June 17, 2019

Tenth Circuit: Despite Probability of Ongoing Harm, Business Failed to Show Former Employee’s Solicitation Violated Business Agreement

The Tenth Circuit Court of Appeals issued its opinion in DTC Energy Group, Inc. v. Hirschfeld on Friday, December 28, 2018.

The district court denied plaintiff DTC Energy Group’s motion for preliminary injunctive relief. On appeal, the Tenth Circuit Court of Appeals affirmed.

DTC is a staffing and consulting firm, and has sued two of its former employees—Adam Hirschfeld and Joseph Galban—as well as a competing firm, Ally Consulting, LLC, for using DTC’s trade secrets to divert business from DTC to Ally.

Hirschfeld worked for DTC as a business development manager, and had signed an employment agreement that included confidentiality, non-solicitation, and non-interference provisions.  The confidentiality provision prohibited Hirschfeld from using DTC’s confidential information for his own benefit or the benefit of another company. The non-solicitation and non-interference provisions prohibited Hirschfeld from encouraging DTC’s current customers to take their business to a competitor and from recruiting DTC’s employees to work for a competitor, for the duration of his employment with DTC and for a period of 1-year thereafter, unless he resigned due to a change in ownership.

While employed by DTC, Hirschfeld used DTC’s resources to win business for Ally, allegedly in violation of his duty of loyalty to DTC and his employment agreement. Hirschfeld resigned from DTC in May 2017, citing a change in ownership. Upon his resignation, Hirschfeld took a flash drive containing DTC’s confidential information, and also kept his laptop logged into DTC’s Dropbox account so he could continue accessing DTC’s confidential information after his departure. The day after leaving DTC, Hirschfeld began working at Ally as its director of business development.

In September 2017, DTC filed its amended complaint and moved for preliminary injunction based on its claims for breach of contract, breach of duty of loyalty, misappropriation of trade secrets in violation of the federal Defend Trade Secrets Act and Colorado’s Uniform Trade Secrets Act, and unfair competition. The district court denied the motion, finding the duty of loyalty owed by defendants to DTC and the non-solicitation clause of Hirschfeld’s employment agreement had expired, and that DTC was unable to show a significant risk of future misappropriation of trade secrets and unfair competition. The district court reasoned that because a majority of the conduct at issue had occurred before DTC moved for a preliminary injunction, the resulting harm to DTC was therefore identifiable and could be remedied by an award of damages.

On appeal, DTC argued that the district court’s finding that DTC had established a significant risk of irreparable harm based on defendants’ past misconduct was erroneous because it failed to take into consideration the harm DTC continues to suffer as a result of defendants’ past misconduct—specifically the harm to DTC’s goodwill and competitive market position.

In its review of the district court’s decision, the Tenth Circuit focused on the showing of irreparable injury in the absence of the issuance of a preliminary injunction. The district court had found that DTC had shown a probability of irreparable harm from Hirschfeld’s ongoing breach of his employment agreement, but not with respect to DTC’s other claims.

DTC’s trade secret claims did not establish a probability of irreparable harm because there was no evidence in the record that defendants retained access to DTC’s confidential information or trade secrets. While the federal Defend Trade Secrets Act and Colorado’s Uniform Trade Secrets Act authorize preliminary injunctive relief to prevent actual or threated misappropriation of a trade secret, the Tenth Circuit concluded that DTC had not offered sufficient evidence that defendants currently possessed DTC’s trade secrets or would be likely to regain access to DTC’s trade secrets.

DTC’s unfair competition claim did not establish a probability of future irreparable harm because DTC had offered no evidence that Ally continues to appropriate DTC’s name or resources to solicit business, nor was there any evidence demonstrating ongoing confusion within the industry as to the relation between the two companies.

DTC’s breach of duty of loyalty claim also did not give rise to a future of irreparable harm. Because DTC identified the 12 contracts that Hirschfeld diverted from DTC to Ally and had previously hired experts to value the company during the change of ownership, the Court of Appeals reasoned that both the prior loss of DTC’s customers and consultants and the general decline of DTC’s value of a business could be quantified in money damages.

While DTC had shown a probability of future irreparable harm from Hirschfeld’s ongoing solicitation of DTC’s customers and consultants, the district court still denied injunctive relief as DTC had not shown a likelihood of success on the merits of the claim. The district court found that Hirschfeld was not bound by his employment’s non-solicitation provision as the change in ownership clause provision had been triggered.

