Who controls what’s in your brain?
When a former employee knows his or her former employer’s trade secrets, the former employer may be able to obtain injunctive relief preventing the employee, not just from disclosing such information, but from working for a competitor under the so-called “inevitable disclosure doctrine.”
Alternatively stated, “where an employee’s work for a new employer substantially overlaps with work for a former employer, based on the same role, industry, and geographic region, a district court may conclude that those employees would likely use confidential information to the former employer’s detriment.” Jazz Pharmaceuticals, Inc. v. Synchrony Group, LLC, 2018 WL 6305602, *6 (E.D. Pa. Dec. 3, 2018).
As one commentator has observed, “The inevitable disclosure rule is really just a common sense response to a common dilemma: an employee who leaves to join a competitor can be tempted to gain an unfair head start by drawing upon proprietary information belonging to a past employer, and once the secret is disclosed, it may be forever lost.” William L. Schaller, “Trade Secret Inevitable Disclosure: Substantive, Procedural & Practical Implications of an Evolving Doctrine,” 86 J. Pat. & Trademark Off. Soc’y 336, 337 (May 2004).
Evolution of the Inevitable Disclosure Doctrine
In its original formulation, the inevitable disclosure doctrine served as a basis for enforcing noncompetition agreements. Id. at 338–39. That application of the concept continues today. See, e.g., Ounce Labs, Inc. v. Harwood, No. 08-2377BLS1 (Mass. Super. Ct. June 18, 2006) (Gants, J.) (“the risk of subtle inevitable disclosure [of confidential information] is precisely the type of competitive harm that a . . . noncompetition [agreement] is designed to prevent”).
Eventually, courts shifted to employing the same concept even where no noncompete was involved, i.e., in trade secrets cases.
However, “in early cases not involving restrictive covenants courts generally shied away from the ‘inevitable disclosure’ label and instead sought to base injunctive relief on a watered-down understanding of probable disclosure, apparently in an effort to make the doctrine seem less revolutionary and hence more palatable.” Schaller, “Trade Secret Inevitable Disclosure: Substantive,Procedural & Practical Implications of an Evolving Doctrine,” at 339–40 (citing Carborundum Co. v. Williams, 468 F. Supp. 38 (E.D. Tenn. 1978) (using probable rather than inevitable disclosure label), aff’d, 590 F.2d 334 (6th Cir. 1978); Standard Brands, Inc. v. Zumpe, 264 F. Supp. 254 (E.D. La. 1967) (using inevitable disclosure label but denying injunctive relief); Allis-Chalmers Mfg. Co. v. Continental Aviation & Eng’g Co., 255 F. Supp. 645 (E.D. Mich. 1966) (noting virtual impossibility of employee performing his new duties without disclosing confidential information); Sybron Corp. v. Wetzel, 413 N.Y.S.2d 127 (N.Y. 1978) (discussing but not deciding potential trade secret disclosure claim without using inevitable disclosure label); E.I. DuPont deNemours & Co. v. Am. Potash & Chemical Corp., 200 A.2d 428 (Del. Ch. 1964) (whether amounting to an inevitability or not, the degree of probable disclosure was a relevant fact to be considered in determining whether a threat of disclosure existed); Fountain v. Hudson Cush-N-Foam Corp., 122 So.2d 232 (Fla. App. 1960) (employing the concept but not the label)).
As one early case (The B. F. Goodrich Co. v. Wohlgemuth, 117 Ohio App. 493, 499-500, 192 N.E.2d 99, 104-05 (Ohio App. 1963)) explained,
We find from the evidence that [defendant] is possessed of knowledge of [plaintiff’s] trade secrets, and that any revelation of them to a [plaintiff’s] competitor is in equity a breach of faith and reprehensible to a court of equity.
. . . We have no doubt that an injunction may issue in a court of equity to prevent a future wrong although no right has yet been violated.
In cases of this character the law does not require an agreement between an employer and employee restricting the employee from securing employment with a competitor before an injunction may issue.
