Bottom Line Business Insights : Maryland Business Lawyer & Attorney : Wagonheim Law Firm : Mergers & Acquisitions & Contractual Negotiation

In a disturbing development, the New Jersey Supreme Court ruled that an employee may take confidential files for the purpose of helping in the prosecution of a discrimination claim. The Court, ruling in Joyce Quinlan v. Curtiss-Wright Corporation, found that the employee’s use of the confidential materials was a protected action for which termination would be improper.

Joyce Quinlan had worked for Curtiss Wright for approximately 20 years when she came to believe that she had been wrongfully passed over for promotion in favor of a male employee. She then devoted herself to the collection and copying of over 1,800 documents from personnel files and project work files to which her position gave her access. 

Selecting documents she believed were helpful to her assertion of gender bias within Curtiss Wright, Quinlan turned the documents over to her attorneys. The documents were admitted at trial and served as the basis for a significant award against Curtiss Wright, including punitive damages.

The Supreme Court of New Jersey upheld the verdict.

In its ruling, the Supreme Court attempted to balance the interests of aggrieved employees with those of employers seeking to preserve the confidentiality of their information.   In so doing, the Court acknowledged the competing interests of each party, stating:

In making these evaluations, the court must be mindful that both employers and employees have legitimate rights. Employers have the right to operate their businesses within the bounds of the law and legitimately expect that they will have the loyalty of their employees as they do so. Employees have the right to be free of discrimination in their employment and the right to speak out when they are subjected to treatment that they reasonably believe violates that right. Balancing all of those considerations is a difficult and important task.

Applying a 7 point balancing test, the Court made it clear that employees are generally safe copying and using an employer’s confidential documents if: (1) the employee acquires the documents in the normal course of his or her job duties; (2) the documents are delivered only to counsel; (3) the employee has a good faith basis for believing s/he has a meritorious case; and (4) the copying of the documents does not interfere in the employer’s business. 

What made the Quinlan ruling so alarming was that it was rendered after a thorough review of applicable federal and state case law. The prospect that the Quinlan decision could be adopted by Maryland and other states should send a shock wave through employers seeking to protect their trade secrets and confidential records. 

While certainly not urging employers to shield illegitimate or improper discriminatory behavior, we would highly recommend that companies review their document management and security policies with an eye toward preventing unauthorized access. Our recommendations are as follows:

1. Ensure that applicable written policies place employees on notice that copying or scanning documents as well as removal of documents from the workplace without proper authorization is a termination-level offense.
   
   
2. Review security measures for personnel files – both medical and administrative – as well as other confidential documentation, including trade secrets, pricing, and customer lists. Determine: (a) who has access; (b) when access is permitted; (c) whether unauthorized access is possible; and (d) how management would know if there was unauthorized access, copying, or removal of files.
   
   
3. Update any security measures, document control technology, and access procedures necessary to ensure that your documents only go where you want them to go.

Sure, I know this may sound a bit alarmist, but consider one thing about document management and security: 

It is better to have it and not need it, than need it and not have it.

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There is no such thing as privacy. You would know that if you were inclined to take even a casual glance at Sports Illustrated as 2010 ran down. The sports world was consumed with stories about Brett Favre’s alleged texts to Jets sideline reporter, Jenn Sterger and now two massage therapists as asserted in recent court filings. Not to be outdone, Jets head coach, Rex Ryan, found himself on the sidelines while all of New York seemingly became obsessed about his wife’s internet persona. 

Now, a Michigan court is preparing to weigh in on the subject of online privacy. According to the ABA Journal, a Michigan man is facing felony charges for reading his wife’s e-mail in an effort to determine whether or not she was having an affair. He was charged under a statute intended to apply to computer hacking, but is read to apply to a circumstance in which someone uses another person’s password, without permission, to, in this case, do a little investigative research.

Given the prevalence of online activities in our society, the issue of online privacy has almost universal ramifications.   A week doesn’t go by when we do not hear a question from one of our clients involving employees texting, using Facebook accounts, or simply shooting e-mails around the office. The legal issues can run the gamut from unauthorized use of equipment to sexual harassment and the creation of a hostile work environment.

But what are the employer’s rights?

There are three statutes which have to be considered when an employer contemplates monitoring the employee’s use of e-mail, telephone or the internet: (1) the Electronic Communications Privacy Act of 1986; (2) the Maryland Wiretap Act; and (3) the Maryland Stored Communications Act.   Maryland courts have consistently explained that the purposes of Maryland law on the subject is to prevent the unauthorized interceptions of conversations where one party has a reasonable expectation of privacy. 

If asked, many employers would maintain that no employee has a reasonable expectation of privacy if company equipment is being used for the communication. But that is not always the case. The question can turn on the type of monitoring at issue and the employer’s goals in taking the offending actions. For example, videotaping employees is different than recording their phone conversations or perusing their e-mail after they have left for the day.

In each case, there may be a legitimate business purpose behind the company’s actions. We’ve all heard the recorded message that “calls may be monitored for quality assurance.” Another reason for monitoring, this time relating to e-mail, is that companies can be sued for copyright infringement or even sexual harassment, depending upon information downloaded by employees onto company systems. 

