September 15, 2008

Consistently Inconsistent: How Courts Assess the Inevitable Disclosure Doctrine

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Executive Summary

The doctrine of inevitable disclosure, which has its source in trade secret law, holds that in rare circumstances an individual possesses such critical knowledge of a company's trade secrets he can be temporarily or even permanently banned from working in a specific job, because doing so would inevitably lead to disclosure of his former employer's trade secrets. The doctrine has been a source of controversy among courts and legal commentators, in part because of strong policy considerations on both sides of the debate, and in part because of inconsistent treatment by federal and state courts.

State law governs trade secrets, unlike most areas of intellectual property law, which are governed by federal statute. The vast majority of states—at last count, 46—have adopted laws based on the Uniform Trade Secrets Act (UTSA), which provides for injunctive relief in the event of "actual or threatened misappropriation" of trade secrets. The remaining states have civil statutes unrelated to the UTSA.

The inevitable disclosure doctrine proposes, in the words of one appellate court, that an employee may be prevented from working for another company if "the employee's new job duties will inevitably cause the employee to rely upon knowledge of the former employer's trade secrets." Originally, courts applied the doctrine only to technical fields, but it has been expanded to include a variety of trade secrets, including financial, manufacturing, production and marketing information.

Although the doctrine can be traced to 1919, the seminal inevitable disclosure case is PepsiCo, Inc. v. Redmond. In a 1995 decision, the U.S. Court of Appeals for the Seventh Circuit affirmed a preliminary injunction temporarily enjoining a former PepsiCo employee from working at a competing company, Quaker. Defendant Redmond had been a member of upper management at PepsiCo and signed a confidentiality agreement, but not a noncompete agreement. After he accepted a similar position at Quaker, PepsiCo brought an action to enjoin him from assuming his duties or divulging trade secrets, mainly strategic sales, marketing, logistics and financial information.

In its decision, the district court that first issued the injunction said, "unless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions . . . by relying on his knowledge of [PepsiCo] trade secrets." The Sevemtj Circuit, upholding that injunction, said, "a plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant's new employment will inevitably lead to [the disclosure of trade secrets]."

As in PepsiCo, courts most frequently discuss inevitable disclosure in the context of temporary injunction motions, which generally require a party seeking an injunction—usually a former employer—to show: 1) the likelihood of success at trial, 2) the potential for irreparable injury absent the injunction, 3) a balancing of the relevant equities and 4) the effect on the public interest. The doctrine affects all four requirements.

Although the inevitable disclosure doctrine is generally considered as flowing from the UTSA's "threatened misappropriation" language, courts and commentators differ in their analysis of the relationship between the two. One court, for example, said, "the inevitable disclosure doctrine appears to be aimed at preventing disclosures despite the employee's best intentions, and the threatened [misappropriation] doctrine appears to be aimed at preventing disclosures based on the employee's intentions." Conversely, a court in Florida described inevitable disclosure as a separate and distinct theory—a hybrid "third type" of misappropriation. In that court's analysis, the main distinction between inevitable disclosure and threatened misappropriation was the level of proof required. And a California court rejected inevitable disclosure, saying it "cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets."

In determining "inevitability," courts have tended to apply four general approaches: 1) a general fact-intensive analysis, 2) a focus on bad faith, 3) a requirement of technical information or 4) an analysis of competition and similarity of position.

At a minimum, all jurisdictions that have adopted the doctrine "require the employer to prove the existence of a trade secret and that the employee possessed the trade secret in some manner." Beyond that, courts and scholars have considered a variety of factors: 1) the existence of a restrictive covenant; 2) the degree of competition between the former and new employer; 3) bad faith behavior by either the former employee or the new employer; 4) type, identification and extent of the employee's knowledge; 5) policy considerations; 6) the new employer's efforts to safeguard the former employer's trade secrets; 7) similarity between the employee's previous and current positions; and 8) whether the trade secrets at issue are highly valuable to both employers. Many courts also consider case-specific factors, such as the nature of the industry and the trade secrets.

Of those factors, courts generally consider the first five to be the most important. But here, too, their interpretations vary.

