreement or a covenant not to compete with Target. Millman assured Polymer that she had signed neither and Polymer conceded that it did nothing to verify Millman’s claim (it turns out that she had signed a non-disclosure agreement while at Target).

Millman then presented a list of Target’s customers that she said she had compiled over the years, “thereby implying that she had generated it on her own.” Polymer never saw the list and apparently never asked for a copy of it. Millman sold Polymer’s products to those former Target customers, generating sales of perhaps $5.1 million until her departure in 2004.  

One of Target’s former investors, Thomas Fox, ultimately bought some of Target’s assets and operations and, in 2004, he sued Polymer for misappropriation of Target’s trade secrets. The jury found for Polymer on the grounds of laches (i.e., that Fox unreasonably delayed in bringing the suit) and that Polymer acted in good faith. An appeal over a host of procedural issues ensued, ultimately to the New Jersey Supreme Court. 

While the Supreme Court believed that there was sufficient evidence for Target’s claim to go to the jury, the Supreme Court was unwilling to impose an “affirmative duty to undertake an inquiry, independent of the information given to them by Millman, as to the source of the customer list that Millman had. . . .  Our consideration of this argument reveals no ground on which to impose a duty of independent inquiry upon an employer, like Polymer, faced with an otherwise unremarkable representation by a prospective employee, like Millman, that a list of contacts is her own.”  

Focusing on the issue of laches, the Supreme Court found that the trial court misapplied the doctrine, it declined Polymer’s request to dismiss the case, and it ordered a second jury trial.
The Takeaway?  Unfortunately, if you are an employer in New Jersey, the Supreme Court did not do you any favors. While it refused to impose an independent duty to inquire (at least based on what it perceived to be an “unremarkable” statement by Millman), it still found that there was sufficient evidence for a second trial to go before a jury, which will lead to more expense and potential exposure for Polymer. 

If an employer wants to minimize the risk of being ensnared in this kind of litigation, it may have to dig deeper.  While the opinion does not provide much particulars about the customer list (other than to say that Polymer never saw it and that it had no markings to suggest that it was Target’s list), Polymer was perhaps too willing to accept what I think was a relatively incredulous claim by Millman — i.e., that she had compiled this list on her own, a list of customers that led to substantial sales for Polymer when its competitor was in the throes of bankruptcy. Frankly, it seems all too convenient, which is perhaps why the Supreme Court was unwilling to dismiss the claim.  

In addition, Polymer would have been well served if it had taken the steps that HP did in its dispute with IBM in the IBM v. Visentin case last year, steps that would have assured a court that it was adequately protecting the former employer’s trade secrets and customer interests (see my post from last November). If it had done so, Polymer might have been able to secure outright dismissal of the trade secret claims.