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Employee Misuse of Confidential Information

The Arizona Supreme Court’s ruling in Orca v. Noder opens the door for employers to make claims of unfair competition against employees who misuse the company’s confidential information.

In our January 2014 article, “Restrictive Covenants in Employment Agreements,” we wrote about the Arizona Court of Appeals ruling in Orca v. Noder. That case made its way to the Arizona Supreme Court, which last month issued its own opinion.

Although this new opinion did not affect the lower court’s reasoning regarding restrictive covenants, the Supreme Court did insert its own reasoning with respect to an issue of increasing importance in disputes between business owners and their former employees: unfair competition based on confidential information.

What the Supreme Court Has Taught Us in Orca

The Orca case involved an ex-employee (Noder) of a public-relations firm (Orca Communications). Orca alleged that Noder left with knowledge of confidential information (e.g., financial information, customer information, vendor information), set up a competing business, and used that confidential information to Orca’s detriment. The trial court dismissed all of Orca’s claims, including claims based on the use of confidential information, which the court held were displaced by Arizona’s Uniform Trade Secrets Act.

In light of the Arizona Supreme Court’s Orca opinion, we now know that the trial court erred by dismissing Orca’s claims that relied on allegations that its former employee misused confidential information. Those claims — claims for breach of fiduciary duty, tortious interference with business expectancies, and unfair competition — should have survived.

The Supreme Court opinion affirms that, even if confidential information is not a “trade secret” as defined by Arizona’s Uniform Trade Secrets Act, it could still be confidential information protected by Arizona law. The Act controls only confidential information that rises to the level of a “trade secret”; other kinds of confidential information will be governed by other statutes or by Arizona common law.

The Supreme Court refused to declare whether Orca actually had a viable common-law unfair competition claim, explaining that “discovery and further litigation” would be needed to ascertain all the facts. However, by citing several sources that Arizona courts use as common-law guides (namely, the Restatement of Torts and the Restatement of Agency), the Supreme Court seems to suggest that it is possible, depending on the facts of the case, to bring a common-law unfair competition claim based on an employee’s alleged misuse of confidential information.

Conclusion

For employers, Supreme Court’s Orca opinion means that, at the very least, employers that have been injured by a former employee’s use of confidential information are not without recourse, even if that confidential information is not technically a “trade secret.” In such cases, employers should consult with a litigation attorney to discuss the facts and explore what claims may be available.