It’s not uncommon for executive employees with specialized knowledge in their fields to be poached by competing companies—but under a recent decision from the United States Bankruptcy Court for the District of Delaware, taking an old employer’s trade secrets or confidential and proprietary information with you may give rise not only to causes of action under state law, but to bankruptcy causes of action as well, against you and your new employer, if you engage in continuous use of the information after the old employer files for bankruptcy.
The decision, Corporate Claims Management, Inc. v. Shaiper, et. al. (In re Patriot National Inc.), springs from the hiring of Michelle Shaiper by insurance services provider Brentwood Services Administrators, Inc. (“Brentwood”). Allegedly, at the time she was hired by Brentwood, Shaiper was serving as the COO of Corporate Claims Management, Inc. (CCMI), a competing firm that was acquired by [affiliated] debtor Patriot National. As part of the acquisition, Shaiper executed a standard Non-Interference Agreement with CCMI, which acknowledged that she would acquire confidential information during her employment and provided that she would not engage in any activities that would interfere with CCMI’s business relationships. After receiving an employment offer from Brentwood, but while still employed by CCMI, Shaiper held a meeting with her team in which she alluded to moving employees and clients away from CCMI: “The idea is to get everybody to move over to where we’re going…get your resumes together because it’d be stupid not to.” Shortly after the meeting, Shaiper left CCMI for Brentwood, and in the following months she was joined by half of CCMI’s workforce and clients representing nearly half of CCMI’s annual revenue.
CCMI later filed for reorganization under chapter 11 of the Bankruptcy Code. In an adversary proceeding it commenced in bankruptcy court, CCMI made the above allegations and asserted that they gave rise to two violations of the Bankruptcy Code against Shaiper and Brentwood, along with Florida and Missouri claims including misappropriation of trade secrets, breach of contract, tortious interference, breach of the duty of loyalty, and unjust enrichment. In turn, Shaiper and Brentwood moved to dismiss the bankruptcy and state law causes of action.
In opposing dismissal of the bankruptcy causes of action, CCMI argued that it had properly alleged Shaiper and Brentwood violated Patriot’s automatic stay by maintaining and continually using Patriot’s misappropriated business information in violation of the Non-Interference Agreement. The bankruptcy court denied the defendants’ motion to dismiss, noting that other courts had found proprietary business information and customer lists to be property of the estate, and that a sufficiently pled allegation of continuous post-petition use could ultimately result in a ruling that such act did violate the stay.
CCMI also brought a claim for turnover under Section 542(a) of the Bankruptcy Code, which requires entities in possession of the bankrupt company’s property to deliver that property to the bankruptcy trustee (or, in this case, debtor in possession) and account for its value. Rejecting the motion to dismiss, the bankruptcy court determined that CCMI had properly alleged there was value in the Patriot business information at issue by stating that Shaiper and Brentwood had misused Patriot’s information to steal “fifteen customers with an aggregate annual revenue of nearly $3.4 million.” This allegation met the minimal pleading requirement of proposing any use, benefit, or value to the information. The bankruptcy court also held that CCMI was not judicially estopped from asserting the turnover claim on the basis of having failed to list any trade secrets on its bankruptcy schedules, as CCMI’s failure to do so was not in bad faith.
The court further denied Shaiper and Brentwood’s motions to dismiss the state law claims, with a few exceptions: the Missouri claim for misappropriation of the customer list, as the Supreme Court of Missouri had previously ruled that customer lists were not a trade secret, and the Florida claim for misappropriation of trade secrets against Brentwood, since Brentwood had not been a party to the Non-Interference Agreement between Patriot and Shaiper. In addition, the court dismissed some of the Missouri claims against Brentwood for tortious interference, aiding and abetting breach of fiduciary duty, and unjust enrichment, and state law claims against both Brentwood and Shaiper premised on improper use of CCMI’s customer list.
For companies in insolvency proceedings, Patriot National offers a roadmap for using the Bankruptcy Code to obtain more comprehensive remedies for trade secret use and misappropriation of confidential and proprietary information that may not be available under state law, especially as some of Patriot’s more specific claims under Florida and Missouri trade secret statutes and common law proved unsuccessful in the same proceeding. In particular, the bankruptcy causes of action allowed the debtor to attempt to recover more fully against Brentwood, which otherwise obtained dismissal of several of the state law claims against it based on a lack of knowledge of the Non-Interference Agreement; the court’s decision suggests that even if Brentwood did not act knowingly in its use of CCMI’s business information, CCMI could still seek a remedy to the extent that Brentwood benefited from the information’s use on a continuous basis after the bankruptcy case began. Conversely, Patriot National is a warning for job-switching executives and their new employers to be cautious regarding use of bankrupt competitors’ protected information; even if you might otherwise evade liability under state law, the expansive enforcement authority of a bankruptcy court with respect to property of the estate may be waiting around the corner.