Trade Secret Misappropriation By Employee: Is The Employer Liable?

The Indiana Supreme Court has held that the Indiana Trade Secrets Act requires that an employer knows or has reason to know that an employee was misappropriating trade secrets of a former employer before the new employer is liable for the misappropriation by the employee. Without such knowledge, the employer is not vicariously liable under the doctrine of respondeat superior.

Herbert Quandt had been employed by T.E. Scott, Inc. for ten years as an OEM sales person. The owners of T.E. Scott commenced negotiations to sell the company to Infinity Products, Inc. Scott asked all of its employees who wished to be employed by Infinity to complete an application process. Quandt refused and was fired. Quandt cleared out his office and took several boxes of file folders and materials with him. The owners reported that customer specific information was missing from Quandt's office after he left.

The next day, Quandt contacted Fabri-Tech Inc., a competitor of T.E. Scott, seeking a sales position. Fabri-Tech asked if Quandt had a non-compete agreement, which he answered truthfully that he did not. Fabri-Tech hired Quandt as a salesman. Three days later, T.E. Scott sold its business including its trade secrets to Infinity.

Quandt, immediately commenced contacting Infinity's newly acquired customers, and over the next several weeks Quandt quoted prices to those customers just below prices Infinity was charging the same customers. Quandt did not, however, use Fabri-Tech's internal cost and pricing analysis to make those quotes. As a result of Quandt's quotes, seven customers transferred their business from Infinity to Fabri-Tech.

Infinity sued both Quandt and Fabri-Tech for trade secret misappropriation. The lower court found Quandt liable because there was credible evidence that he had used trade secrets to make the quotes, but found Fabri-Tech not liable because there was insufficient evidence to show that Fabri-Tech had knowledge of or participated in the misappropriation. The Indiana Appellate Court reversed holding that Fabri-Tech was vicariously liable under the doctrine of respondeat superior irrespective of knowledge. The Indiana Supreme Court granted transfer.

Upon review, the Supreme Court found that there was insufficient evidence to find that Fabri-Tech "knew or should have known" of the misappropriation by Quandt, and thus, Fabri-Tech was not directly liable under the Indiana Uniform Trade Secrets Act. Further, the Supreme Court found that the Indiana Uniform Trade Secrets Act supplants the common law and provides a statutory remedy of trade secret misappropriation. Thus, the Supreme Court concluded that the Indiana Act statutorily requires "scienter" (i.e., knew or should have known), and consequently, an employer cannot be vicariously liable under the doctrine of respondeat superior without such knowledge.

This case leads to the conclusion that for self protection, employers hiring employees from competitors should, at a minimum, first ascertain that there is no non-compete agreement with the prior employer. Second, the new employer should have the new employee sign a statement for the personnel file that the new employee either does not have knowledge of any trade secrets of the prior employer or shall not use any such trade secrets of the prior employer while employed by the new employer. While such a statement may not necessarily assure protection against liability, it will at least show a good faith attempt to avoid misappropriation of trade secrets.

For further information, please contact Jay G. Taylor or John F. Prescott.