The Law

Trade Secret Violations Leave Insurer Paying for the Defense

After hiring a competitor's former employee, one company faced a litany of legal charges and a claim denial from its insurer.
By: | July 30, 2018 • 2 min read

When Bernadette Ruby left her employer, Extended Stay America Inc. and ESA Management, for a job at WoodSpring Hotels, she did not know the legal hubbub she’d bring with her.

ESA sued Ruby, WoodSpring and Michael Docteroff, claiming “Ruby, with the help of ESA’s IT consultant Docteroff, allegedly obtained and distributed confidential and competitively sensitive ESA-electronically stored information, including an ‘ESA Sales Spreadsheet,’ to WoodSpring’s sales team.”

This data, ESA claimed, held extensive customer and market-specific information that could give WoodSpring an unfair competitive edge over ESA. The suit listed 11 specific counts of action against the defendants, including violations of various trade secrets acts. One count specifically alleged Docteroff’s violation of the federal Computer Fraud and Abuse Act (CFAA).

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WoodSpring held a D&O insurance policy through National Union Fire Insurance Co. When the ESA suit was brought against WoodSpring, the hotel turned to National Union to defend litigation under the D&O policy, which had a $10 million limit and a $50,000 self-insured retention.

Multiple accusations against an insured can make defense dicey, especially if one accusation is covered and another is not. Be certain to detail coverage exclusions to avoid loopholes in court.

National Union denied the claim, stating that the counts of sharing trade secrets against WoodSpring were excluded in its D&O policy. It did state, however, that it would advance Ruby’s defense costs subject to a reservation of rights.

Meanwhile, mediation on the underlying suit was reached, and WoodSpring settled in the amount of $1,160,000. Ruby would have to pay ESA $40,000.

WoodSpring filed a complaint against National Union, stating the insurer had a duty to pay defense costs for claims against both the hotel and Ruby. The ESA complaint, said WoodSpring, did not specify or explicitly refer to any trade secrets in the CFAA count, which made the supposed exclusions to the policy irrelevant.

When the court reviewed the wording of the exclusion on trade secret coverage, it sided with WoodSpring.

Scorecard: The court ruled National Union has a duty to defend both Bernadette Ruby and WoodSpring in the underlying ESA action.

Takeaway: Multiple accusations against an insured can make defense dicey, especially if one accusation is covered and another is not. Be certain to detail coverage exclusions to avoid loopholes in court. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]