On appeal, DTC argued that the prior breach doctrine prevented Hirschfeld from relying on the change in ownership clause, stating that Hirschfeld could not claim the benefit of the contract’s change in ownership clause after he had already violated the contract by improperly diverting business to Ally prior to his resignation. The Tenth Circuit agreed with the district court’s finding that the prior breach doctrine was inapplicable, as this was not an instance where DTC was defending against a demand specific performance, and the text of the employment agreement itself did not prevent Hirschfeld from relying on the provision in instances of prior breach. The Circuit went on to say that Hirschfeld’s present solicitation of DTC’s customers and consultants would not support issuing a preliminary injunction because the injunction would exceed the 1-year durational scope of the non-solicitation (the agreement’s provisions had expired prior to the time of the appeal).

In his concurrence, Judge McHugh wrote that in some circumstances an injunction can supported by the irreparable harm caused by defendants’ legal actions that would not have been possible but for their past breaches, as courts will sometimes enjoin future legal conduct because it was made possible by prior illegal conduct and will cause irreparable harm to the plaintiff. However, DTC had not pointed to any evidence of future irreparable harm stemming from defendants’ past misconduct (e.g., evidentiary support that DTC’s goodwill and competitive market position continues to be harmed) in the record that should have been considered by the district court, therefore the district court’s denial should be affirmed.

Dissemination of Confidential Client Information Discouraged in Formal Ethics Opinion 130

The Colorado Bar Association Ethics Committee recently issued Formal Opinion 130, dated April 3, 2017. Formal Opinion 130 addresses the disclosure of confidential client information, including information that is publicly available, such as when the information has been on the news. The opinion concludes that dissemination of such information is prohibited by the Rules of Professional Conduct, and specifically states that there is no exception for information contained in the public record.

Formal Opinion 130 also addresses the use of information about former clients, concluding that such use may be allowed under the Rules when such information is “generally known.” The opinion advises attorneys to exercise caution when using information about former clients.

The opinion offers redaction and informed consent as reasonable measures to use for the dissemination of confidential client information, but cautions that merely redacting the client’s name is likely insufficient to comply with the Rules.

Finally, the opinion cautions against editing confidential client information in order to mislead or misrepresent positions. This would implicate Rule 8.4(c), which prohibits conduct involving dishonesty, fraud, deceit, or misrepresentation.

The opinion concludes, “In many situations, making information obtained in the course of representing a client public is helpful, either to other lawyers or to educate the public.  But client confidences must be respected.” Lawyers should use caution when disseminating confidential client information.

Formal Opinion 130 by cleincolorado on Scribd

ABA Formal Ethics Opinion Issued Regarding Secured Communications of Client Information

On Thursday, May 11, 2017, the ABA Standing Committee on Ethics and Professional Responsibility released Formal Opinion 477, “Securing Communication of Protected Client Information.” The opinion discusses internet transmission of protected client information, concluding that:

A lawyer generally may transmit information relating to the representation of a client over the internet without violating the Model Rules of Professional Conduct where the lawyer has undertaken reasonable efforts to prevent inadvertent or unauthorized access. However, a lawyer may be required to take special security precautions to protect against the inadvertent or unauthorized disclosure of client information when required by an agreement with the client or by law, or when the nature of the information requires a higher degree of security.

Formal Opinion 477 is an update to the basic confidentiality requirements addressed in Formal Opinion 99-413. The opinion was issued in response to the 2012 amendments to the ABA Model Rules in which technological competency was enunciated. This opinion discusses cybersecurity and measures that lawyers should take to safeguard client information, electing to reject requirements for specific security measures in favor of a fact-specific approach to business security obligations.

The opinion offers guidance on what reasonable steps an attorney may undertake in response to a cybersecurity threat, including:

  1. Understand the nature of the threat;
  2. Understand how confidential client information is transmitted and where it is stored;
  3. Understand and use reasonable security measures;
  4. Determine how electronic communications about client matters should be protected;
  5. Label confidential client information;
  6. Train lawyers and nonlawyer assistants in technology and information security; and
  7. Conduct due diligence on vendors providing communication technology.

To read the entire opinion, click here.

