In Thyroff v. Nationwide Mutual, New York's highest court ruled that the common-law cause of action of conversion applies to certain electronic computer records and data. In so holding, the Court resolved an unsettled issue of state law and provided employers with a powerful additional remedy against employees who misappropriate confidential information and other company property.

The Facts

Plaintiff Louis Thyroff was an independent insurance agent for defendant Nationwide Mutual Insurance Company. In 1988, the parties entered into a contractor's agreement whereby Nationwide agreed to lease Thyroff computer hardware and software, referred to as the agency office-automation (AOA) system. In addition to the entry of business data, Thyroff also used the AOA system for personal e-mails, correspondence and other data storage.

In September 2000, Nationwide advised Thyroff that his contract as an exclusive agent had been cancelled, repossessed its AOA system and denied Thyroff further access to the computers and all electronic records and data. As a result, Thyroff was unable to retrieve his customer information and other personal information that was stored on the computers which he claimed ownership to as an independent insurance agent. Thyroff initiated an action against Nationwide in the U.S. District Court for the Western District of New York, asserting several causes of action, including a claim for the conversion of his business and personal information stored on the company's computer hard drives. The District Court held that the complaint failed to state a cause of action for conversion.

On appeal to the U.S. Court of Appeals for the Second Circuit, Thyroff sought reinstatement of his conversion claim. Nationwide responded that his claim could not be based on the misappropriation of electronic records and data because New York does not recognize a cause of action for the conversion of intangible property. The Second Circuit found that the law was unsettled on the issue of whether a conversion claim extends to electronic data under state law and, as a result, certified the question to the New York Court of Appeals.

The Decision

In New York, conversion - the unlawful appropriation of another's property - originally applied only to interferences with or misappropriation of "goods" that were tangible personal property. Notwithstanding the long-standing reluctance to expand conversion beyond the realm of tangible property, courts later recognized that an intangible property right may be united with a tangible object for conversion purposes, a theory referred to as the "merger" doctrine.

Under the merger doctrine, a conversion claim will apply to intangible property, such as shares of stock, that are merged or converted into a document, such as a stock certificate. Accordingly, conversion of the certificate may be treated as conversion of the shares of stock represented by the certificate. More recently, the court ruled that a plaintiff could maintain a cause of action for conversion where the defendant infringed the plaintiff's intangible property right to a musical performance by misappropriating a master recording, a tangible item of property capable of being physically taken.

Thyroff was the Court's first opportunity to consider whether the common law should permit conversion for intangible property that did not strictly satisfy the merger test. Recognizing that it "is the strength of the common law to respond, albeit cautiously and intelligently, to the demands of common sense justice in an evolving society," the Court decided that the time had arrived to depart from the strict common-law limitation of conversion. In its analysis, the Court looked back on the reasons for the merger doctrine and the law's initial expansion of conversion to encompass a different class of property, which was motivated, in part, by "society's growing dependence on intangibles." At the core of the merger rule was the concept that intangible property interests, such as stock, could be converted only by exercising dominion over the paper document that represented that interest. Now, however, it is customary that stock ownership exists exclusively in electronic format. In this regard, a thief can use a computer to access a person's financial accounts and transfer the shares to another account. Similarly, electronic documents and records stored on a computer can be converted by simply pressing the delete button.

Emphasizing society's increasing reliance on computers and electronic data, the Court concluded that "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." Accordingly, the information that Thyroff stored on his leased computers in the form of electronic records of customer contacts and related data had 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 Court ruled that the protections of the law should apply equally to both forms, physical and virtual, and that New York law would recognize a cause of action for conversion of such information.

What This Means for Employers

This decision provides a powerful remedy for New York employers to bring a cause of action against employees who steal company information or property. Unlike claims for breach of fiduciary duty or misappropriation of trade secrets, conversion may be easier to plead than other claims because it does not require that the employer establish willfulness or wrongful conduct.