Strategies for Bringing Counterclaims or Separate Lawsuits Against Plaintiff Employees

This article provides guidance to employers on bringing counterclaims or separate lawsuits against plaintiff employees who have initiated claims against the employer. Employers and their attorneys are usually well versed in the types of claims that employees can bring. However, the employee might not be the only one with a potential claim after an employment relationship sours—the employer may also have various contract, tort, or statutory claims against its employee.

Recognizing and pursuing these claims can enable an employer to protect its relationships and confidential information from the departing employee and to obtain financial and equitable redress for employee wrongdoing. At the same time, you must be cognizant of the risks inherent in pursuing an unjustified claim.

Procedure for Bringing Counterclaims

Rule 13 of the Federal Rules of Civil Procedure governs counterclaims in federal lawsuits. In a federal employment case, the defendant-employer must generally assert claims arising out of the same transaction or occurrence as the plaintiff-employee’s claims in that lawsuit; the employer cannot bring such claims in a separately filed lawsuit. These types of claims are called compulsory counterclaims. For example, an employer’s claim that a former employee violated his duty of loyalty to the employer may be compulsory in a discrimination lawsuit brought by the employee based on the employee’s termination for those disloyal actions. This is because both the employer’s and employee’s claims would rely on much of the same evidence and derive from overlapping facts.

In contrast, a claim that does not qualify as a compulsory counterclaim is a permissive counterclaim, which an employer may assert either in the employee’s lawsuit or in a separate lawsuit. For example, an employer would likely not have to assert a counterclaim against its former employee for the employee’s post-termination breach of a non-compete agreement in a lawsuit that relates to the employer’s pre-termination actions.

Employers should assert counterclaims in the answer to the employee’s complaint, assuming the employer has decided to pursue these claims in the employee’s lawsuit. If the employer identifies possible counterclaims after filing its answer, the employer should seek to file an amended answer that includes the new counterclaims as soon as possible. The employer’s ability to file an amended answer will depend on Rule 15 of the Federal Rules of Civil Procedure (or possibly Rule 16, if the employer seeks to amend its answer after a court-set deadline for doing so).

Many states have rules of civil procedure modeled after the Federal Rules of Civil Procedure. However, the requirements and procedures for asserting counterclaims in state court may vary.

Assert Permissive Counterclaims or File a New Lawsuit?

When an employer has the option of either bringing permissive counterclaims against an employee or filing a separate lawsuit, various considerations may come into play.

Litigating all claims in one lawsuit is often the most efficient option, particularly where the claims have at least some factual overlap. Additionally, this approach provides the factfinder with a fuller picture of the parties’ history, including facts that may undermine the employee’s efforts to be perceived as an innocent actor.

With claims involving minimal factual overlap, however, the upside of litigating all claims in one lawsuit will be less. In this circumstance, an employer might decide to file a separate lawsuit rather than assert its claims in the employee’s pending lawsuit. This approach may be desirable to avoid complicating the first lawsuit with multiple unrelated claims or to allow the employer to take advantage of a contractual venue selection provision that calls for litigation of its claims in a more attractive forum. If the employer’s claim is for a small amount of damages, the employer might also consider filing a separate small claims action, which is typically much more informal and expeditious.

Types of Claims against Employees

Contract Claims

Contracts between the employer and employee—specifying what the employee will or will not do during and after employment—are a primary source of potential claims against the employee. Most commonly, such agreements contain restrictions that limit the employee’s ability to harm the employer’s business interests. However, the parties might also have agreed that the employee must take certain affirmative steps or achieve certain performance outcomes. Either type of contract can form the basis of a potential claim.

Restrictive Covenants

Employers often require their employees to sign contracts that contain restrictive covenants that limit the actions the employee can take during and/or after the employment relationship. These restrictive covenants can range from prohibitions on the use of the employer’s confidential information (such as customer lists and business strategies), to solicitation of the employer’s customers or other employees on behalf of some other entity, to subsequent employment with a competitor.

A primary hurdle to asserting a breach of contract claim is establishing the enforceability of the restrictive covenant. State law typically governs enforcement, and some states codify enforcement rules by statute. Although most states require reasonable restrictions, cases interpreting reasonableness can vary widely by jurisdiction. Accordingly, attorneys should familiarize themselves with the applicable case and statutory law in their states. Moreover, counsel should draft restrictive covenants with the most limited breadth, duration, and geographic reach that will adequately protect the employer’s interests.

