Wednesday, April 03, 2013

At-Will Employment, Loyalty and Computer Access

This post examines an opinion a federal district court judge recently issued in a civil case:  Schaeffer v. Kessler, 2013 WL 1155587 (U.S. District Court for the Southern District of New York 2013).  The plaintiffs in the suit are Richard Schaeffer, Shaf Holdings LLC and Schaeffer Holdings LLC; the defendants are Deborah Kessler and “her husband, Daniel Kessler.”  Schaeffer v. Kessler, supra. 

In this opinion, the judge is ruling on Rule 12(b)(6) motions filed by both defendants, each of whom asked the court to dismiss the claims filed against him/her on any of several theories.  Schaeffer v. Kessler, supra.  As Wikipedia notes, in civil litigation a Rule 12(b)(6) motion is “how lawsuits with insufficient legal theories underlying their cause of action are dismissed from court.”  So what is at issue here is not whether the facts support the plaintiffs’ claims against the defendants, but whether the plaintiffs have adequately pleaded those claims.

That brings us to how the case arose, after which we’ll examine the claims in the suit:

Richard Schaeffer is the Executive Chairman of Liquid Holdings Group LLC, a financial services company. . . . He was formerly . . . the proprietor of Harbour, a Manhattan restaurant. . . . Deborah Kessler began working at Harbour as a hostess and bartender in 2009. . . . After Harbour closed, Schaeffer continued to employ [her] as a personal assistant whose responsibilities included scheduling meetings, coordinating travel, organizing incoming mail, and . . . handling [his] finances. . . .

In 2011 and 2012, Schaeffer increased [her] responsibilities to include acting as his representative in meetings with business associates and assisting with other business matters. . . . [She] continued to work for Schaeffer in April 2011, when [he] and Brian Ferdinand began a business venture that became Liquid. . . .

Through Ms. Kessler, Schaeffer became . . . acquainted with her husband, Daniel Kessler, an attorney with the law firm Connell Foley LLP, whom Schaeffer retained to assist him with trusts-and-estates matters. . . . In early 2012, Schaeffer decided to give Ms. Kessler a fraction of his interest in Shaf Holdings LLC, which held a portion of Schaeffer's interest in Liquid, and requested that Mr. Kessler amend the Shaf Holdings operating agreement to accomplish this. . . .

On March 20, 2002, Mr. Schaeffer executed a retainer agreement, dated February 17, 2012, sent him by Mr. Kessler on Connell Foley letterhead. . . . Unbeknownst to [him], Mr. Kessler also drafted a `Conflict Waiver’ on Connell Foley letterhead, dated February 17, 2012, that purported to waive any conflict of interest stemming from the relationship between the Kesslers. . . . 

The Conflict Waiver refers to Ms. Kessler as Schaeffer's `junior partner’ and states Schaeffer and Kessler `have entered into an agreement whereby she receives a one-tenth (1/10) interest in any business venture that you work on collectively.’ . . . Schaeffer alleges that he never received, reviewed, discussed, or signed the Conflict Waiver, and discovered its existence when reviewing his files after Ms. Kessler's resignation in September 2012. . . . [T]he complaint alleges that [his] signature on the Conflict Waiver was forged by the Kesslers. . . .

A third agreement dated February 17, 2012 purported to give Ms. Kessler a percentage of Schaeffer's interest in Liquid, while also purporting to waive any claims against Mr. Kessler based on his conflict of interest. . . . The February 17 Agreement states that it supersedes an earlier agreement dated August 10, 2011. . . . 

Schaeffer alleges that he had never seen the agreements, neither of which he knowingly executed but each of which contains what purports to be his signature on a separate page. . . . The complaint alleges . . . that the Kesslers intentionally placed the signature line of the February 17 Agreement on a separate page and fraudulently caused Schaeffer's signature to appear on that page. . . .