It is a rule in equity jurisprudence that, if an employee gains knowledge of his employer’s trade secrets as a result of the confidential relationship existing between employer and employee, and, in violation of the confidence, discloses such secrets to competitors after the termination of his employment, such abuse of confidence may be enjoined. The basis for equitable intervention is the employee’s wrongful conduct in violating the confidence. Equitable intervention is sanctioned when it appears, as it does in the instant case, that there exists a present real threat of disclosure, even without actual disclosure.
PepsiCo, Inc. v. Redmond: The Watershed Moment
The inevitable disclosure doctrine gained widespread attention following the watershed case of PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). By that time, the UTSA, with its language in Section 2 authorizing the issuance of injunctions to prevent any “actual or threatened misappropriation,” had been widely adopted, including in particular in Illinois, the state in which the PepsiCo v. Redmond case arose.
The facts in PepsiCo v. Redmondwere as follows:
Redmond worked for the Pepsi-Cola North America (PCNA) division of PepsiCo. At the time he left PepsiCo, Redmond was in a high-level position with PCNA, as its general manager for the northern California business unit. In that role, he had access to PepsiCo’s trade secrets.
In May 1994, a former PepsiCo employee began recruiting Redmond for sports drinks and “new age” drinks competitor, Quaker Oats Company. Redmond received an offer on October 20, 1994, for the position of vice president for on-premises sales. On November 8, following negotiations over money, Redmond received a written offer, which he accepted that day. Later that day, Redmond informed PepsiCo that he had received an offer for employment from Quaker Oats (which was the first time he disclosed his job search to PepsiCo), though he (falsely) told them that he had not yet accepted the offer. Two days later, Redmond told PepsiCo that he had decided to accept the offer.
PepsiCo brought an action seeking a preliminary injunction prohibiting Redmond from working for Quaker Oats, based on claims of trade secret misappropriation and breach of a confidentiality agreement. PepsiCo obtained a preliminary injunction from the District Court, which defendants appealed.
The 7th Circuit identified and balanced the competing interests between the protection of trade secrets (and related standards of commercial morality and encouragement of innovation) and permitting workers to pursue “their livelihoods when they leave their current positions,” observing that “trade secret law does not provide a reserve clause for solicitous employers.” As the court explained, “This tension is particularly exacerbated when a plaintiff sues to prevent not the actual misappropriation of trade secrets but the mere threat that it will occur.”
As the 7th Circuit reiterated from one of its prior decisions, “[T]he mere fact that a person assumed a similar position at a competitor does not, without more, make it ‘inevitable that he will use or disclose . . . trade secret information’ so as to ‘demonstrate irreparable injury.’” From this, the court concluded:
[A] plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets. See also1 Jager, supra, § 7.02[a] at 7-20 (noting claims where ‘the allegation is based on the fact that the disclosure of trade secrets in the new employment is inevitable, whether or not the former employee acts consciously or unconsciously’).”
Applying it to the facts of that case, the court concluded that PepsiCo sufficiently established threatened misappropriation (based on the concept of the “inevitability” of use) through the following facts:
- “Redmond possessed extensive and intimate knowledge about PCNA’s strategic goals for 1995 in sports drinks and new age drinks.”
- “Unless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about Gatorade and Snapple by relying on his knowledge of PCNA trade secrets.”
- “It is not the ‘general skills and knowledge acquired during his tenure with’ PepsiCo that PepsiCo seeks to keep from falling into Quaker’s hands, but rather ‘the particularized plans or processes developed by [PCNA] and disclosed to him while the employer-employee relationship existed, which are unknown to others in the industry and which give the employer an advantage over his competitors.’”
The court did observe, however, that
PepsiCo has not contended that Quaker has stolen the All Sport formula or its list of distributors. Rather PepsiCo has asserted that Redmond cannot help but rely on PCNA trade secrets as he helps plot Gatorade and Snapple’s new course, and that these secrets will enable Quaker to achieve a substantial advantage by knowing exactly how PCNA will price, distribute, and market its sports drinks and new age drinks and being able to respond strategically.