Restrictive covenants. Most courts require, at a minimum, a nondisclosure agreement in order to issue an injunction, even under the theory of inevitable disclosure. But at least one has found the existence of a nondisclosure agreement to be a factor against inevitable disclosure because it shows the employer "clearly anticipated" that the former employee might want to work for a different company after acquiring confidential information. Courts generally seem more willing to grant an injunction based on inevitable disclosure in cases where the former employee has also signed a noncompete agreement. But one appeals court found the absence of such an agreement to be irrelevant because liability under the UTSA is premised on the defendant's use of the plaintiff's confidential information, not the existence of a competitive relationship.

One argument in favor of requiring restrictive covenants is that application of the inevitable disclosure doctrine otherwise effectively imposes a noncompete restriction without the employee having had an opportunity to negotiate for and receive additional consideration from the employer.

Competition. In most inevitable disclosure cases, the new and old employers are competitors. However, direct competition is not necessarily a requirement. If the employers are competitors, courts have considered the degree to which they are competitive as a factor in determining whether or not disclosure is inevitable.

Bad faith. Some courts require evidence of bad faith conduct on the part of the defendant before they will issue an injunction under a theory of inevitable disclosure. Critics of that view argue, however, that it fails to recognize the rationale underlying the doctrine, i.e. that disclosure is inevitable, regardless of an employee's intentions. Some courts also consider bad faith by the new employer.

Type and extent of knowledge. An employee has the right to use general knowledge, skills and experience, but not confidential or trade secret information. In inevitable disclosure cases, a key challenge is distinguishing between general knowledge and trade secret information. In cases such as PepsiCo, where the claimed secrets are "soft" knowledge, such as marketing and sales information, one could argue it is simply general industry knowledge and therefore unprotectable. Likewise, knowledge can be "general" not because everyone has it, but because it is not exclusive to the employer. The mere fact that an employee gained skills while working for an employer does not make them trade secrets, and an employee is free to sell those skills in the marketplace.

Whether the defendant is able to recall the knowledge and whether it is specific enough to constitute a trade secret are also factors in inevitable disclosure cases. In some situations, courts have declined to issue an injunction because the information a plaintiff claimed to be trade secrets was too broad. Another consideration is the employee's possession of negative trade secrets—knowledge of what does not work.

Policy considerations. The balancing of policy considerations is a major factor in most inevitable disclosure cases. Employers clearly have an interest in being able to hire employees with specific skills. They also have an interest in protecting and pursuing investments in innovation. Without legal protection, employers would have little incentive to make investments in economically valuable trade secrets.

Employees have an interest in being able to market their skills to the highest bidder and to choose where to work. Opponents of the inevitable disclosure doctrine argue it is unfair to prevent employees from choosing where to work, particularly when they did not sign a non-compete agreement, and when case law is inconsistent. As a court in North Carolina, which rejected the doctrine, noted, "it creates an after-the-fact covenant not to compete." Injunctions based on this doctrine may also conflict with an employee's First Amendment rights.

Society has an interest in encouraging competition in order to foster innovation and create a competitive market for goods and services. Another policy consideration, one analyst notes, is encouraging "fair business practices and business ethics and the endorsement of a greater commercial morality."

Hoping to balance these various interests, some courts have, in the words of one scholar, "used the inevitable disclosure doctrine as the foundation for the evaluation of the merits of the case but have gone on to craft injunctions in a way that minimizes the burden on the employee's right to be employed."

Although states' interpretation of inevitable disclosure has been inconsistent, the majority of courts that have addressed the doctrine have endorsed it. In those states, the uneven application is due primarily to disagreements about the relationship between inevitable disclosure and threatened misappropriation. On the other hand, a few—most prominently, California—have "offered significant resistance to the inevitable disclosure principle itself, as opposed to its application to particular facts."

In light of the UTSA's specific reference to threatened misappropriation, one might assume states that have adopted this model law would also embrace inevitable disclosure. But here too, consistency is lacking. For instance, California has adopted the UTSA, but rejected inevitable disclosure. Alternatively, New York and New Jersey have not adopted the UTSA, but have recognized the doctrine.

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