By Seyamack Kouretchian

New York Law Journal

March 18, 1996

One would not know the sixties are over with all the streaking going on nowadays. Everywhere one looks, nakedness surrounds; and surprisingly, traditional company executives seem to be the least modest. Some with just their backsides exposed and others completely naked, but all with at least their flies down, companies of all sizes appear to be running loose and wild, with nothing more than the wind to protect their family jewels. Is it that they think the attorneys haven't noticed? Or, do they like to run around exposed? Whatever the case, a cold breeze is on the horizon and it is the general counsel's responsibility to provide coverage.

If the law is a "jealous lover," then today's company executives really do have a lot to worry about. In modernizing their companies by adding computer network systems, scanners, and Internet access, they may have begun a campaign that innocently mistreats the rights of third parties and company employees and results in substantial and devastating damage awards and settlements. From violating the defamation law of some distant and seemingly insignificant locality(1), to violating federal securities laws(2), decisions that facially appear related to increasing operational efficiency and maintaining the company's competitive advantage actually have a considerably broader impact. This is because the data bits and transmission networks that underlie this new digital world defy a comprehensive definition or a limited form of useage.

As a result, the decision to put a computer on an employees desk can, if not properly managed, cost more than just the t housand dollar price tag. It can cost $25.5 million for mis-appropriating a trade secret; $2.2 million to settle a sexual harassment lawsuit; $200,000 to settle a defamation lawsuit; $500,000 to settle a trademark infringement and copyright infringement lawsuit; and $750,000 in lost production costs related to a preliminary injunction that prevents the release of a new company product. These hidden costs don't appear on the fancy graphs and reports which are offered in support of the expenditure because company executives and, not surprisingly, their general counsels are obviously not aware of the potential exposure to signigicant liability created by new technologies.

To appreciate the exposure, the perspective must change. Afterall, more than just sophisticated electronics are enclosed within the plastic casing of a computer. That plastic box sitting under most corporate desks also includes a smoking gun, a peep hole, a community center, a newstand, a copy machine, a spy, a magazine, a megaphone, an international broadcast network, a radical audience, skeletons in a closet, a movie camera, and an utterly incompetent ignoramus. Clearly, company executives can easily appreciate the legal significance of authorizing an expenditure to install a peep hole in the womens' bathroom. This same type of sensitivity must be applied to decisions relating to modern technology.

Although, it is impossible to here examine every example of how technology can lead to liability, a few glaring examples will be reviewed in the hopes that companies and their executives will cover themselves in order to reduce their exposure. To be completely covered, however, it is prudent to review technological issues with specialists in computer and cyberspace law and issues at every turn of the decision-making process.

Computers As A Smoking Gun

Every business day, very detailed information is being stored on a company's computer system. Over the course of time, the accumulated information provides a precise historical timeline of a company's operations which can, if left to a creative litigator, make for big trouble. Take, for example, the case of Vermont Microsystems Inc. (VMI) v. Autodesk(3), wherein VMI used bits and bytes, and the fact that certain bits were missing, to prove that Autodesk mis-appropriated its trade secrets. Rather than simply rely upon eyewitnesses and internal memoranda, VMI used information stored on the Autodesk computers to convince a judge to award it $25.5 million in damages. Using modern techniques, VMI was able to prove that certain data had been permanently deleted from an engineer's computer file, thereby persuadingly suggesting that Autodesk was up to some funny business.

The accumulation of information also has the unfortunate consequence of allowing for all types of communications, in both casual (such as through Email), draft, and final forms, to indefinitely remain resident in the system and, when in the midst of litigation, susceptible to discovery by the opposing side. This can, and should, cause company executives some abdominal discomfort and stiffening of the upper cervical muscles since, for example, even an innocent joke sent through the E-mail system years earlier could create a destructive impression in the minds of a jury asked to consider the question of punitive damages.

That such potentially incriminating information are being preserved for decades on end suggests that companies have little to no idea of what lies resident on their computer systems. This creates additional problems when companies are asked to respond to discovery demands during the the course of litigation. Millions of dollars are being spent by companies to review the information stored on their systems just to respond to discovery demands. Intuit Inc., for example, recently had to review approximately 200 hard disks, each containing about 300 megabytes of data (or some 15 million pages of text), to respond to the Justice Department's request for information regarding the company's merger with Microsoft Corp(4). Clearly, the costs and time associated with such a review are substantial.

To minimize such costs and prevent potential exposure to liability, companies need to regularly audit their information systems and delete those documents that do not need to be maintained. This is not meant to suggest that companies should acitvely conceal their wrongs. Rather, companies should simply act responsibly by "spring cleaning" the computer system.

Computers As A Peep Hole

Communication via computers is becoming an increasingly standard part of the corporate environment. In companies of all sizes, computers are being used for personal and casual purposes. From preparing a love letter, to receiving a political joke over the E-mail system, to using a company spreadsheet program to prepare a personal income tax return, employees are finding the company computer quite suitable for their personal needs. Where a company has failed to express a policy providing that all such "electronic" information is susceptible to periodic review by the employer, however, an employee may have a valid claim for the breach of their privacy interests when and if an employer decides to review the information stored on employee's system.