Sobering Statistics — Prevalence of Alcohol Use and Mental Health Issues Among Lawyers

COLAPEditor’s Note: If you are or someone you know is struggling with substance abuse or mental health issues, please contact COLAP for confidential assistance at (303) 986-3345 or (855) 208-1168. 

The legal profession is noble indeed. Lawyers are tasked with holding high standards of integrity while zealously advocating for their clients, often during the worst experience of their clients’ lives. Lawyers must maintain competence, diligence, truthfulness, and candor. Biglaw attorneys must be rainmakers as they work grueling hours in a high-stakes environment. Solo and small firm attorneys must also worry about bringing in and keeping clients, but they also have office management duties. In-house counsel must be knowledgeable about many different areas of the law so they can provide competent representation on any issue their business may face. Prosecutors balance heavy caseloads while trying to bring justice to grieving victims. Defense attorneys sometimes face literal life-or-death situations with their clients. The law is not a profession for the faint of heart. And it shows—stories of lawyer suicides are so common it sparked a CNN report, “Why Are Lawyers Killing Themselves?” The South Carolina Bar Association’s South Carolina Lawyer published “The Lawyer’s Epidemic: Depression, Suicide, and Substance Abuse.” Patrick Krill wrote a compelling article for “The Hennepin Lawyer” called “Legally Intoxicated: The Impacts and Implications of Substance Abuse in the Practice of Law,” describing one fictional partner’s descent into substance abuse but also describing situations that are all-too familiar for many lawyers.

A new study from the Hazelton Betty Ford Foundation revealed alarming rates of substance abuse and mental health disorders among attorneys. Nearly 13,000 legal professionals responded to an anonymous survey posted by bar associations across the country. Of the respondents, 53.4 percent were men and 46.5 percent were women. Age was measured in 10-year increments beginning with under 30 and ending with 70 and older, and respondents were fairly evenly divided through the age groups, with the fewest responses from the 70+ attorneys and the second fewest from the under-30s. Marital status and race/ethnicity were also considered; the vast majority of participants were white/Caucasian (91.3 percent) and married (70.2 percent). Professional characteristics, including work environment, position in firm, hours per week, and whether litigation was involved, were also examined. Participants self-reported on alcohol and substance use, and 84.1 percent reported using alcohol in the past 12 months.

The study included a 10-item self-report test called the Alcohol Use Disorders Identification Test (AUDIT), which is used to screen for hazardous use, harmful use, and potential alcohol dependence. An alarming 20.6 percent of reporting attorneys had positive AUDIT screens, as compared to 11.8 percent for a broad, highly educated workforce and 15 percent for physicians. The youngest attorneys were the most likely to report problem drinking—31.9 percent of the under-30 attorneys and 25.1 percent of attorneys aged 31-40 had positive AUDIT screens, with the percentages tapering off for each age segment. Similarly, attorneys in practice 10 years or less reported the highest rates of problem drinking—28.1 percent of new attorneys had positive AUDIT scores, with percentages diminishing in each age segment. The results were fairly static across all types of firms; private firms and bar administration had the highest rate of positive AUDIT screens but solos, in-house (government), in-house (corporate), and law schools were not far behind. Junior associates were most likely to screen positive for problem drinking, and senior partners were least likely.

The study also found alarmingly high percentages of depression and anxiety among responding attorneys. Of the attorneys surveyed, 28 percent experienced mild or higher levels of depression, 19 percent experienced mild or higher levels of anxiety, and 23 percent experienced mild or higher levels of stress as measured on the DASS-21 scale. Over 60 percent of the attorneys surveyed reported having experienced anxiety at some point in their career, and 45.7 reported having experienced depression. Suicidal thoughts and actions were also described, with 11.5 percent of responding attorneys admitting they had had suicidal thoughts at some point in their careers and 2.9 percent admitting self-injurious behaviors. The study noted significantly higher levels of stress, anxiety, and depression among those screening positive for problematic alcohol use, and those with stress, anxiety, and depression scores within the normal range endorsed significantly fewer problematic alcohol behaviors. The study also remarked that alcohol can cause mental health issues, and mental health issues can often lead people to self-medicate with alcohol, so the two issues frequently co-exist.

Among all respondents, the same barriers to treatment for substance abuse and mental health disorders were raised: not wanting others to find out they needed help and concerns about privacy and confidentiality. However, those who sought treatment in programs designed for legal professionals reported significantly lower AUDIT scores than those who attended programs not tailored to legal professionals.