In addition to unreasonableness, a restrictive covenant could fail for lack of consideration. Some states view continued at-will employment as sufficient consideration, whereas others require something more. In states where continued employment does not suffice, courts may find adequate consideration if the employee agreed to the restrictive covenant as a condition for obtaining the job in the first place or in exchange for a payment or promotion after the employment relationship has begun. To improve the likelihood that a court will find a restrictive covenant to be enforceable, focus your arguments on establishing:

• Why the restriction is appropriately tailored to protect the employer’s particular business interests and vulnerabilities –and–
• Why the employee benefited from entering into the agreement (because the employee obtained employment or some other additional benefit that he or she would not have otherwise received)

State courts vary in their willingness to modify (or blue-pencil) an unreasonable restrictive covenant to make it reasonable, instead of simply finding the entire agreement unenforceable. In blue-pencil states, you might also argue that the employee violated some more limited version of the restrictive covenant.

Once you establish enforceability of the covenant, you must surmount the remaining hurdles of proving a breach of the agreement and resulting damages. In addition to seeking damages, an employer will likely want to consider requesting equitable relief, which may include an injunction barring a former employee from disclosing the employer’s confidential information, soliciting its customers or employees, or working for its competitors for some period.

Counterclaims in Response to Declaratory Judgment Actions

An employee subject to a restrictive covenant may seek a declaratory judgment that the restrictive covenant is void, thereby allowing the employee to take the actions ostensibly prohibited by the restrictive covenant. The employer can respond to such a claim with a counterclaim that seeks court enforcement of the restrictive covenant. In doing so, the employer should identify any specific conduct that the employer wants the court to prohibit, such as continued employment with a particular competitor or solicitation of a specific client.

Performance Metrics

Although less common, an employer might also have a contract that requires a certain level of performance from an employee. Higher-level employees, hired to achieve specific outcomes for the employer, will more likely have a contract with required performance goals. In the event that such a contract exists, the employer may be able to seek damages due to the employee’s failure to meet these performance metrics.

In the absence of such a contract, a court is unlikely to allow an employer to recover damages for poor performance. Rather, many courts have explained that a dissatisfied employer’s remedy for poor performance is simply to terminate the employment relationship—not to sue the employee for lost profits or other damages.

Tort Claims

An employer is not necessarily without a remedy if no contract governs the employment relationship. The employer can seek redress through state tort claims for many of the same types of conduct targeted by an employment contract. Such tort claims include breach of the fiduciary duties of loyalty and good faith and fair dealing as well as tortious interference. In addition, an employee who steals or defrauds his employer may also be susceptible to a conversion or fraud claim. Moreover, employers may have potential defamation claims against employees. We address these tort claims in greater detail below.

Breach of Fiduciary Duties of Loyalty and Good Faith and Fair Dealing

State law may impose fiduciary duties of loyalty as well as good faith and fair dealing on some categories of employees— most likely those who occupy positions with higher levels of responsibility, authority, and discretion.

An employee’s fiduciary duties to his employer encompass many of the same obligations that employers often seek to impose through restrictive covenants. These include generally refraining from:

• Competing against the employer
• Usurping corporate opportunities
• Using the employer’s confidential information to the employer’s detriment –or–
• Otherwise acting in a way that undermines the employer’s ability to reap the benefit of the employment relationship

However, fiduciary duty claims have some important limitations. First, as mentioned above, only certain higher-level employees owe their employer fiduciary duties. Second, fiduciary duties only constrain an employee during the existence of the employment relationship. Absent a separate contractual obligation, an employee is generally free to do as he or she pleases, including competing with his or her former employer, after the employment relationship ends. In addition, an employee can take limited steps to prepare to compete with the employer while still employed, assuming he or she disclosed those steps to the employer.

Tortious Interference

An employer may bring a tortious interference claim against an employee who knowingly and intentionally interferes with a present or prospective contractual or business relationship between his or her employer and a customer, employee, or other business partner of the employer.

A couple of points on such claims are worth noting. First, state law varies regarding claims for interference with a prospective relationship. Some states require a stronger likelihood than others that the relationship would have materialized, if not for the employee’s interference. Second, state law typically requires that the interference is somehow wrongful. For example, the employee’s conduct was dishonest, contrary to the employee’s contractual obligations, or involved some sort of illegal action. In the absence of wrongful conduct, courts are reluctant to bar competitive efforts by former employees.

