Where a business alleges that a former employee stole its confidential information and gave it to a competitor which then used it to compete, the business has no claim for unjust enrichment against the former employee or competitor. KNC Techs., LLC v. Tutton, et al., 2019 NCBC 71 (J. McGuire). Without a claim for unjust enrichment, the business cannot seek a constructive trust against the competitor or former employee if no fraud or fiduciary duty otherwise exists.
Defendant Tutton worked for KNC Technologies, LLC (“KNC”) as a project manager from November 2012 through November 2013. At the time he became employed, Tutton signed a non-compete agreement with KNC that also prohibited him from disclosing KNC’s trade secrets and confidential information. On November 14, 2013, Tutton resigned from KNC, immediately began working for its competitor, Nitor Solutions, Inc. (“Nitor”), and began soliciting KNC’s customers. KNC subsequently discovered that for more than one month prior to his departure, Tutton had downloaded numerous electronic files containing KNC’s confidential and trade secret information and had given the files to Nitor. KNC filed suit against Tutton. Tutton then admitted that he had taken KNC’s confidential and trade secret information. KNC and Tutton thereafter reached a settlement agreement wherein Tutton agreed to an injunction prohibiting him from soliciting KNC’s customers and from retaining/using KNC’s trade secrets or confidential information for ten (10) years. The settlement agreement was memorialized in a consent order entered by the Superior Court. One year later, Tutton founded Defendant I-Tech Security & Network Solutions, LLC (“I-Tech”) and began competing against KNC. In 2018, Tutton and I-Tech solicited several of KNC’s customers. KNC filed suit against Tutton and I-Tech, accusing them of breaching the settlement agreement by soliciting KNC’s customers and using KNC’s confidential and trade secret information to compete. KNC asserted a claim against both Tutton and I-Tech for, inter alia, unjust enrichment based upon their use of KNC’s confidential and trade secret information to I-Tech’s benefit. KNC sought imposition of a constructive trust on any profits the Defendants had obtained from the use of KNC’s confidential and trade secret information. Tutton and I-Tech sought to dismiss the unjust enrichment claim, arguing that KNC had failed to allege the necessary element that it had conferred a benefit on either Tutton or I-Tech.
The Business Court agreed. In dismissing the unjust enrichment claim, the Business Court stated that it sought to dispel a “continuing and widespread misunderstanding” that a party can maintain a claim for unjust enrichment simply because the information or item the defendants took belongs to the plaintiff. (Opinion, ¶65-66). Holding that a claim for unjust enrichment must be based on a “contract implied in law in which one party has provided a benefit to another,” Id, the Business Court dismissed the claim because KNC had not alleged that it provided a benefit to either Defendant, but only that Defendants had taken something of value that belonged to it. Id. After dismissing the unjust enrichment claim, the Business Court found no basis to impose a constructive trust on any profits the Defendants gained from misuse of KNC’s confidential information because KNC pled no claim for fraud or breach of fiduciary duty. The request for a constructive trust was therefore dismissed as well.
Based upon this decision, a business will likely be unable to maintain an unjust enrichment claim against a competitor that receives its confidential information because the business will not be deemed to have “conferred a benefit” on the competitor, notwithstanding that the competitor is clearly obtaining a benefit by using the business’ information. This decision, along with the Business Court’s earlier decisions prohibiting a claim for conversion when electronic confidential information is merely copied and stolen (HCW Retirement & Financial Services, LLC v. HCW Employee Benefit Services, LLC, 2015 WL 4238193 (N.C. Super. Ct. July 14, 2015)), means it is unlikely that a business can maintain viable claims to recover ill-gotten profits against a competitor which receives and then uses the business’ stolen confidential information. A business should therefore take steps to protect itself by ensuring that, at a minimum, any employee who accesses confidential and/or trade secret information agrees in writing both to maintain the confidential nature of the information and to agree that she is in a fiduciary relationship with the business when accessing the confidential information. While such an agreement may not enable the business to bring a claim against the competitor, it might enable the business to recover its losses against the employee.
Additional legal points from this decision:
- Non-competes contained within a settlement agreement will likely be subject to a “situation-specific approach” and be analyzed as neither a covenant between an employer and employee nor as a covenant between a buyer and seller. (Opinion, ¶29).
- A consent judgment that merely incorporates the parties’ agreement and makes no further findings of fact is not a final judgment protected from being collaterally attached. (Id., ¶19—21).
Categories: Key Business Court Decisions