Attorneys and clients are always seeking fee shifting provisions to both minimize costs and put an adversary at peril. While much has been made of the Federal Computer Fraud and Abuse Act, 18 U.S.C. 1030, which prescribes both criminal and civil penalties for computer related offenses,1 New Jersey has a unique parallel statute, which, unlike the federal statute, explicitly allows the prevailing party to recover not only compensatory damages but also punitive damages and "the cost of the suit, including a reasonable attorney's fee ." N.J.S.A. 2A:38A-3 (emphasis added). The New Jersey Statute thus provides an extraordinary opportunity for practitioners to shift court costs. Earlier this year, the New Jersey Supreme Court in Fairway Dodge, LLC v. Decker Dodge, Inc. , and the U.S. District Court for the District of New Jersey in P.C. Yonkers, Inc. v. Celebrations! the Party and Seasonal Superstore, LLC , both interpreted the New Jersey Statute, including the provision for attorneys' fees and punitive damages. This article will focus on those recent decisions and consider the uses of the New Jersey Statute in business litigation.
The New Jersey Statute
New Jersey's Computer Statute provides:
A person or enterprise damaged in business or property as a result of any of the following actions may sue the actor therefor in the Superior Court and may recover compensatory and punitive damages and the cost of the suit, including a reasonable attorney's fee, costs of investigation and litigation:
a. The purposeful or knowing, and unauthorized altering, damaging, taking or destruction of any data, data base, computer program, computer software or computer equipment existing internally or externally to a computer, computer system or computer network;
b. The purposeful or knowing, and unauthorized altering, damaging, taking or destroying of a computer, computer system or computer network;
c. The purposeful or knowing, and unauthorized accessing or attempt to access any computer, computer system or computer network;
d. The purposeful or knowing, and unauthorized altering, accessing, tampering with, obtaining, intercepting, damaging or destroying of a financial instrument; or
e. The purposeful or knowing accessing and reckless altering, damaging, destroying or obtaining of any data, data base, computer, computer program, computer software, computer equipment, computer system or computer network.
N.J.S.A. 2A:38A-3 (emphasis added).
The New Jersey Statute potentially applies to a broad range of business litigation: trade secret and restrictive covenant litigation, litigation between business competitors, employee disloyalty situations and indeed anywhere where someone could potentially alter, damage, take or destroy information on a computer. While some litigators may instinctively try to "shoehorn" an action into federal court or into the Federal Statute, that may be unnecessary and in fact disadvantageous, given that New Jersey's statute provides for punitive damages, costs of suit and attorney's fees. Indeed, it is conceivable that in certain instances the attorney's fees and investigative costs could exceed compensatory damages.
Case Law From The New Jersey Supreme Court And Third Circuit
In the seminal New Jersey state case of Fairway Dodge, LLC v. Decker Dodge, Inc. ("Fairway "), defendant Kate Fair ("Fair"), a former employee of plaintiff Fairway Dodge, Inc. ("Fairway"), was hired to work at Fairway's competitor Decker Dodge, Inc. ("Decker"). Fair and her husband, Timothy Morgan ("Morgan"), entered Fairway's premises after business hours and attempted to make a backup file of Fairway's computer system. Fairway Dodge, Inc. v. Decker Dodge, Inc. , 2005 WL 4077532 (N.J. Super. App. Div. June 12, 2006). The data obtained by Fair and Morgan included Fairway's confidential customer and sales list, and the complete sales and service history of vehicles and automotive parts. Id . Fairway filed an action against Decker, Fair, Morgan and others under the New Jersey Computer Statute. Id. at *2. After a jury trial, on the claims under the New Jersey Statute, the jury assessed compensatory damages at $347,5662 and the court awarded plaintiff $525,628.26 in attorneys' fees, and $16,429.82 for costs of investigation. Id. at *9. In an unpublished opinion, the Appellate Division affirmed the most important parts of the judgment as to liability. That court rejected defendants' argument that a "taking" had not occurred because they simply copied information, reasoning that under the New Jersey Statute liability is established if an actor, purposely or knowingly and without authorization accesses, or attempts to access a computer system. Id. at *10. The Appellate Division reversed liability as to the defendants other than Fair and Morgan, however; it held that only the parties that actually accessed the computers could be held liable under the New Jersey Statute, which applies only to "actors." Id. at *13.
