In a typical lawsuit brought by an employee under the Fair Labor Standards Act (“FLSA”), the employer has no upside—the employer can’t recover the attorneys’ fees spent defending the suit, and counterclaims are few and far between.  A recent California case, however, demonstrates that undertaking modest forensic due diligence when an employee departs may yield a gold mine for an employer if litigation ensues, providing a basis for claims and damages against the employee.

In Benedict et al. v. Hewlett-Packard Co., Eric Benedict, a technical solutions consultant, filed a collective action lawsuit against Hewlett-Packard in January 2013, claiming the company skimped on overtime pay.  During the lawsuit, HP discovered that Benedict, prior to leaving his employment with HP to join a competitor, copied the entire hard drive of his work computer and made copies of manager-only data that he was not authorized to access.  [Fish's Trade Secret Litigation practice]  HP counterclaimed against Benedict for breach of a confidentiality agreement and replevin (seeking the return of HP’s data).  Benedict moved to dismiss the counterclaims, arguing that they were baseless because HP had no evidence Benedict had used any of the data to compete against HP or caused any economic harm (i.e., actual damages), and he sought sanctions against HP for bringing these claims in retaliation for his FLSA suit.

Judge Lucy H. Koh rejected Benedict’s motion, holding that HP’s general allegations that it suffered damages including lost profits, unjust enrichment and reasonable royalties by virtue of Benedict’s theft, secret retention, and/or use of HP’s confidential information and proprietary developments were sufficient allegations of damages to survive dismissal. The court also found that HP was not required to allege when and how Benedict had actually used the confidential information to survive dismissal. Judge Koh found that HP’s allegations of harm met the Twombly plausibility requirement in view of the suspicious circumstances of Benedict’s conduct, including copying the entire hard drive (rather than just personal files) of his work computer, which included highly confidential business information, just prior to leaving to work for a competitor.  Judge Koh further noted that some of the information Benedict copied was information limited to managers that Benedict was not permitted to access even when he was employed by HP, and that Benedict had demonstrated a willingness to disclose this information to third parties (in this case, his attorneys).  Benedict’s motion for sanctions was denied on similar grounds.  Since the counterclaims were not frivolous, it was immaterial whether they were brought for an “improper purpose” (i.e., retaliation for asserting FLSA claims).

Benedict demonstrates that careful examination of departing employees’ computers can have multiple benefits for employers.  First, employers can deter theft of confidential information and prevent loss of this information to competitors.  Second, employee computers may contain data that would be useful in a defense against future claims by the employee.  Finally, as demonstrated in the Benedict case, employee computers may contain evidence to support claims against the employee which could offset any claims by the employee against the employer, deter the employee from actually filing claims in the first place, or, if claims are brought, to encourage settlement of those claims sooner rather than later.