The recent Illinois Supreme Court decision in Lawlor v. North American Corporation of Illinois presents a cautionary lesson for employers who hire investigators to obtain evidence of wrongdoing by former employees. In the end, the employer not only lost its case against a former employee for breach of fiduciary duty, but was stuck with an award inclusive of punitive damages because the investigation firm it hired pretended to be the employee in order to obtain her private telephone records.

The lawsuit began as a simple claim by Kathleen Lawlor seeking outstanding commissions allegedly owed by her former employer, North American Corporation of Illinois. North American, in turn, believed she had attempted to direct business to a competitor while still employed. It instituted an investigation and also filed a counterclaim for breach of fiduciary duty. Lawlor later learned that someone had pretended to be her in order to obtain her private phone records, and she amended her complaint to add a claim for the tort of "intrusion upon seclusion." As it turned out, the impersonation was committed by a subcontractor of the investigation firm that North American's outside counsel had hired to conduct the investigation. The records thereby obtained were turned over to the primary investigation firm, which then turned them over to North American.

North American disclaimed responsibility for this "pretexting scheme" on the basis that neither of the investigation firms was its agent but that both were independent contractors; and that it had never directed the method by which the phone records were to be obtained and had not even been made aware of how they were obtained.

A Cook County jury, however, found against North American and awarded $65,000 in compensatory damages and $1.75 million in punitive damages to Lawlor, all on account of the impersonation. The trial judge then found for North American on its fiduciary breach claim against Lawlor and awarded it compensatory damages of $78,781 and punitive damages of $551,467. The trial judge also knocked down the jury award of punitive damages against North American to $665,000. On appeal, however, an Illinois appellate court reinstated the original $1.75 million punitive damages award against North American and threw out the trial judge's damages award against Lawlor.

It then became the Illinois Supreme Court's turn. The Court upheld the "intrusion upon seclusion" finding against North American on the basis that there was enough evidence to support a conclusion that North American was responsible for the investigation firm's actions. But it also felt the circumstances did not justify such a high punitive damages award, and it reduced that award down to $65,000, the same amount as the compensatory damages award. It then upheld the appellate court's voiding of the trial judge's judgment against Lawlor on the basis of insufficient evidence of any fiduciary breach.

In the end, after what must have amounted to a massive expenditure of time and legal fees, Lawlor wound up with a total of $130,000 in damages and North American wound up with nothing. Ironically, Lawlor lost on her claim for owed commissions, which had started the whole lawsuit. As for the phone logs that wound up turning the tables on North American, they apparently never revealed anything of significant evidentiary value to support North American's fiduciary breach claim.

So what lessons should an employer take away from this legal saga?

Take steps to guard against your hired investigator being found to be your agent. Because the investigators were found to be its agents, North American was held vicariously liable and subjected to punitive damages for their actions that it claimed to have known nothing about. One way such a result might have been avoided was if North American had entered into a retention agreement making clear that the investigation firm was an independent contractor free from the direction and control of the employer in carrying out its assignments. Such an arrangement could also have specified that all investigation techniques were to comply with all requirements of the law, including honoring privacy interests, and have contained an indemnification clause.

Don't put on blinders if your investigator is able to produce information about someone that ordinarily is not obtainable without that person's authorization. While North American professed not to know that the phone logs were obtained by pretexting, it also never bothered to question how they were obtained. It further provided the investigators with information from Lawlor's personnel file that was used in the scheme, and followed up on the phone numbers that were produced by attempting to determine whom they belonged to. This doubtless created the impression that North American was at least tacitly complicit and not just passively involved in the process. The lesson learned is that claiming ignorance sometimes will not work if the degree of "fishiness" and involvement is just too high.

Don't pursue counterclaims if you don't have the evidence or have not suffered any harm. Even though North American initially was able to prevail on its fiduciary breach claim, that award was unable to stand on review, as both the appellate court and the Supreme Court found no admissible evidence of such a breach. Also damning was the absence of evidence that Lawlor ever diverted business from North American. While sometimes pursuing a counterclaim is a good strategy because it puts the plaintiff on the defensive, in this case North American would have been better off just defending against the original claim for commissions, which it ultimately did successfully.

We have reported in previous issues of the Labor and Employment Alert other examples of how employers can get themselves into trouble by not being sufficiently sensitive to employees' privacy interests (see Employer Searches of Electronic Communication and Computer Fraud and Abuse Act.) This continues to be an area of potential liability that employers should keep in mind.