Conversion or Fraud

State conversion and fraud claims apply in the employment context just as in other contexts. Employers can use these tort claims to seek damages from employees caught stealing or otherwise defrauding them. See, e.g., Astra USA, Inc. v. Bildman, 914 N.E.2d 36, 58 (Mass. 2009) (affirming jury verdict of over $1 million against former pharmaceutical president for fraud, conversion, waste of corporate assets, and other offenses, and additionally allowing employer to recover compensation paid to president during period of disloyalty). An employer might also consider pursuing criminal theft or fraud charges against such an employee, which not only provides an alternative route for redress, but also sends a message to other employees about the seriousness of this conduct.

Defamation

Employees do not always just go to court when they think their employers have wronged them. Sometimes, they also go to the media or various government agencies with their complaints. If that occurs and the employee makes untrue statements, the employer may have a defamation claim against the employee.

Common law generally governs defamation claims. To prevail, an employer usually must show that the employee made a false statement to a third party that harmed the employer. An employee can defend against a defamation claim by establishing that the statement in question was neither false nor misleading, was made in good faith and with a reasonable belief of its truth, or was a mere statement of opinion.

An employer can increase the likelihood of prevailing on its defamation claim by marshalling evidence that the employee’s utterance was a statement of fact (rather than opinion) and was objectively untrue, as well as that the employee could not have reasonably believed that the statement was true. The employer must also develop evidence of harm—for example, that the employee’s statement caused it to lose business or damaged its reputation.

An employer should exercise caution about asserting a defamation claim in response to an employee’s protected activity. Such activity may include reports to the government about an employer’s alleged violation of anti-discrimination laws, the Occupational Safety and Health Act, the False Claims Act, or other federal and state laws or regulations. A court could construe such a defamation claim as retaliation for the protected activity, which many federal and state laws prohibit.

Statutory Claims

Various statutes may provide another basis for a claim by an employer against its employee. These include the federal Defend Trade Secrets Act and state laws that govern trade secrets, as well as the federal Computer Fraud and Abuse Act.

The Defend Trade Secrets Act

In 2016, the federal government enacted the Defend Trade Secrets Act (DTSA), which amends the Economic Espionage Act of 1996. See 18 U.S.C. § 1831 et seq. As discussed below, the DTSA provides employers a new weapon in their litigation arsenals for combatting trade secret theft. But, to avoid neutralizing this weapon, employers must provide notice of the DTSA’s protections to employees.

The DTSA created a new federal cause of action by providing a federal civil right of action for employers and others for trade secrets misappropriation. 18 U.S.C. § 1836(b)(1). See Henry Schein, Inc. v. Cook, 2016 U.S. Dist. LEXIS 81369, at *13-17 (N.D. Cal. June 22, 2016) (employer demonstrated a likelihood of success that customer buying patterns and company marketing and pricing strategies are protected under the DTSA). Previously, those injured by trade secrets misappropriation could generally look only to state law for redress.

The DTSA offers a variety of remedies in the event of trade secrets theft, including injunctive relief, damages, double damages for willful and malicious misappropriation, and attorney’s fees. 18 U.S.C. § 1836(b)(3). It also makes a short-term, ex parte court order available to seize stolen trade secrets and retain them in court custody pending a hearing (which must be held within seven days). 18 U.S.C. § 1836(b)(2); but see OOO Brunswick Rail Management v. Sultanov, 2017 U.S. Dist. LEXIS 2343, at *4-5 (N.D. Cal. Jan. 6, 2017) (considering and ultimately rejecting request for seizure as unnecessary: the court ordered the e-mail providers to preserve all relevant records, and the court ordered the former employees to refrain from accessing or modifying their company laptops or phones until the upcoming hearing). This is a powerful remedy that allows employers to promptly divest a current or former employee of confidential business information taken without authorization, thereby limiting the damage an employee might do with the trade secrets.

Employers must disclose carve-outs to trade secret protection. Importantly, the DTSA also requires employers to make certain disclosures in any employment contract “that governs the use of a trade secret or other confidential information” entered into or updated after May 11, 2016. 18 U.S.C. § 1833(3)(A). Specifically, an employer must disclose that an individual is immune from liability for disclosing a trade secret as follows:

• In confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law or in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal
• To the individual’s attorney or the court in a retaliation lawsuit if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to a court order 
   
  18 U.S.C. § 1833.

Failure to make these disclosures about the DTSA’s immunity for whistleblowers and use of a trade secret in litigation bars an award of exemplary damages and attorney’s fees against an employee who did not receive the disclosures. 18 U.S.C. § 1833(b)(3)(C). Accordingly, employers should ensure that they notify employees that they will not be liable for trade secret misappropriation in the above circumstances in any new employment agreements, as well as agreements or employment policies dealing with confidentiality or trade secrets.