The Fairway court also affirmed the lower court's award of punitive damages, finding no error in its application of the Punitive Damages Act, which requires a finding that defendant acted with "actual malice or with wanton and willful disregard." Id. at *20. At least with respect to Fair, there was evidence that she acted out of spite because her mother sold Fairway, the family business, against her wishes. Id. Last, the Court found no merit in defendants' challenge to the attorney's fee award since under R. 4:42-9(a)(8) courts are authorized to award counsel fees as permitted by statute - in this case, the New Jersey Computer Statute. Id.
The Fairway case went up to the New Jersey Supreme Court, which affirmed earlier this year. Fairway Dodge, LLC v. Decker Dodge, Inc., 191 N.J. 460 (2007). The Supreme Court did not reach Fairway's argument that the owner and manager, who did not actually access the computers, should also be held liable for taking and accessing computer data, because liability should not be limited only to "those with hands-on involvement." Id. at 468. The Supreme Court noted that the New Jersey Statute imposes liability upon an "actor" who engages in "purposeful or knowing" conduct proscribed by the statute. Because it found insufficient evidence that the additional parties had acted purposefully or knowingly, the Court passed on further defining the term "actor." Id. at 469. The issues of punitive damages and attorneys fees were not before the Supreme Court, so the decision of the Appellate Division still stands.
In the case of P.C. Yonkers, Inc. v. Celebrations! the Party and Seasonal Superstore, LLC (" P.C. Yonkers "), plaintiff Party City retail stores, franchisees of Party City Corporation ("Party City"), sued two former executives under both the Federal Statute and the New Jersey Statute. Party City alleged that the executives, who had opened competing party goods stores, had gained unauthorized access to Party City's computer system to decide on store location, marketing efforts and budgets, and to obtain important sales information for the upcoming Halloween season. P.C. Yonkers, Inc. v. Celebrations! the Party and Seasonal Superstore, LLC , 428 F.3d 504, 506-507 (3d Cir. 2005). The Third Circuit decision, on appeal from denial of a preliminary injunction, did not significantly discuss the New Jersey Statute before remanding the matter to the United States District Court for the District of New Jersey. In the course of denying the defendants' motion to dismiss the complaint, the district court carefully analyzed the potential scope of liability under the New Jersey Statute. P.C. Yonkers, Inc. v. Celebrations! the Party and Seasonal Superstore, LLC , 2007 WL 708978 (D.N.J. March 5, 2007).
Party City did not claim that the defendants had changed or damaged its computer system or the information therein; rather, Party City claimed that it had been damaged because it had sustained significant expenses in investigating the defendants' acts and in taking remedial actions to prevent them from being repeated. Significantly, the district court found that this was sufficient to maintain a claim under the New Jersey Statute. Id. at *8. The Court also found that Party City had sufficiently alleged how the defendants had "purposely and/or knowingly" taken their computer data, and how Party City was "damaged in business or property," since they explained that defendants obtained access to general revenue and ranking information and used it to determine where to locate and how to operate their stores. Id.
Also interesting was the district court's discussion of punitive damages. Party City alleged that the defendants' reason for intentionally accessing the computer without authorization was to obtain a competitive advantage. Id. at *9. The district court found this allegation sufficient to support a claim that defendants maliciously engaged in intentional wrongdoing, and therefore denied defendants' motion to dismiss Party City's claim for punitive damages based on the standard set forth in the Punitive Damages Act, as in the Fairway case. Id.
Practice Pointers
The New Jersey Statute has been underutilized. But because the Statute authorizes recovery of attorney's fees and investigation costs, and because most companies' critical business information is stored on computers, the Statute has the potential to become a powerful tool and a valuable weapon in business litigation. As a practical matter, if a company suspects that information on a computer has been compromised or tampered with in any manner, it should first have the system forensically investigated, and maintain clear records of its investigative costs, because they may prove to be recoverable if sufficiently documented. If a civil action is eventually brought, the Complaint should lay out all the critical elements, demonstrating that the act was "purposeful or knowing," and that there was some malice to warrant an award of punitive damages. No doubt New Jersey's powerful Computer Statute will evolve as its use becomes the subject of various causes of action pled by creative practitioners.
1The Federal Statute allows a person who has suffered damage by a statutory violation to "maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief" so long as it is brought within two (2) years of the alleged act. 18 U.S.C. 1030(g). See David W. Garland and Linda B. Katz , Computer Fraud and Abuse Act: Another Arrow in the Quiver of an Employer Faced with a Disloyal Employee - Part I, Metropolitan Corporate Counsel (May 2006) (outlining the Federal Statute and its evolution through the federal courts).
2The compensatory damages awarded to plaintiff totaled $1,920,250 and included common law claims of conspiracy to interfere with prospective economic advantage and breach of the duty of loyalty. Id. at *9.
Published October 1, 2007.
