Insurer’s suit against former employees remanded to Biz Court

In an action brought by an insurance company against former employees who left to start a competing insurance company, the Business Court’s summary judgment orders must largely be reviewed in light of an order for adverse inference, the North Carolina Supreme Court has ruled.

An independent insurance company and broker in the business of the sale, marketing and provision of various insurance products and services shifted its commission rate model, giving rise to discontent among employees.

One of them left in early 2020 and formed a new insurance agency as a direct competitor. Several other employees followed.

The insurance company filed suit against the former employee and three others, alleging breach of their employment agreements, tortious interference and unfair and deceptive trade practices.

A settlement agreement was reached between the parties.

Over the next few months, seven more employees left the insurance company for the new company. During this time, these employees sent numerous messages to each other, as well as to their old clients; they also forwarded various documents from their work email to their personal email accounts.

The insurance company then filed a second lawsuit – which was designated as a mandatory complex business case – alleging misappropriation of trade secrets under the North Carolina Trade Secrets Protection Act (NCTSPA) and federal Defend Trade Secrets Act (DTSA).

Despite having received a preservation notice, the former employees reset their cellphones, switched out the SIM cards and deleted files on laptops.

On cross motions for summary judgment, the Business Court granted in part and denied in part but also granted the insurance company’s motion for adverse inference.

The insurer appealed.

In Relation Insurance, Inc. v. Pilot Risk Management Consulting, LLC, Justice Tamara Barringer affirmed the motion for adverse inference for the insurance company as well as summary judgment in favor of the employees on the insurance company’s unjust enrichment claim but reversed on all other claims the insurance company raised on appeal.

“The spoliation of evidence in this case is remarkable,” the court wrote. “As the forensic analyst opined, ‘in his 35+ years of experience, he has never seen such extensive and coordinated deletions of evidence across so many electronic devices as he discovered in his forensic examination in this matter.’”

However, the extensive spoliation of evidence rendered meaningful review of many factual questions “exceedingly difficult,” the court said, as “the Business Court failed to identify with specificity where and how the inference should be drawn, leaving its scope unclear.”

Affirming the motion, the court instructed that on remand the Business Court needed to clarify its application of the inference as to each claim and detail in its orders where the inference applies.

Turning to the misappropriation of trade secrets claim, the court reviewed two documents – a customer list and a client renewal list – that the insurance company identified as trade secrets that the Business Court rejected.

While the court acknowledged that a client list may not qualify as a trade secret if it could have been compiled through public listings, no online source provided those outside the business with a compilation of the clients serviced by the insurance company and the employee could only recall three (of the 98) clients from memory.

In addition, the company computer systems were password protected, the insurance company pointed out, and most of the employees’ clients at the new company can be identified on the list, demonstrating the value of the list to the business.

Finding genuine issues of material fact as to whether the client list constitutes a trade secret, the court reversed the Business Court. For similar reasons, it reached the same conclusion with the client renewal list.

The court also found that the purported trade secrets may have been misappropriated, taking a different approach than the Business Court.

“[M]ere access to a trade secret alone is insufficient,” to demonstrate misappropriation under the NCTSPA, the court said. “There must also be an absence of express or implied consent or authority at the time that the employee had a specific opportunity to acquire the trade secret.”

Applying this understanding to a production analysis that the Business Court dismissed both the NCTSPA and DTSA claims against an employee for retaining, the court reversed.

While the insurance company did not provide evidence to suggest that the employee acquired, had a specific opportunity to acquire, or used the document without consent or authority, the adverse inference related to this factual defect, the court said.

The insurance company asserted breach of contract claims against the employees for breaching provisions that prohibited the solicitation of employees and clients in their employment agreements.

Remanding to the Business Court, the court found that evidentiary disputes regarding the size and scope of the insurance company and its affiliated members prevented it from making a ruling, as the breadth of each non-solicitation provision was linked to the issue.

The court was not persuaded by the insurance company to apply the “blue-pencil doctrine” to save the non-solicitation provisions if the court were to find them unenforceable.

“Simply stated, [the insurance company is] seeking to invoke the blue-pencil doctrine for interlineation deletions in over forty different places throughout a single contract,” the court said. “North Carolina’s strict application of the blue-pencil doctrine does not allow courts to surgically excise language.”

The court remanded the provisions as they were written.

Considering the insurance company’s claims for breach of the settlement agreement from the first lawsuit against those former employees, the court reversed the Business Court’s dismissal of the claim, remanding with a reminder about the adverse inference issue.

The court affirmed the Business Court’s grant of summary judgment in favor of the employees on the insurance company’s unjust enrichment claim, albeit on alternative grounds.

“The underlying basis for [the insurance company’s] unjust enrichment claim is that the Former Employees took or wrongfully retained [its] clients, employees, and confidential information and gave them to [the new company],” the court wrote. “However, a taking and transferring of another’s property without permission is not a willing transfer. Accordingly, [the insurance company has] not shown that [it] ‘conferred’ the benefits on defendants.”

Finally, the court reversed the Business Court’s grant of summary judgment in favor of the employees on the insurance company’s Computer Fraud and Abuse Act (CFAA) claims, again highlighting its inability to determine where and how the adverse inference might apply to the factual defects in the claim.

The court also recognized that civil liability under the CFAA is strictly limited to those claims resulting in loss “aggregating at least $5,000 in value” during any “1-year period,” noting that the Business Court must undertake an additional inquiry as to the extent of loss resulting from the civil claims.

Kip D. Nelson of Fox Rothschild in Greensboro, who represented the insurance company, did not respond to a request for comment.

Neither did Greensboro attorney Amiel J. Rossabi of Rossabi Law Partners, who represented the former employees.