As the court explained,
[T]he danger of misappropriation in the present case is not that Quaker threatens to use PCNA’s secrets to create distribution systems or co-opt PCNA’s advertising and marketing ideas. Rather, PepsiCo believes that Quaker, unfairly armed with knowledge of PCNA’s plans, will be able to anticipate its distribution, packaging, pricing, and marketing moves. Redmond and Quaker even concede that Redmond might be faced with a decision that could be influenced by certain confidential information that he obtained while at PepsiCo. In other words, PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game. Quaker and Redmond’s protestations that their distribution systems and plans are entirely different from PCNA’s are thus not really responsive.
Not surprisingly, the court did not stop here. Rather, it went on to note that the District Court had found a lack of candor on the part of the defendants:
Redmond’s lack of forthrightness on some occasions, and out and out lies on others, in the period between the time he accepted the position with defendant Quaker and when he informed plaintiff that he had accepted that position leads the court to conclude that defendant Redmond could not be trusted to act with the necessary sensitivity and good faith under the circumstances in which the only practical verification that he was not using plaintiff’s secrets would be defendant Redmond’s word to that effect.
Accordingly, the court summarized,
[W]hen we couple the demonstrated inevitability that Redmond would rely on PCNA trade secrets in his new job at Quaker with the district court’s reluctance to believe that Redmond would refrain from disclosing these secrets in his new position (or that Quaker would ensure Redmond did not disclose them), we conclude that the district court correctly decided that PepsiCo demonstrated a likelihood of success on its statutory claim of trade secret misappropriation.
It bears mention that, although PepsiCo v. Redmond is most notable for its advancement of the inevitable disclosure doctrine based purely on a trade secrets theory (rather than as the basis for enforcing a noncompete), the court also addressed the impact of a less-restrictive covenant: the confidentiality agreement signed by Redmond. Specifically, the court explained as follows:
For the same reasons we concluded that the district court did not abuse its discretion in granting the preliminary injunction on the issue of trade secret misappropriation, we also agree with its decision on the likelihood of Redmond’s breach of his confidentiality agreement should he begin working at Quaker. Because Redmond’s position at Quaker would initially cause him to disclose trade secrets, it would necessarily force him to breach his agreement not to disclose confidential information acquired while employed in PCNA. . . .
. . . The threat of misappropriation that drives our holding with regard to trade secrets dictates the same result here.
How Inevitable is Inevitable?
One issue that arises in these cases is how inevitable the use or disclosure must be.
To answer that question, the court in Mickey’s Linen v. Fischer, 2017 WL 3970593 (N.D. Ill. Sept. 8, 2017), identified the following three-factor test:
The factors to determine whether disclosure of trade secrets is inevitable are: 1) the level of competition between the former employer and the new employer; 2) whether the employee’s position with the new employer is comparable to the position he held with the former employer; and 3) the actions the new employer has taken to prevent the former employee from using or disclosing trade secrets of the former employer.
Id. at *12; see also Molon Motor and Coil Corp. v. NIDEC Motor Corp., 2017 WL 1954531 (N.D. Ill. May 11, 2017) (same test).
Also instructive about Mickey’s Linen is the impact of the defendant’s deceitful conduct on the court’s analysis of the merits of the misappropriation claim. Specifically, despite finding that the plaintiff had satisfied all three prongs of the inevitable disclosure analysis, the court noted that even if the new employer had taken adequate “preventive measures, case law supports discounting [defendant’s] claim that he would not or could use or divulge [plaintiff’s] trade secrets in the performance of his [new] job . . . , given his ‘history of deceit.’”
Must There Be Bad Conduct?
