How to Mitigate the Legal Risks of Social Media

Employee use of social media in marketing and business development poses at least two categories of legal risk in-house counsel must be prepared to manage.

First, social media use can lead to exposure to liability for false endorsement, defamation, trademark infringement or copyright infringement. Second, a new hire with a large contact list on LinkedIn procured while working for a prior employer may lead to potential liability for trade-secret misappropriation and related torts. These risks can seem amorphous and unmanageable to the legal department, given that social media is immediate, accessible and prolific.

But in-house counsel can help the company partially manage the risks by assembling a solid written in-house social media policy. Strategic use of insurance coverage can help mitigate the risks that survive even a well written, well implemented social media policy.

As social media becomes an essential marketing tool, insurance companies are paying attention. While, for the most part, general liability policies may exclude coverage for alleged injuries related to employees’ social media use, insurers are developing new coverage tools that in-house counsel can negotiate as standalone policies or to add on to a policy via endorsements.

  1. The risk: liability for false endorsement, defamation, trademark infringement and copyright infringement. Defamation and intellectual property-related causes of action are the most frequently court-tested categories of liability that may be influenced or aggravated by employees’ social media usage.

Jurisdictions universally require that a statement be knowingly false to establish a cause of action for defamation. The bad news for in-house counsel is, therefore, that, as with privacy-related causes of action, the company’s insurance policy likely will exclude defamation from coverage. So the company will be on the hook for any damages without insurance protection.

In some jurisdictions policy coverage may depend on the outcome of litigation. While most policies base coverage on the language of a particular complaint, in some jurisdictions other than Texas it may depend on a factual finding regarding the level of intent involved. For example, in The Cincinnati Insurance Co. v. Trosch , the 3rd U.S. Circuit Court of Appeals stated that the “duty to defend is triggered when the complaint involves an injury that is ‘actually or potentially’ within the scope of the policy. Although the complaint in the Underlying Action avers conduct that would be excluded because of the alleged intent and knowledge of the [defendants], there is the potential for the claim to be covered if a different level of knowledge or intent were to be found by the jury.”

In Texas, coverage may be a little more predictable. Under the Texas “eight corners rule” and as stated this year by the 5th Circuit in Simmons, et al. v. Liberty Mutual Fire Insurance Co. , Texas law is that a duty to defend is determined “solely by the allegations in the pleadings and the language of the insurance policy.”

A corporate defendant in a defamation case may be able to winon the merits. For a court to impute defamation to an employer via respondeat superior or vicarious liability, the alleged defamation must occur within the alleged defamer’s scope of employment and in conjunction with his or her job duties.

A commercial general liability insurance policy’s personal and advertising injury clause may cover claims for intellectual property infringement. However, courts interpreting Texas lawhave defined the term “advertising injury” to exclude causes of action such as trademark infringement. For example, in America’s Recommended Mailers Inc. v. Maryland Casualty Co. (2009), the 5th Circuit held “the definition of advertising does not include trademarks; therefore, trademark infringement claims do not involve misappropriation of advertising ideas.”

Therefore, if at all possible, an in-house lawyer should seek to negotiate a personal and advertising injury clause that affirmatively identifies infringement, to ensure the policy covers this type of intellectual property injury. In industries where employees frequently use social media and web publication with little management control, companies should expect higher insurance premiums, based on the greater risk of liability or an increase in insurers carving infringement out of their advertising-injury clauses.

In some cases where a policy generally covers copyright infringement, it may not cover a specific publication that occurred before the policy’s effective date. The three-year statute of limitations may not bar liability for copyright infringement for online publication, because the infringing material becomes perpetually available. Though alleged infringement may take place during the policy period, it may be excluded from coverage because the allegedly infringing material in question was first published prior to the effective date of the policy.

  1. The risk: misappropriation of trade secrets and customer lists and breach of noncompete or nondisclosure agreements. Trade secret misappropriation in the form of customer solicitation generally is not an insurable cause of action under the advertising injury clause in a general liability policy. Courts typically find trade secret misappropriation or similar torts involving contacting a competitor’s customers do not constitute “advertising,” as the actions do not involve disseminating information to the general public. In Continental Casualty Co. v. Consolidated Graphics Inc., et al. (2009)the U.S. District Court for the Southern District of Texas held that soliciting customers does not constitute “advertising” as that term was defined in a general liability policy.