Trade Secrets Misappropriation under State Law

Because the DTSA does not preempt state law, employers may also have remedies available under state law. Most states have laws modeled after the Uniform Trade Secrets Act. These statutes prohibit employees from misappropriating their employers’ trade secrets. In addition, these statutes typically prohibit third parties (such as the employee’s next employer) from using the misappropriated trade secrets, if the third party knows or should have known that the trade secret was stolen.

To take advantage of such a statute, an employer must establish that the confidential information rises to the level of a trade secret. Some states impose a higher bar than others. For example, many states reject trade secret misappropriation claims based on a stolen customer list, particularly where the list simply compiles names and contact information. As a general rule, the confidential information must have required some analysis or special effort or skill to create.

In addition, an employer must have made a reasonable effort to maintain the secrecy of the confidential information for it to qualify as a trade secret. These efforts may include limiting access to only those employees who require the information to perform their jobs, employing various security measures to protect the information (such as passwords or locked files), and requiring employees to sign contracts promising to maintain the information’s confidentiality.

Computer Fraud and Abuse Act

The Computer Fraud and Abuse Act (CFAA)—codified at 18 U.S.C. § 1030 —is a federal criminal statute that provides a civil cause of action for individuals and entities that have suffered a loss of at least $5,000 because of another’s unauthorized access to a computer or computer network. In the employment context, an employer may pursue a CFAA claim after an employee steals electronic data (such as a customer list or other important business document) from the employer.

An employer can establish the requisite damages in several ways. For example, the employer can seek remuneration for damage caused by the employee to the computer or network itself as well as costs incurred by the employer to investigate the employee’s improper activities.

Similarly, the employer can establish that the access was unauthorized in multiple ways. For example, the employer can show that the employee was never authorized to access the specific data in the first place. In addition, the employer can show that a company policy barred the employee from accessing the data to use it for any reason other than his employer’s benefit. See United States v. John, 597 F.3d 263, 272 (5th Cir. 2010) (holding that the employee “exceed[ed] authorized access” to the employer’s computer when he used certain information to commit fraud, which the employer only allowed him to use for employer business); United States v. Rodriguez, 628 F.3d 1258, 1263-64 (11th Cir. 2010) (holding that the defendant employee “exceed[ed] his authorized access” when he accessed information from his employer’s computer for a purpose in violation of the employer’s policies); Ef Cultural Travel Bv v. Explorica, 274 F.3d 577 (1st Cir. 2001) (holding that an employee breached the duty of loyalty and “exceed[ed] authorized access” under the CFAA when he accessed the employer’s computer and obtained the employer’s confidential information against company policy to aid a competitor).

Moreover, the Seventh Circuit held that an employee engages in unauthorized access under the CFAA when he or she accesses information in a manner that breaches his or her duty of loyalty. See Int’l Airport Ctrs., L.L.C. v. Citrin, 440 F.3d 418, 420-21 (7th Cir. 2006). But see United States v. Valle, 2015 U.S. App. LEXIS 21028, at *49 (2d Cir. Dec. 3, 2015) (holding that if a defendant had permission to access information from a computer for any purpose, then accessing the computer does not violate the CFAA, even if he or she utilized the information for improper purposes); United States v. Nosal, 676 F.3d 854, 862-63 (9th Cir. 2012) (en banc) (holding that the CFAA does not extend to situations where an employee accesses a computer to which he or she normally has access to misappropriate trade secrets or other confidential information); WEC Carolina Energy Solutions LLC v. Miller, 687 F.3d 199, 205-06 (4th Cir. 2012) (an employee who downloaded an employer’s confidential information, e-mailed it to himself, and gave the information to the employer’s competitor did not violate the CFAA; the employee did not “exceed authorized access” to the employer’s computer because the employer permitted the employee to access that computer as a part of his employment); Cloudpath Networks v. SecureW2 B.V., 157 F. Supp. 3d 961, 973 (D. Colo. 2016) (providing overview of circuit split regarding whether a party can prove unauthorized access by simply showing that an employee used his or her access “for purposes contrary to the employer/principal’s interests” or whether a party must show that an employee used otherwise-permitted computer access “to obtain data the employer/ principal has declared off-limits to that employee”).