Colorado has a lawyer assistance program tailored for legal professionals, appropriately named the Colorado Lawyer Assistance Program or COLAP. COLAP is completely confidential, and in fact Colorado Supreme Court Rule 254 establishing COLAP provides that none of the information gathered by COLAP can be released without a signed release. COLAP’s mission is to protect the interests of clients, litigants, and the general public by educating the bench, bar, and law schools regarding the causes of and remedies for impairments affecting members of the legal profession, and to provide confidential assistance to lawyers, judges, and law students who suffer from physical or mental health issues, or other impairments that affect their ability to be productive members of the profession. As COLAP’s website informs, “Getting help won’t sabotage your career, but not getting help can!”

If you are among the one out of every five attorneys who struggles with problematic alcohol use, or the one-in-four attorneys who is experiencing depression, please do not struggle in silence. Contact COLAP or your personal physician today.

Conducting a Client Intake — A Five-Minute Mentor Video

In celebration of Legal Professionalism Month, the Colorado Bar Association is issuing weekly five-minute mentor videos on topics related to professionalism. This week’s video is presented by Peter Goldstein, the co-chair of the CBA’s Professionalism Coordinating Counsel. In this video, he discusses the client intake and potential areas of concern for practitioners.

Client Intake by Peter Goldstein from Colorado Bar Association on Vimeo.

Colorado Supreme Court: Exception to Physician-Patient Privilege when Patient Institutes Action Arising Out of Physician’s Care or Treatment of Patient

The Colorado Supreme Court issued its opinion in In re Ortega v. Colorado Permanente Medical Group, P.C. on November 7, 2011.

Physician–Patient Privilege—Health Maintenance Organization—Confidentiality Requirements.

The Supreme Court held that CRS § 13-90-107(1)(d)(I) provides an exception to the physician–patient privilege codified in CRS § 13-90-107(1)(d). The exception applies when a patient institutes an action against a physician, and that action arises out of or is connected with the physician’s care or treatment of the patient. In that instance, the information acquired by the physician is not privileged.

The Court also held that CRS § 10-16-423 does not govern the physician–patient privilege; instead, it governs the confidentiality of health maintenance organization (HMO) members’ information. CRS § 10-16-423 controls the confidentiality of enrollee information provided to HMOs by enrollees and medical providers, and contains an exception for the disclosure of relevant information in the event a claim or litigation occurs between the HMO and the enrollee.

Finally, the Court held that the trial court did not abuse its discretion when it denied plaintiff’s motion for a protective order and determined that plaintiff’s electronic medical record was relevant to preparing a defense. Accordingly, the Court discharged the rule to show cause.

Summary and full case available here.

Colorado Address Confidentiality Program Rules Amended

The rules for the Colorado Address Confidentiality Program have been revised. The proposed amendments have been made to the following rules:

  • Application Assistant Designation
  • Participant Telephone Number and Address Changes
  • Expedited Release of Participant Information to Criminal Justice Officials or Agencies
  • Public School Enrollment and Record Transfers

The Colorado Address Confidentiality Program provides survivors of domestic violence, sexual offenses, or stalking/harassment with a means to prevent abusers and potential abusers from locating them through public records. The goal of the program is to help survivors stay safe by protecting their location. The program is administered by the Colorado Department of Personnel & Administration.

A hearing on the revised rules will be held on Monday, October 3, 2011 at 633 17th Street, Suite 1600, Denver, Colorado 80202, beginning at 10:00 am.

Full text of the proposed rules can be found here. Further information about the rules and hearing can be found here.

Directive Concerning Public Access to Court Records Revised by Colorado Supreme Court

The Colorado Supreme Court has issued a revised Chief Justice Directive, which was adopted and effective as of August 1, 2011. The changes reflect amendments made by the Public Access Committee.

The purpose of CJD 05-01 is to provide reasonable access to court records while simultaneously ensuring confidentiality in accordance with existing laws, policies, and procedures. In addition, the directive is intended to:

  • provide direction to Judicial Branch personnel
  • promote the accuracy and validity of the information in court records that is released to the public
  • provide guidance regarding the content of the Judicial Branch web sites

Click here to review the public access policy in its entirety.