However, as the case law develops, this liability risk may diminish if the proliferation of contact lists on social media sites causes customer lists to lose trade secret status.

In Texas, if a customer list is reasonably ascertainable from publicly available sources, it is not classified as a trade secret. Though Texas courts have not addressed specifically social media contact lists, as recently as 2010, the U.S. District Court for the Eastern District of New York held, in Sasqua Group Inc., et al. v. Courtney, that a database of client information was not a trade secret, where it was ascertainable from a search on a variety of sites, including the social networking site LinkedIn.

An employee who converses with his contacts on LinkedIn may run the risk of violating a noncompete agreement with a former employer. In that situation, the employee’s new company may be able to rely on insurance coverage through a directors and officers liability policy.

However, D&O policies are not standardized and usually cover only certain employees, the company, and employees’ actions as they relate to his or her job duties. Exclusions vary greatly, so in-house counsel hoping to secure such coverage in the social media arena should negotiate a D&O policy directly tailored to the needs of the company’s industry.

This article was originally printed in Texas Lawyer on June 13, 2011.

Katherine Sunstrom is an associate with Lorance & Thompson in Houston. She helps small businesses and individuals with their copyright, trademark and related intellectual property needs. She can be found on Twitter: @beingkatie

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The Texas Uniform Trade Secrets Act

The most important event that took place in 2013 for intellectual property law in Texas was the Legislature’s April enactment of the Texas Uniform Trade Secrets Act (TUTSA). The act, which went into effect on Sept. 1, brings Texas in line with the 46 other states that have adopted some version of the Uniform Trade Secrets Act. Prior to the TUTSA’s enactment Texas trade secret law was mostly derived from the 1958 Texas Supreme Court decision in Hyde v. Huffines as well as from the Restatement (Third) of Unfair Competition.

The four key substantive changes resulting from TUTSA’s enactment are as follows.

  1. Definition of trade secret: The TUTSA’s new definition of “trade secret” likely will have the most effect on Texas trade secret litigation than any other provision of the act. TUTSA defines “trade secret” as information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that 1. derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and 2. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Under Texas common law there was some uncertainty as to whether “continuous use” was necessary to maintain trade secret status. Under the TUTSA’s definition of “trade secret,” it appears that continuous use is not required. Further, the old definition originally came from the 1939 Restatement of Torts and until now remained substantially unchanged but for a litany of inconsistent case law interpreting the definition based on the six nonexclusive factors in the Restatement.

  1. Definition of misappropriation: Under the TUTSA, misappropriation occurs when a trade secret is acquired by improper means or when it is disclosed without consent. Further, the TUTSA makes clear that only those who know or have reason to know that a trade secret was acquired improperly are subject to liability. Previously, courts were reticent to so limit liability and subjected to liability those who had acquired a trade secret by accident or mistake.
  2. Damages and injunctive relief: Under the TUTSA, plaintiffs are entitled to recover the same types of damages (actual lost profits, infringer’s profits or a reasonable royalty) as they were under the Texas common law. In addition, the TUTSA clarifies that injunctive relief is available in addition to, rather than in lieu of, monetary damages. The new TUTSA allows for exemplary damages for malicious misappropriation, but unlike the common law, the new Act caps exemplary damages at two times the amount of actual damages.
  3. Attorney fees: Previously there was no provision for attorney fees in a trade secret case under common law. Parties had to seek attorney fees under the Texas Theft Liability Act. The new TUTSA now specifically requires an award of attorney fees where the plaintiff’s claim of misappropriation was in bad faith, a motion to terminate and injunction was resisted in bad faith, or willful or malicious appropriate exists.

The TUTSA is a great step forward especially in a state growing and prospering in the technology and (of course) energy sectors. It modernizes the state’s laws pertaining to misappropriation of trade secrets and provides clearer guidelines for litigating trade secrets cases. Hopefully, the TUTSA will aid courts, lawyers and litigants in navigating trade secret matters with more certainty.

This article was first published in the Texas Lawyer on December 16, 2013.

Katie Sunstrom gives legal assistance to her clients in intellectual property and business litigation matters as an associate with Lorance & Thompson in Houston. She posts about intellectual property matters under the Twitter handle @beingkatie.