Unaware of the Conflict Waiver, the February 17 Agreement, or the August 10 Agreement, Schaeffer alleges that he instructed Mr. Kessler to amend the Shaf Holdings operating agreement to give Ms. Kessler a 9% interest in Shaf Holdings, but Mr. Kessler ignored those instructions and drafted an agreement purporting to give Ms. Kessler a 10% interest instead; Schaeffer executed the agreement believing that it had been drafted in compliance with his instructions.

The complaint also alleges . . . that Mr. Kessler drafted an operating agreement for Schaeffer Holdings LLC that purported to give Ms. Kessler a 9% interest in [it] after Schaeffer rejected a proposal to give her such an interest. . . . When Schaeffer refused to sign this agreement, Ms. Kessler forged or fraudulently caused [his] signature to appear on the agreement. . . . It was only after [she] resigned . . . that Schaeffer discovered a copy of the fraudulent Schaeffer Holdings operating agreement. . . .

In or about early September 2012, shortly before resigning, Ms. Kessler allegedly shredded large quantities of documents and deleted a large number of computer files related to her employment for Schaeffer and his business dealings; other documents she allegedly stole. . . . 

Then, immediately after resigning on September 4, 2012, she went to Schaeffer's personal downtown office, where [he] discovered her going through his files and . . . accessing his computer. . . . Ms. Kessler left with large bags, which she refused to have inspected, and Schaeffer later discovered hard copy files related to Shaf Holdings and Schaeffer Holdings were missing. . . .

Schaeffer v. Kessler, supra. 

The complaint included several causes of action, one of which was that “Ms. Kessler breached her duty of loyalty to Mr. Schaeffer as his employee.” Schaeffer v. Kessler, supra.  She did not move to dismiss the claim, but argued that it duplicated the plaintiff’s claim for a declaratory judgment, essentially that she had “no legal or equitable interest in” any of Schaeffer’s holdings.  Schaeffer v. Kessler, supra. 

The judge did not agree:  He noted, first, that under New York state law (which governed in this federal diversity jurisdiction case), “`an employee is to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’” Schaeffer v. Kessler, supra (quoting Western Electric Co. v. Brenner, 41 N.Y.2d 291 (New York Court of Appeals 1977)).  Deborah Kessler argued that the duty of loyalty, which she characterized as a “contract claim”, was duplicative of the claims at issue in the request for a declaratory judgment and so should be dismissed.  Schaeffer v. Kessler, supra. 

The judge again disagreed, noting first that while the complaint did not indicate she had “an express employment contract” with Schaeffer, that did not matter because New York courts have held that employees “`owe a duty of loyalty to their employers, regardless of whether the employee has a formal employment contract.’” Schaeffer v. Kessler, supra (quoting Camp Summit of Summitville, Inc. v. Visinski, 2007 WL 1152894 (U.S. District Court for the Southern District of New York 2007)). The judge also pointed out that her argument missed the point because a “declaratory judgment is not a substantive cause of action, but merely a remedy.”  Schaeffer v. Kessler, supra.  So he denied Deborah Kessler’s motion to dismiss the breach of loyalty claim and the request for declaratory judgment. Schaeffer v. Kessler, supra. 

That brings us to the plaintiffs’ claim under the Computer Fraud and Abuse Act (CFAA):  18 U.S. Code § 1030.  While § 1030 is primarily a criminal statute, it includes, as I have noted in prior posts, a civil cause of action that lets those who have been damaged or suffered loss as the result of conduct that constitutes a crime under § 1030(a) bring a civil action for damages or other relief.  For more on that, check out this prior post.

The third claim pled in the complaint was that “Ms. Kessler violated . . .18 U.S. Code § 1030 when she `stole, deleted, altered, or destroyed computer files in furtherance of the Kessler's fraudulent scheme.’” Schaeffer v. Kessler, supra.  As the judge noted, this claim was based on the offense created by 18 U.S. Code § 1030(a)(4), which makes it a crime to “knowingly and with intent to defraud, access[] a protected computer without authorization, or exceed[] authorized access, and by means of such conduct further[] the intended fraud and obtain[] anything of value. . . . “  Schaeffer v. Kessler, supra. 

