When an employee leaves to join a competitor, the former employer may have concerns that the employee will use its proprietary and confidential business information to assist that competitor. These concerns may lead the former employer to conduct a forensic review of the employee’s access to its computer systems preceding their departure, and to send a demand to the former employee and their new employer to preserve electronic records pending potential claims relating to trade secret protections.

Last month, the North Carolina Supreme Court demonstrated how ignorance of these evidence preservation directives can negatively impact defense of trade secret misappropriation claims. In Relation Ins. Inc. v. Pilot Risk Mgmt. Consulting LLC, the defendants were insurance employees who left their employer to join a company started by a former co-worker. The former employer sued the company who hired these workers along with those employees, alleging breach of contract and trade secret misappropriation. As part of the lawsuit, the former employer sent cease and desist letters to its former employees asking them to preserve anything relating to the case. The plaintiff also filed a motion with the court seeking an order to preserve information on the defendants' personal devices.

The North Carolina Business Court subsequently concluded that after receiving these cease and desist letters, the defendants began systematically deleting information on their personal cellphones and computers. Despite this conclusion, the business court dismissed the trade secret claims because the plaintiff failed to produce evidence of such misappropriation. The plaintiff appealed this decision to the state Supreme Court.

The North Carolina Supreme Court reversed the lower court’s dismissal and remanded the case for additional consideration of the scope of the defendant’s spoliation of evidence. Despite the lack of direct evidence that the defendants took proprietary information, the scope of their removal of information from their devices created an adverse inference that the missing records would have supported the plaintiff’s claims. The state Supreme Court directed the business court to make specific findings about the spoliation and what conclusions could be inferred from this behavior.

This decision contains important lessons for parties on both sides of trade secret misappropriation cases. For former employers, it is crucial at an early stage in the litigation process to send a written evidence preservation request. For companies considering hiring a competitor’s employees, offer letters or employment agreements should contain specific language directing those persons not to bring with them or use any proprietary information belonging to a third party. The new employer can also encourage the new hire to carefully review records in their possession and to be circumspect about avoiding any actions that could be viewed as misappropriating such information.

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