Does Contract or Tort Law Protect an Agent/Lessee’s Electronic Data?

Under New York law, is a claim of conversion cognizable for electronic data? Yesterday, the Second Circuit Court of Appeals held that itisn’t clear under New Yorklaw, and certified the question to New York’s highest court. The Second Circuit also held that no rationaltrier of fact could conclude that an insurance company owed a contractualobligation to a former agent not to seize policyholder information a computerthat the agent leased from the company.

Plaintiff Louis Thyroff was associated with NationwideMutual Insurance Company (“Nationwide”) as an insurance agent for 21 years.  When the relationship began in 1988, Thyroff andNationwide entered into an Agent’s Agreement, which provided a non-compete clausethat allowed competition only if certain enumerated requirements were met. Thryoff was also required to lease an agency-automationsystem, which consisted of hardware and software from Nationwide. Thyroff relied on this system to keep trackof customer data.

In September of 2000, Nationwide sent Thyroff a letter cancelingthe Agent’s Agreement. The following day,without notice, Nationwide denied Thryoff access to the agency-automationsystem, and all his client files contained therein.

Thryoff sued Nationwide for (1) conversion of the personaland business data contained on the computer and (2) breach of contract fordepriving him of access to business information necessary to compete once theAgency’s Agreement expired. In anunpublished opinion, the District Court dismissed the conversion claim andgranted Nationwide summary judgment on the breach of contract claim. Thyroff appealed to the Second Circuit.

In what is perhaps the most interesting aspect of the case(and has much less to do with contract law), the Second Circuit has certifiedthe following question to the New York Court of Appeals: Is a claim ofconversion cognizable for electronic data?

In addition, the Second Circuit affirmed the grant of summary judgment toNationwide on Thyroff’s breach of contract claim. Thryoff asserted that Nationwide owed acontractual obligation not to seize policyholder information from the leasedcomputer without first providing Thyroff with an opportunity to duplicateit. Thryoff attempted to cobble togetherthis duty by pointing to (1) a section of his Agent’s Agreement that allowedhim to compete if certain requirements were met and (2) the implied covenant ofgood faith and fair dealing. The SecondCircuit interpreted the non-compete provision to allow Thryoff to compete incertain situations, but did not interpret it as requiring Nationwide to provideThryoff with a means to compete. Thecourt determined that “despite Thyroff’s evidence that Nationwide may have acted inbad faith in the manner in which it removed the policyholder information fromThryoff’s possession, no rational trier of fact could conclude that in so doingNationwide violated any provision of the contract.” The court held that the Agent’s Agreement,coupled with the implied covenant of good faith, could not be read to impose anyaffirmative obligation on Nationwide.

Thryoff v. Nationwide Mutual Ins. Co., __ F.3d __ (2d Cir. Aug. 21, 2006).

[Meredith R. Miller]