Notwithstanding its long history since the PepsiCo v. Redmond decision and the frequent expansion of the doctrine to cases involving no misconduct, the inevitable disclosure doctrine is narrow, focused on the information that the employee remembers and cannot avoid bringing to bear in his or her new position. Accordingly, where stolen materials (no longer in the former employee’s possession) “are only useful to a competitor as a ‘body’ of information” and no one could recall sufficient amounts of the information, the inevitable disclosure doctrine generally will not apply. Free Country Ltd. v. Drennen, 235 F. Supp. 3d 559, 569–70 (S.D.N.Y. 2016); see also Mickey’s Linen v. Fischer, 2017 WL 3970593, *13 & n.5 (N.D. Ill. Sept. 8, 2017) (given defendant’s misconduct, including his “unconvincing explanation of why he returned a wiped company cellphone,” the court rejected defendant’s argument that the information was too complex to recall without a copy or that the new employer’s protective measures were adequate).
As the court in Free Country explained,
To be sure, the finding that Drennen no longer possesses Free Country’s materials does not mean that Drennen did not look at the files prior to deleting them. Free Country could therefore theoretically lodge an inevitable disclosure claim based on the information still in Drennen’s head. But this argument would nonetheless fail. Plaintiff concedes that the materials transferred by Drennen are only useful to a competitor as a “body” of information. This body is enormous. Drennen transferred nearly 50,000 files, and while only a subset of these files may be proprietary, plaintiff concedes that even individual documents contain a “tremendous” amount of information. Drennen possessed the files at issue for a maximum of nine days, and the Court is not persuaded that Drennen could have memorized gigabytes of data concerning Free Country’s past, present, and future business in such a short period of time. See, e.g., Robert Half Int’l, Inc. v. Dunn, No. 5:13-CV-974, 2013 WL 10829925, at *8 (N.D.N.Y. Oct. 29, 2013) (rejecting inevitable disclosure claim because there was no evidence that defendant was still in possession of plaintiff’s confidential information). Accordingly, in the absence of evidence of misuse, the Court finds that plaintiff has failed to show a likelihood of success on the merits of its misappropriation claim against Drennen.
Though the law varies by jurisdiction, the significance of bad conduct as a potentially significant factor in a court’s analysis of the need for injunctive relief should not be ignored.
The Tension Between Noncompetes and Trade Secrets
Noncompetes have recently come under siege by researchers and the media. The concerns identified through preliminary research are (primarily) the potential impacts of noncompetes on innovation and employee mobility and wages. (More on that later.)
On the flip side, noncompetes are generally regarded as an important tool to protect trade secrets. Indeed, some courts question the value of a company’s claimed trade secrets if the company did not use noncompetes to protect them.
Balancing the potential ills of noncompetes against the need to protect the enormous value of trade secrets to the US economy from its primary threat – a company’s employees (studies show between 50 and 72% of employees have taken or will take sensitive company information when they leave) – is no easy task.
Different states have reached different results.
In Massachusetts, for example, new noncompete and trade secrets legislation (both became effective on October 1, 2018) balance those interests by limiting the use of noncompetes, but offering trade secrets owners two options that are, in many respects, two sides of the same coin: imposition of a so-called “springing noncompete” (or as John Marsh called it, a “time out noncompete”) and availability of the inevitable disclosure doctrine.
Specifically, under the new noncompete law, a court may impose “a noncompetition restriction . . . , whether through preliminary or permanent injunctive relief or otherwise, as a remedy for a breach of another agreement or a statutory or common law duty,” e.g., breach of a nondisclosure agreement, misappropriation of trade secrets, or breach of fiduciary duty.
Under the new trade secrets law, “Actual or threatened misappropriation may be enjoined upon principles of equity including but not limited to consideration of prior party conduct and circumstances of potential use, upon a showing that information qualifying as a trade secret has been or is threatened to be misappropriated.” The italicized language was added to the existing UTSA language (on which the statute is based) specifically to allow a court to enjoin inevitable disclosure where there has been bad conduct.
How any other state – or the federal government (which in 2016 enacted the first federal private right of action to protect trade secrets while simultaneously and subsequently considering limitations on noncompetes) – balances the interests will be an evolving issue. So, stay tuned!