By far, the best policy for any business where monitoring will take place or even where employees have access to e-mail and the internet is to create and distribute a written policy explaining the company’s right to engage in the specific type of monitoring anticipated by the company. The warning alone, if well drafted and universally distributed, will serve to limit or eliminate the employee’s expectation of privacy. And in the end, that’s what it comes down to – fair warning, reasonableness, and the question of what a normally intelligent person’s privacy expectations should have been.

We’ll just have to see how the court defines “reasonable expectation of privacy” where Brett Favre and the Michigan husband are concerned.

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“I got a phone call this morning from one of our oldest customers. He fired us. After 20 years, he fired us. Said he doesn’t know us anymore. I think I know why.” 

The speaker recounted his phone conversation to his account reps, saying “we used to do business with a handshake, face-to-face. Now it’s a phone call, a fax, ‘get back to you later,’ with another fax, probably.” 

This United Airlines commercial was originally aired before e-mail and the advent of social media. First aired twenty years ago, in 1990, it still resonates. So many businesses are started by an entrepreneur, skilled in the producing the product or service that spawned the company. Customers came because of the skill and stayed because of the attention. As the owner of a small business, the founder could track every project and knew every client. When someone was upset; he knew it.

Growth has a way of making that kind of personal attention obsolete. Time passes and a founder looks around to realize that whole projects are being performed for customers he never met.   And what about the ones he knew – the ones who built his business or who inspired him to go into business in the first place? Chances are, they’ve been delegated. Delegated to talented people, to be sure, but delegated just the same. 

Sooner or later, the thought has to occur to these customers – your old friends -- that if they mean little enough to your company that they can be delegated, your company means little enough to them that they can go elsewhere.  

Looking ahead to 2011, most business owners set targets for growth -- more revenue, more customers, bigger projects, better distribution. But how many set goals reflecting stronger relationships, customer retention, and expressions of gratitude? 

Many years ago, I read a book in which the author urged business owners to “pay attention to the ‘fine’s.’” He meant that people rarely voice their complaints. When asked about service or the particular product they purchased, even when dissatisfied, they’d normally respond that things were “fine.” Not every customer can be counted on for enthusiasm. After all, there isn’t an infinite amount of enthusiasm to go around. But the silence and the “fine’s” speak volumes to those with a keen enough ear and enough focus to notice. 

So what are you doing to focus on client retention, rather than just growth? Studies indicate that a new client is 7 times more expensive in terms of marketing and advertising dollars than existing clients. The point is that it is much cheaper and more efficient to keep the clients you have than spend every ounce of energy trying to bring new prospects in the door. 

If you do not already track trends in returning business, 2011 is an ideal time to start. After all, nothing speaks to customer satisfaction more than repeat business. Even more than tracking it, look for the things that increase the pace of returning business over time. 

Perhaps, like those executives in the United Airlines commercial, you can forgo e-mail, faxes and phone calls, and, just once in a while, put in the time to travel even great distances for a handshake.

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One of my favorite lawyer jokes goes like this:

Q:  What’s the definition of a corporate lawyer?

A:  Someone who prevents exciting things from happening.

Unfortunately, and all too often, the joke is true.  Many corporate lawyers fail to see the forest for the trees.  They get so wrapped up in focusing on every possible thing that could go wrong in your business or transaction that they “overdraft” your corporate documents and contracts and scare off the other party to your transaction.  Moreover, they often adopt an adversarial stance vis a vis your business partners, customers, and contracting counterparties, which ends up souring what is supposed to be a positive business experience for the companies involved.  All this extra time and extra analysis ends up costing you time, unnecessary anxiety, and more money in legal fees.

 In short, corporate lawyers too often act like overly wordy litigators.  And that’s not what we’re supposed to be.  We’re supposed to help you build, not to tear down.  We’re supposed to help you perform cost-benefit analyses with respect to your contract language, not throw in everything but the kitchen sink.  And building and benefiting should always be a cooperative and forward-looking endeavor, not an adversarial and retrospective one.  It’s not about your lawyer’s ego.  It’s about your business.

However, there’s at least one time during the life of your company when letting your lawyer get analytical and obsessive is actually more beneficial than detrimental, and when there’s a quantifiable benefit to the money you’re paying him for his services.  And that time is when you decide to start a new business.

You’ve got to get your ducks in a row, make sure the language in your formation documents is tight, and keep your gaze steely.  You don’t want your lawyer to stop this exciting thing from happening, but you DO want him to slow it down enough for you to make some serious decisions that will affect the financial and operational future of your new enterprise.  Decisions such as choice of corporate form, tax considerations, investor rights and obligations, corporate governance, banking relationships, and a host of other issues.  Some can be put off until a few months after you’re up and running.  Most cannot.  This is one time when preventing an exciting thing from happening too quickly is actually desirable.

 Are you going to part with some money in legal fees, as the title of this blog states rather forcefully?  Probably.  You might be able to spend a bit less, but you might end up spending more.  It depends on the type of business you’re starting, your financing, your facilities, your investors, your choice of corporate entity, certain tax considerations, and your appetite for risk, among other things.  It won’t cost you an arm and a leg, but it’s going to cost you something.  And it’s going to be some of the best money your business ever spends. 

 I’m going to explain why over the course of the next several weeks of blogging.  Stay tuned . . . .

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