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8th Circuit Affirms Verdict Requiring Employee to Return $735,000 Severance Payment After She Disclosed Confidential Information

If you thought there was nothing an employer could really do when a departed employee discloses the employer’s confidential information, think again. Last week, the Eighth Circuit Court of Appeals upheld a jury verdict requiring a former vice president of marketing to pay Hallmark $735,000 – the entire payment the company had given her under a severance agreement – after she disclosed confidential information to a competitor.

Hallmark eliminated the job of the employee, Janet Murley, in a corporate restructuring in 2002, and the parties entered into a severance agreement. Among other provisions, the agreement prohibited Murley from working in the greeting card industry for 18 months and prohibited her from ever disclosing Hallmark’s confidential business information. Murley abided by the 18-month non-compete provision in the agreement. However, in 2006, Murley accepted a consulting assignment with Recycled Paper Greetings (“RPG”), a competitor of Hallmark, during which she disclosed to RPG confidential information about Hallmark’s business model redesign, its consumer buying process, and its market research. Her agreement prohibited her not only from disclosing Hallmark confidential information, but also from retaining any business records or documents relating to Hallmark.

Hallmark sued Murley in 2009, shortly after learning of her disclosures to RPG. In addition, there was evidence that Murley deleted numerous Hallmark documents from her computer less than 48 hours before a forensic review of her hard drive took place in 2007. This conduct led the trial judge to give an “adverse inference” jury instruction, allowing the jury to infer that the deleted information would have been harmful to Murley’s case.

The jury issued a verdict requiring Murley to pay Hallmark $860,000 – the entire amount of Hallmark’s $735,000 severance payment to her, plus the $125,000 she received from RPG for her consulting services. Murley appealed to the Eighth Circuit, arguing that the adverse inference instruction should not have been issued, and that the jury verdict was excessive.

The Eighth Circuit held that the jury instruction was appropriate, given the timing of Murley’s deletions from her hard drive. In addition, the Eighth Circuit affirmed the part of the jury verdict requiring Murley to return her entire severance payment to Hallmark. Although Murley complied with some of her obligations in the severance agreement, this part of the jury verdict was upheld because the severance agreement made it very clear that Hallmark considered it a priority and a core term of the agreement to ensure that its confidential business information was protected. (The jury’s award of the $125,000 consulting fee from RPG was reversed.)

Based on the result in this case, employers should ensure that severance agreements are carefully drafted to make protection of confidential information a top priority. This careful drafting, at least in some cases, will allow employers to enforce those agreements in litigation in the event an employee divulges this information to competitors. This may be the case even if the disclosure occurs long after the employee’s non-compete obligations have expired.