Employer’s Duty to Report Crimes: Trade Secrets & Computer Fraud

by:  Hayes Hunt and Jonathan Cavalier

police telephone.jpgOver the past decade, many European countries have passed laws mandating that individuals and employers report criminal conduct.  In the United States, however, individuals are typically not required to report criminal conduct that they have observed.  Likewise, employers have no general duty to report criminal conduct by their employees.  Often, this lack of an affirmative duty or any other incentive to report criminal conduct will lead an employer to simply look the other way, rather than risk disrupting workflow, losing a valuable employee, bringing negative publicity on the company or facing liability for invasion of privacy or defamation. Consider the following scenario:

SCENARIO: A salesperson for a manufacturing company is having a record-setting year.  His sales are continually the best in the company.  Another employee notices a competitor’s price list and contacts sheet on his desk.  When asked about these materials, the employee reveals that he used to work for the competitor and that, when he left, his former supervisor failed to disable his computer access.  He has since continued to log in to his former employer’s system to gain access to information that enables him to undercut his competition on price.  What should his current employer do?

 

businessman.jpgThe employee above is likely breaking at least two federal laws.  First, he is certainly violating the federal Computer Fraud and Abuse Act, which prohibits, among other things, knowingly accessing a protected computer with intent to defraud and to obtain anything of value.  He is also likely violating Section 1832 of the Economic Espionage Act of 1996, which criminalizes misappropriation of a trade secret with the intent to convert the trade secret to the economic benefit of someone who is not the rightful owner.  He is also likely violating a slew of state laws regarding computer fraud and trade secret protection.

It goes without saying that the employee should be severely disciplined for his conduct, which has subjected the employer to potential civil and criminal liability.  The best course of action may be to terminate the employee.  Should the employer report his conduct to the authorities? On one hand, if the employer keeps the conduct of the employee in-house, the situation could blow over.  This is a huge risk.

If, however, the conduct is discovered by the competitor, a lawsuit is sure to follow and the competitor may report the individual’s actions to the appropriate authorities.  In the latter situation, reporting the employee to the authorities would have gone a long way toward establishing that the employer does not authorize or condone such trade secret theft and that, when confronted with a rogue employee, the employer took swift and decisive action to prevent the conduct from reoccurring.

trade scecret.jpgThe key to avoiding this kind of dilemma is to prevent the criminal conduct from occurring in the workplace.  Employers should institute a trade secret policy which clearly specifies that employees are not encouraged, authorized or permitted to use trade secrets or confidential information belonging to competitors and that, if an employee is caught using such information, he will be subject to severe discipline.  By establishing and enforcing such a policy, employers can gain significant protection against suits for trade secret misappropriation and  unfair competition.

 Published in The Legal Intelligencer on 4/18/12.

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About the Editor
Hayes Hunt concentrates his practice in the representation of individuals, corporations and executives in a wide variety of federal and state criminal law and regulatory enforcement matters as well as complex civil litigation. Hayes is a partner in the firm's Commercial Litigation Department as well as its Criminal Defense and Governmental Investigations Group.
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