Announcing new requirements for federal district courts in the Eighth Circuit Court of Appeals when instructing juries on “adverse inferences” they may draw when a litigant has destroyed evidence relevant to the case, the U.S. Court of Appeals in St. Louis has largely upheld a jury award of $860,000 to Hallmark Cards, Inc., in a suit arising from a former executive’s breach of her severance agreement obligations. Hallmark Cards, Inc. v. Murley, 2013 U.S. App. LEXIS 917 (8th Cir. Jan. 15, 2013). Under her agreement with Hallmark, Janet Murley was required to maintain the confidentiality of certain company information and was prohibited from using or disclosing Hallmark’s documents and other records after leaving the company, but, according to the Eighth Circuit, failed to meet her obligations. The Eighth Circuit has jurisdiction over Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

Background

Murley was employed as a marketing group vice president by Hallmark from 1999 to 2002. Her job was eliminated as part of a corporate restructuring. During her employment, Murley had access to Hallmark’s business plans, market research and financial information. Hallmark negotiated a separation agreement with Murley, which provided her with $735,000 in severance benefits, company-paid health insurance for 18 months, and other benefits. The severance agreement required Murley not to work in the greeting card and gift industry for 18 months after leaving the company and prohibited her from soliciting Hallmark employees, disclosing or using any proprietary or confidential information, or retaining any of Hallmark’s business records or documents.

Following the expiration of Murley’s non-competition covenant, she accepted a 2006 consulting engagement with Recycled Paper Greetings (RPG) that paid her $125,000. The Circuit Court held that Murley disclosed Hallmark information to RPG during her consultancy, which included slides describing a redesign of Hallmark’s business model, and information regarding Hallmark’s processes and market research. When American Greetings bought RPG in 2009, it contacted Hallmark to arrange for a third-party review to ensure that none of Hallmark’s confidential information was maintained within RPG’s records. However, the reviewer located a number of Hallmark documents and subsequently advised Hallmark. Hallmark then filed a lawsuit against Murley in the U.S. District Court for the Western District of Missouri, alleging breach of contract, misappropriation of trade secrets, conversion of Hallmark’s confidential information and unjust enrichment. 

Jury Trial 

Hallmark presented expert testimony that, in a two-day period before the RPG review, Murley had deliberately destroyed eight files and one computer folder relating to Hallmark. Hallmark asked the trial court for an “adverse inference” instruction, that is, an instruction to allow the jury to infer from Murley’s action that she deleted the computer information because it would have been harmful to her case. Murley objected to the instruction in the absence of court findings that: (1) she acted in bad faith; and (2) Hallmark was prejudiced. However, the trial judge instructed jurors that they were allowed, but not required, to assume that the contents of the files destroyed would have been adverse or detrimental to Murley even without these two findings. The jury returned a verdict in favor of Hallmark, awarding the company the $735,000 it paid Murley in severance, as well as the $125,000 she earned at RPG. Murley appealed to the Eighth Circuit. 

Murley’s Appeal

Murley argued that jurors were improperly instructed that they could draw an adverse inference from her destruction of computer files five years after she left Hallmark. While the Court of Appeals held that, in the future, trial judges had to make express findings of bad faith and prejudice before delivering such instructions, here, the Court found “overwhelming evidence” against Murley made such findings unnecessary and any failure to do so was harmless error. The Court reasoned that the minimal burden imposed on trial courts associated with having to make such findings is offset by “sanctions [being] imposed only after thoughtful consideration and an appropriate weighing of the evidence.” 

Further, the appeals court rejected Murley’s claim that the $735,000 awarded to Hallmark was improper or excessive; it held that the jury’s award of the full severance amount was not against the weight of the evidence. On the other hand, the Eighth Circuit reversed the jury’s award of an additional $125,000 to Hallmark. It held that requiring Murley to pay that amount — the consulting fee earned through RPG — would have placed Hallmark in a better position than if Murley had never breached her severance agreement.

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As Hallmark demonstrates, there are various considerations to bear in mind not only in crafting severance agreements, but also in seeking to enforce them. Jackson Lewis LLP and its Non-Competes and Protection Against Unfair Competition Practice Group can assist in developing appropriate courses of action to safeguard your confidential information.