For starters, the First Amendment of the Constitution of the United States of America guaranties individuals the right to privacy(5). This right is further enhanced in the private sector by various state statutes, as well as the Electronic Communication Privacy Act of 1986.(6) Generally, the failure to respect one's right to privacy can result in an award of monetary damages, as well as attorneys' fees and costs.(7)

These laws, either expressly or by reasonable implication, govern the interception and review of electronic messages. Since an increasing number of employees are utilizing E-mail systems to communicate both internally and externally, a company executive's desire to review one's E-mail messages can ultimately prove to be a thorny issue.

Now consider a well-publicized California case(8) where a company employee was fired because she transmitted certain personal messages, some containing sexual content, through the company's internal network system. The employee filed suit for wrongful termination, claiming that the the company had illegitimately reviewed her E-mail, and for invasion of privacy. The court denied her claims, however, because she had signed an agreement stating that the company's computer systems would only be used for Acompany business.

It should also be noted that a right to privacy violation has been found to occur when a company actually collects and retains too much information about an individual's life. In White v. Davis(9), California's highest court noted that the increasing collection and retention of data on all facets of an individual's life threatens one's personal freedom and security. Where, therefore, a company's informational systems are so broad and encompassing that a large sum of material on an employee has been collected over the years, it could be argued that the company has violated the employee's privacy rights.

Surprisingly, most companies do not require their employees to sign such documents limiting the use of the computer systems to Acompany business. They don't even have policies in place which explicitly state that an employee has no reasonable expectation of privacy in the electronic messages and information transmitted, received, and/or stored on and/or through the company's computer system. Considering the potential for exposure, a company's failure to adopt such straight-forward policies and procedures is inexcusable.

Computers As A Copy Machine

From full-motion video clips, to audio messages, to text, computers have the capability of storing a myriad of information. Because such information is  stored in the form of a string of ones and zeroes, computers also allow for the creation of an infinite number of perfect, near-perfect, and/or intentionallymodified duplications. Where such duplications are made without proper authorizations, the result can prove devastating to a company's annual financial performance in the form of monetary judgments awarded pursuant to national and international laws governing the use, duplication, and modification of intellectual property.

The Copyright Act, for example, provides the author with certain rights in Aoriginal works of authoriship.(10)  These rights include, among other rights, the right to make duplications of and modifications to the work. A party infringing these rights may be susceptible to statutory damages and attorneys' fees and costs.

Notwithstanding these rights, most companies are recklessly scanning certain information into their computer systems without much regard to the fact that the proper authorizations for the electronic and/or digital rights have not been obtained. Companies, and/or their employees using company computers, are also duplicating information recieved over the Internet and/or posting certain information over the Internet without proper license. Again, this type of activity is also cause for alarm.

Take, for example, the efforts of Playboy Enterprises, Inc. to enforce its copyrights and trademarks. In two recent cases, Playboy filed suit for the unathorized use and duplication of its name, logo, and photographs. In one of the cases, Playboy was paid $500,000 to settle its claims. In the other case, Playboy was able to prove that the unauthorized transfer of an image file through an online system constitutes, as a matter of law, copyright infringement.(11) Clearly, company executives authorizing the expenditure of a company Web Site should be particuarly concerned about this precedent. Today's technology is an amusement park full of dangerous and hidden landmines. Although computers, scanners, and Internet connections provide for increased efficiency and, by correlation, increased productivity, they also provide for increased exposure to lawsuits by employees and third parties. Company executives and most of their general counsels have not begun to appreciate the variety of means by which liability may be created and/or exagerrated. Clearly, as a smoking gun, a peep hole, and a copy machine, the computer can, if not properly managed, prove to be a significant liability. It is, therefore, becoming increasingly important that company executives and their general counsels pay particular attention to the radical digitial device running their office, lest they catch a nasty draft.

1. 1. See, U.S. v. Thomas, Case No. 94-20019-G (W.D.Tenn.1994) (California-based
2. online system operators were found guilty of violating a Tennessee obscenity
3. law).
4. 2. When Modems Squawk, Wall Street Listens, Lance Rose, 1994, April 18, 1994,
5. Wired Magazine (discussing Medphone Corp.'s decision to file suit in New Jersey
6. Federal Court against an individual who made disparaging online comments
7. about Medphone).
8. 3. Vermont Microsystems v. Autodesk, Case No.2:92-CV-309 (D.Ver.1994), 1994
9. U.S. Dist.Lexis 18737).
10. 4. See, The Snitch In The System, Linda Himelstein, April 17, 1995, Business Week.
11. 5. See Griswold v. Connecticut (1965) 381 U.S. 479, 14 L.Ed.2d 510, 85 S.Ct. 1678.
12. 6. 18 U.S.C.S. '' 2510 et seq.
13. 7. Id.
14. 8. Bourke v. Nissan Motor Corp., No. B068705 (Cal.App.2d Dist., Div.5,1993). See
15. also, Shoars v. Epson America, Inc., No. B073234 (Cal.App.2d Dist., Div.2,1993).
16. 9. 13 C.3d 757, 120 Cal.Rptr. 94 (1975).
17. 10. 17 U.S.C. ' 102(a).
18. 11. Playboy Enterprises, Inc. v. Frena, 839 F.Supp. 1552 (M.D. Fla.1993).

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