An employer may also prove unauthorized access by showing that it revoked a former employee’s right to access upon termination of employment. Such revocation bars the employee from accessing the information directly, as well as indirectly through colleagues still employed by the employer. See United States v. Nosal, 844 F.3d 1024, 1028 (9th Cir. 2016) (holding defendant liable for obtaining protected information after his termination through individuals still employed at company; “once authorization to access a computer has been affirmatively revoked, the user cannot sidestep the statute by going through the back door and accessing the computer through a third party. Unequivocal revocation of computer access closes both the front and back door.”). To protect against post-termination trade secrets theft, an employer should immediately revoke a terminated employee’s access to its computer and e-mail systems, as well as expressly notify the individual that the employer prohibits any direct or indirect access. See also Facebook, Inc. v. Power Ventures, Inc., 844 F.3d 1058, 1067 (9th Cir. 2016) (although violation of a website’s terms of use cannot be the sole basis for liability under the CFAA, access after express prohibition violates the CFAA).

The CFAA is an attractive option for employers for a couple of reasons. First, it provides a claim even if a restrictive covenant does not protect the stolen information and the data does not qualify as a trade secret. Accordingly, employers can seek damages and injunctive relief for the theft of a much broader scope of confidential or sensitive business information. Second, the CFAA establishes a basis for federal court jurisdiction, where there might otherwise be none.

Assess Risks of Bringing Claims against Employee

Although asserting a claim against an employee can be an appropriate course in many circumstances, overeager counterclaims or lawsuits occasion risks for both you and the employer.

The employer risks retaliation liability if the claim intends to penalize the employee for engaging in protected conduct (such as asserting a discrimination claim under the Americans with Disabilities Act , Title VII, or the Family and Medical Leave Act). Employers also risk liability in the form of a malicious prosecution claim. Various state and federal statutes may provide additional bases for sanctioning an unsupported claim. In addition, both you and the employer risk losing credibility with the judge by pursuing an unjustified claim. Accordingly, carefully consider the motivation and factual basis for any potential claim by an employer before the employer pursues it.

Courts look to multiple facts to evaluate whether an employer’s claim was retaliatory. For example:

• Timing. A court will more likely find retaliation when the employer delayed in asserting a long-standing claim until after the employee filed his or her lawsuit. See Crawford v. Coram Fire District, 2015 U.S. Dist. LEXIS 57997, at *21 (E.D.N.Y. May 4, 2015) (noting that the employer’s apparent delay suggests retaliation). Conversely, a court will less likely find retaliation when the employer immediately asserted its claim (or at least has a good explanation for any delay). See id. (reasoning that the employer’s delay could be explained by the need to investigate the factual basis for its claim and secure appropriate counsel); Johnson v. Ultravolt, Inc., 2015 U.S. Dist. LEXIS 16013, at *15-16 (E.D.N.Y. Feb. 10, 2015) (finding no retaliation in part because there was no evidence that the employer delayed in asserting its claim).
• Strength of claim. A claim that appears weak and contrived is more likely to raise suspicions of retaliation than a well-supported claim. See Crawford, 2015 U.S. Dist. LEXIS 57997, at *21 (employees’ admission of the conduct alleged by employer weighed against finding retaliation); Johnson, 2015 U.S. Dist. LEXIS 16013, at *12-14 (finding no retaliation in part because substantial, unrefuted evidence supported the claims); Stockdall v. TG Investments, Inc., 129 F. Supp. 3d 871, 878 (E.D. Mo. Dec. 30, 2015) (denying employer’s motion for summary judgment on retaliation claim because employer’s “empty [counter]claims” appeared to be designed “to increase the expenses of litigation and to force Plaintiffs to dismiss the suit”); but see Stockdall v. TG Investments, Inc., 178 F. Supp. 3d 810, 819 (E.D. Mo. Apr. 14, 2016) (granting judgment for employer on retaliation claim because former employees failed to present any supporting evidence at trial). Relatedly, an employer’s request for an exorbitant, unjustified amount of damages also suggests a retaliatory motive. Johnson, 2015 U.S. Dist. LEXIS 16013, at *16 (noting lack of request for unreasonable amount of damages in finding no retaliation).
• Threats. Finally, any out-of-court threats of retaliation would obviously increase the risk that a court will find the employer’s claim retaliatory. In fact, the mere threat of filing a retaliatory lawsuit suffices to constitute retaliation, even if the employer never actually files the lawsuit. See Brown v. TD Bank, N.A., 2016 U.S. Dist. LEXIS 45166, at *17-19 (E.D. Pa. Apr. 4, 2016); Walsh v. Irvin Stern Costumes, 2006 U.S. Dist. LEXIS 57398, at *6 (E.D. Pa. Aug. 15, 2006). 

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