The problem of departing employees taking electronic data with them when they leave has troubled companies for more than a decade. A recent court decision now gives them another weapon to seek a remedy for the theft of electronic and other intangible data.
The decision—Thyroff v. Nationwide Mutual, made by the New York Court of Appeals—held that the ancient tort of “conversion,” which traditionally applied only to tangible property, also applies to electronic documents. Experts say the ruling provides employers additional protection against employee misappropriation of trade secrets, confidential information, and other company property.
Akerman
“This is significant because it gives companies another cause of action to go into court to retrieve their data and stop its dissemination,” says Nick Akerman, a computer fraud specialist at the law firm Dorsey & Whitney.
The case also “illustrates the evolution of an older, traditional body of law for application in the new online world,” notes Jeffrey Neuburger, a technology lawyer with the firm Thelen Reid Brown Raysman & Steiner.
In New York, conversion (where a plaintiff alleges that someone wrongly took possession of, or “converted,” some good he owned) originally applied to tangible property. It was later expanded to include other kinds of property such as shares of stock under the so-called merger doctrine, which recognizes that an intangible property right can be united with a tangible object for conversion purposes, Akerman says. The Thyroff decision takes it a step further by applying conversion to computer data.
Nationwide Mutual had an agreement with the plaintiff, Louis Thyroff, to act as an agent for the company. Nationwide leased him computer hardware and software, known as the agency office-automation (AOA) system, to facilitate the collection and transfer of customer information. The information from the AOA system was uploaded daily to Nationwide’s centralized computers.
The problem: While Thyroff did use the AOA system for business, he also used it for personal e-mail and correspondence.
Nationwide later cancelled Thyroff’s contract, repossessed its AOA system, and denied him further access to the computers, electronic records, and data, including his personal information stored on the computers. Thyroff filed a lawsuit, asserting a claim for the conversion of his business and personal information stored on the computer hard drives, which the court dismissed.
When Thyroff appealed, Nationwide argued that a conversion claim couldn’t be based on the misappropriation of electronic records and data because New York doesn’t recognize a cause of action for the conversion of intangible property. The Second Circuit determined that the issue was unresolved in New York and handed it up to the Court of Appeals, which answered that yes, conversion does apply to electronic data.
In the opinion, Judge Victoria Graffeo wrote that the tort of conversion “must keep pace with the contemporary realities of widespread computer use.” Noting that computers and digital information “are ubiquitous and pervade all aspects of business, financial, and personal communication activities,” the court said that a document stored on a computer hard drive “has the same value as a paper document kept in a file cabinet.”
Putting Conversion to Work
DECISION
Below are excerpts of the New York Court of Appeals decision in Thyroff v. Nationwide Mutual.
A variety of arguments have been made in support of expanding the scope of conversion. Some courts have decided that a theft of intangible property is a violation of the criminal law and should be civilly remediable; that virtual documents can be made tangible "by the mere expedient of a printing-key function;” that a writing is a document whether it is read on the computer or printed on paper; and that the expense of creating intangible, computerized information should be counterbalanced by the protection of an effective civil action …
Furthermore, it generally is not the physical nature of a document that determines its worth, it is the information memorialized in the document that has intrinsic value. A manuscript of a novel has the same value whether it is saved in a computer's memory or printed on paper. So too, the information that Thyroff allegedly stored on his leased computers in the form of electronic records of customer contacts and related data has value to him regardless of whether the format in which the information was stored was tangible or intangible. In the absence of a significant difference in the value of the information, the protections of the law should apply equally to both forms—physical and virtual.
In light of these considerations, we believe that the tort of conversion must keep pace with the contemporary realities of widespread computer use. We therefore answer the certified question in the affirmative and hold that the type of data that Nationwide allegedly took possession of—electronic records that were stored on a computer and were indistinguishable from printed documents—are subject to a claim of conversion in New York.
Source
Legal Information Institute (Cornell University)
While companies already have other options when former employees take company property, experts say conversion claims may be easier to plead than other claims, such as misappropriation of proprietary business information or trade secrets, or breach of fiduciary duty; those claims require that companies establish elements of willfulness or wrongful conduct.
Neuburger
“This is a helpful development that gives companies another arrow in their quiver of weapons to use against unauthorized access,” Neuburger says. “It may give them an opportunity to assert a claim where there may not have been a claim previously.”
Companies often rely on a federal statute, the Computer Fraud and Abuse Act, as a cause of action for retrieving electronic data. Now, Akerman says, “they also have a cause on the state side that has certain advantages that they may not have with the CFAA.”
For example, Akerman says, some federal courts have held that employees implicitly have access to electronic information necessary for their jobs, so their activity cannot be “unauthorized.” That negates four of the seven causes of action the CFAA offers to companies in cases where employees have taken data. Conversion “gives companies the belt and suspenders they need to go into court immediately and get an injunction and prevent the dissemination of their data,” he says.
And while the CFAA only permits compensatory damages and requires companies to show a threshold $5,000 loss, conversion permits punitive damages and doesn’t require any minimum loss.
Gary Friedman, a partner at the law firm Weil, Gotshal & Manges, notes that conversion is generally a lower burden of proof than other torts, which may require plaintiffs to show an element of willfulness or wrongful conduct, and sometimes malice.
Friedman
In conversion disputes, however, a plaintiff only needs to prove that he has a right to possession or legal ownership of the property, that the property is in the unauthorized possession of the defendant, and that the defendant has acted to exclude the rights of the owner, Friedman says.
Still, Friedman says, an employee could argue that the employer has as much access to the data as the employee. A claim could be made that the employee has taken a copy of the intangible data “tricky to assert.”
Setting a Thyroff Policy
As result of Thyroff, Friedman says employers should revaluate their electronic communication policies to ensure that “there's no dispute as to the ownership of the data. What’s clear is that, now more than ever, e-mail policies and Internet policies … have become essential to conducting business and to minimizing litigation risk,” he says.
Similarly, Neuberger says the decision “highlights the fact that companies need to be aware of where their intangible information is and how it’s being protected and used.”
Friedman says there’s a “clear trend” toward other state courts recognizing torts of conversion for intangible data. Akerman, who notes that Florida already applies conversion to computer data, agrees.
“I absolutely think we’ll see more courts treating this issue the same way,” he says. “The decision is so well-reasoned, I think it will be the benchmark for other states.”
Friedman adds that the New York Court of Appeals “tends to have persuasive effect on other jurisdictions.”
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