The complaint also included a claim for “common-law fraud” under New York law based on the allegations noted above.  Schaeffer v. Kessler, supra.  The defendants’ motion asked the judge to dismiss this claim as not having been adequately pled, but he found it satisfied the requirements of the Federal Rules of Civil Procedure, and so denied the motion to dismiss in this regard.  Schaeffer v. Kessler, supra. 

Deborah Kessler “first argue[d] that the [§ 1030] claim is duplicative of the duty-of-loyalty claim” but cited “no authority in support of the proposition that a federal statutory cause of action can be dismissed as duplicative of a state-law claim for breach of the duty of loyalty”. Schaeffer v. Kessler, supra.  The judge also explained that he was not “aware of any” such authority, so her first argument failed.  Schaeffer v. Kessler, supra. 

She also argued that the 18 U.S. Code § 1030 should be dismissed because

Ms. Kessler, as Mr. Schaeffer's junior partner and employee, was entitled to access the computer system as she is alleged to have done. In other words, Ms. Kessler argues that she did not access a protected computer without authorization or in excess of her authorized access. 18 U.S. Code § 1030(a)(4).

Schaeffer v. Kessler, supra. 

Once again, the judge was not persuaded by her argument:

[E]ven assuming that Ms. Kessler, as Schaeffer's junior partner and employee, was authorized to access the files in question, there is no basis in the complaint for supposing that she was authorized to destroy files in the manner alleged in the complaint, and, indeed, the complaint alleges that she was `not authorized to delete or destroy Plaintiffs' computer files.’

As used in the CFAA, `the term “exceeds authorized access'” means to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.’ 18 U.S. Code § 1030(e)(6). Certainly the unauthorized deletion of files alleged here constitutes the `alter[ation] [of] information in the computer that the accesser is not entitled so to . . .  alter. . . .’ 18 U.S. Code § 1030(e)(6).

Schaeffer v. Kessler, supra. 

He also explained that this

reading is confirmed by the fact that a private right of action under the CFAA is available to `[a]ny person who suffers damage or loss by reason of a violation of this section,’ 18 U.S. Code § 1030(g) (emphasis added), where `damage’ is defined as `any impairment to the integrity or availability of data, a program, a system, or information. . . .’ 18 U.S. Code § 1030(e)(8). 

This definition logically includes the deletion of computer files. See, e.g., Cohen v. Gerson Lehrman Group, Inc., 686 F.Supp.2d 317 (U.S. District Court for the Southern District of New York 2010) (holding employer's allegation of unauthorized `“mass deletion’  of files by employee stated claim for relief under the CFAA).

Schaeffer v. Kessler, supra. 

Finally, the judge noted that

Ms. Kessler cites cases supporting the proposition that the CFAA does not apply where an employee uses his authorized access to a computer system to misappropriate his employer's information. See, e.g., Univ. Sports Pub. Co. v. Playmakers Media Co., 725 F.Supp.2d 378 (U.S. District Court for the Southern District of New York 2010); Orbit One Communications, Inc. v. Numerex Corp., 692 F.Supp.2d 373 (U.S. District Court for the Southern District of New York 2010); see also United States v. Nosal, 676 F.3d 854 (U.S. Court of Appeals for the 9th Circuit 2012) (characterizing the CFAA as an `anti-hacking statute’).

As explained above, the complaint adequately alleges that Ms. Kessler's access exceeded her authorization within the meaning of the statute. Any argument to the contrary is a factual dispute not properly addressed on a motion to dismiss under Rule 12(b)(6).

Schaeffer v. Kessler, supra. So, for all these reasons, the judge denied Deborah Kesller's motion to dismiss the claim under 18 U.S. Code § 1030(g).  Schaeffer v. Kessler, supra.  

None of this, of course, means the plaintiffs have “won” the case.  It simply means that the claims at issue will proceed, perhaps to a trial or a settlement, if they are not dismissed for other reasons later on in the proceedings.

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