The United States Court of Appeals for the Third Circuit has upheld a preliminary injunction that Scherer Design Group, LLC (SDG), an engineering firm, obtained against four former employees, stopping them from contacting SDG’s clients and destroying information taken from SDG. The defendants asserted that SDG surreptitiously monitored one of the former employees’ Facebook activity after he left SDG and claimed that the company’s “unclean hands” barred it from obtaining equitable relief. The Third Circuit ruled that the federal trial court acted within its discretion in declining to apply the unclean hands doctrine against defendant’s former employer. Scherer Design Group, LLC v. Ahead Engineering LLC, et al., No. 18-2835 (3rd Cir. Feb. 25, 2019).
One of the defendants, Chad Schwartz, left SDG after a dispute over whether he was promised an equity partnership in the engineering firm. Before resigning, Schwartz declined to sign a noncompete agreement. After resigning, Schwartz started two competing engineering firms and recruited SDG employees to join his new firms. Three SDG employees discussed Schwartz’s new venture with him using, in part, Facebook, and transmitted SDG documents and information to Schwartz’s firms. The three employees eventually resigned from SDG to work with Schwartz.
After the mass loss of employees and a key customer account, SDG’s network administrator examined the former employees’ SDG computers. One of those former employees, Daniel Hernandez testified that while working at SDG, he accessed his Facebook account from his SDG laptop and “would log off sometimes and leave it open sometimes,” but that on the day he resigned from SDG he closed out of Facebook by clearing the history on the internet browsers on his SDG laptop. SDG’s network administrator (1) reviewed Hernandez’s browser history using software that allowed him to access deleted activity, (2) asserted that he was able to access Hernandez’s Facebook account without a password because Hernandez had not cleared it from the laptop and (3) installed software that allowed him to monitor Hernandez’s Facebook activity without detection. For several weeks after the exit of the employees, the administrator accessed Hernandez’s Facebook account “very often” from Hernandez’s laptop and uncovered messages that revealed the defendants’ plans and actions taken to secure SDG’s client information and other intellectual property.
In litigation, the parties disputed how SDG gained access to Hernandez’s Facebook account, and the defendant employees opposed any injunctive relief against them by contending that their former employer’s secret monitoring left it with “unclean hands,” thus precluding its request for injunctive relief. The “unclean hands” doctrine is not an automatic or absolute bar to injunctive relief, but rather one factor to apply in the equitable analysis. A party seeking to invoke the doctrine must show: (1) the party seeking equitable relief committed an unconscionable act; and (2) the act is related to the claim upon which equitable relief is sought.
In affirming an injunction in favor of SDG, the Third Circuit cited three grounds. First, SDG did not dirty its hands to “acquire the rights” that it asserts in the complaint. SDG did not monitor Hernandez’s Facebook account so it could obtain a right it did not otherwise have. Defendants owed a duty of loyalty to SDG well before the Facebook monitoring occurred. Second, while SDG obtained proof of its duty of loyalty claim from its monitoring and benefitted from its activity, it had a right to defendants’ loyalty and could prove their breach without relying on the surreptitiously obtained Facebook messages, as SDG was able to corroborate all of the messages among the defendants. SDG’s monitoring of the Facebook messages was not related to whether the defendants earlier stole SDG’s property. Third, SDG’s alleged privacy violation and defendants’ alleged breach of duty of loyalty are causes of action subject to distinct bodies of law and with separate remedies. In sum, because relatedness is a critical element of the unclean hands doctrine and SDG’s allegedly unclean hands are not directly related to the defendants’ breaches of their duty of loyalty, the Third Circuit ruled that the trial court did not abuse its discretion in declining to apply the unclean hands doctrine to prevent SDG from obtaining injunctive relief.
A dissenting opinion disagreed with the majority’s analysis, citing to the requirements of New Jersey privacy law. The dissent concluded that SDG’s activities were tortious based upon New Jersey case law regarding employer monitoring of personal e-mails from work accounts and the standards for invasion of privacy claims.
The ruling presents a common occurrence in business dealings, especially where there are no noncompete or nonsolicitation agreements in place applying to employee departures. Before engaging in similar monitoring as SDG’s actions, a company should carefully consult with counsel to evaluate the extent to which company policies and controlling jurisdictional law will permit the review and monitoring of social media and private e-mail accounts, particularly as to former employees.