When Your Contract Falls Short: Can You Sue a Former Employee’s New Firm for Aiding and Abetting Data Misappropriation?

Employee mobility is a normal part of modern business, particularly in industries driven by client relationships and proprietary information. However, disputes often arise when a departing employee transfers confidential data—such as client lists, internal reports, pricing models, or strategic information—to a new employer. Many businesses assume their only protection lies in the employment agreement they had with the departing employee. When that contract is poorly drafted or limited in scope, companies may believe they have little recourse. From a litigation perspective, that assumption is often incorrect.

Even when a contract does not fully protect a business, the law may provide other avenues for relief. In certain circumstances, the new employer may face liability for aiding and abetting wrongful conduct, particularly if it knowingly benefits from the misuse of confidential information.

The Litigation Framework

In cases involving the transfer of restricted or proprietary data, litigation typically begins with identifying the underlying wrongful conduct by the former employee. This may include misappropriation of trade secrets, breach of fiduciary duty, breach of confidentiality obligations, or unfair competition. Once that underlying misconduct is established, attention often turns to whether the new employer played a role in facilitating or benefiting from the conduct.

Under aiding and abetting theories recognized in many jurisdictions, a plaintiff generally must demonstrate three elements:

1. An underlying wrongful act by the primary actor (the former employee).
2. Knowledge of the wrongful conduct by the third party (the new employer).
3. Substantial assistance or encouragement of that conduct by the third party.

In the employment context, substantial assistance can take many forms. A new firm may encourage the employee to bring client information, incorporate improperly obtained data into its systems, or allow the employee to solicit clients using confidential information obtained from the prior employer. In some cases, even passive acceptance of obviously misappropriated information may create liability.

Why Contracts Are Not the Only Protection

Many companies rely heavily on restrictive covenants or confidentiality provisions in employment agreements to safeguard proprietary information. However, these agreements are often drafted using generic templates or fail to anticipate how data is stored and transferred in a digital environment. Contracts may omit key definitions of confidential information or fail to address electronic downloads, cloud storage, or remote access to internal systems.

Additionally, certain restrictive covenants—particularly non-compete agreements—may be subject to strict limitations or outright prohibition in some jurisdictions. As a result, a company may discover during litigation that the contract it believed provided protection is partially unenforceable.

From a litigation perspective, however, the absence of a strong contract does not eliminate the possibility of recovery. For example, trade secret misappropriation targets the unauthorized use or disclosure of confidential business information that derives independent economic value from not being generally known. Breach of fiduciary duty arises where an individual in a position of trust—such as an employee or advisor—acts contrary to the interests of the principal, including by exploiting confidential information for personal gain. Unfair competition claims broadly prohibit unlawful, unfair, or fraudulent business practices, often capturing conduct that may fall short of a contractual violation but nonetheless undermines fair dealing. These causes of action shift the focus from the existence of contractual restrictions to the misuse of protected or confidential information, allowing plaintiffs to pursue remedies based on wrongful conduct rather than contractual breach alone.

Building the Case: Evidence and Forensic Analysis

Successful litigation in these cases often depends on the ability to establish knowledge and participation by the new employer. This is where early investigation and evidence preservation become critical.

Digital forensic analysis frequently plays a central role. Companies may be able to determine whether confidential files were downloaded shortly before the employee’s departure, transferred to personal email accounts, or uploaded to external storage platforms. Metadata associated with electronic files can reveal when documents were accessed, copied, or transmitted.

Email communications can also be highly probative. Messages exchanged between the departing employee and the new employer prior to resignation may show coordination of the transition, discussions about client information, or instructions regarding the transfer of data. Even where such communications occur through personal email accounts, they are not beyond reach. Through targeted discovery—such as requests for production, third-party subpoenas, and forensic collection of devices—litigants can obtain relevant communications where there is a sufficient showing of relevance and proportionality. Courts routinely permit discovery of personal email accounts when there is evidence that business-related communications were conducted through those channels, particularly where they bear on the misuse of confidential or proprietary information.

Courts also consider circumstantial evidence. For example, if a new firm immediately begins soliciting clients using detailed knowledge that could only have come from internal records of the prior employer, that pattern may support an inference that the new firm knowingly benefited from improperly obtained information.

Strategic Litigation Considerations

From a litigation standpoint, timing is often critical. Companies that suspect improper data transfers should act quickly to preserve evidence and evaluate potential claims. Early action may allow a plaintiff to seek injunctive relief, such as a temporary restraining order or preliminary injunction, to prevent further use or dissemination of the information.

Obtaining injunctive relief can significantly alter the dynamics of a case. Courts may order the return of proprietary materials, restrict the use of client data, or require the preservation of electronic evidence. These measures can prevent further harm while the case proceeds through discovery.

In addition to seeking equitable relief, plaintiffs often assert multiple causes of action simultaneously. Claims against the former employee may include breach of fiduciary duty or trade secret misappropriation, while claims against the new employer may include aiding and abetting liability or unfair competition. This broader approach can expand discovery and increase pressure on the parties involved.

Prevention and Risk Mitigation

While litigation can provide remedies after misconduct occurs, businesses should also implement preventive measures to reduce risk. Clear internal policies regarding the handling of confidential information, monitoring of data transfers, and structured exit procedures can help identify potential issues before they escalate into disputes.

Regular review of employment agreements and confidentiality provisions is also important. Agreements should clearly define proprietary information and address modern data storage and transfer practices.

Conclusion

When a former employee transfers confidential information to a new employer, liability may extend beyond the individual who left. If the new firm knowingly assists or benefits from the misuse of proprietary data, it may face claims for aiding and abetting wrongful conduct. From a litigation perspective, success often depends on early evidence preservation, forensic analysis, and strategic use of injunctive relief.

Even when contractual protections are imperfect, businesses are not without legal remedies. By focusing on the underlying misconduct and the role of the new employer, companies can pursue claims that protect their confidential information and deter future misuse.

Author: Dharmi Mehta, Sr. Attorney, Jacko Law Group, PC (“JLG”).  

JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.

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