By: Woenho Chung

Imagine a scenario in which a high-level employee at a startup is looking to switch over to a similar position at another company that provides similar services. Of course, the startup had all of the requisite confidentiality/trade secret-protections in place, said high-level employee had signed confidentiality/nondisclosure agreements, and no intentional misappropriation of any trade secrets had occurred. But how do we account for trade secrets that come in the form of knowledge associated with high-level positions (e.g., knowledge of products, business plans, marketing and distribution strategies, etc.)? This is something implanted in the employee’s memory, and as human beings, we are not able to perfectly compartmentalize. How can the employee not use that information, even subconsciously, when making decisions at his new job?

This issue was first widely addressed in a nationally-quoted case, PepsiCo v. Redmond[1]. A high level employee for PepsiCo moved to Quaker to serve a similar position. The employee had signed a confidentiality agreement with PepsiCo and there was no clear evidence of misappropriation. The question was whether PepsiCo could obtain a preliminary injunction to prevent the employee from assuming any duties relating to beverage pricing, marketing, and distribution without evidence of not only actual misappropriation but also actual threat of misappropriation.

In holding that the preliminary injunction should be granted, the court outlined the inevitable disclosure doctrine. The court adopted doctrine based on the following facts: (1) the employee had substantial knowledge about trade secrets. (The court identified specific things like “attack plan”, “price architecture”, “long term strategic plan” and took into consideration the fact that the employee helped create them and implement them);[2] and (2) the employee would go to a position in which his decisions cannot help but be influenced, even indirectly, by the specialized knowledge. (The court said that the former PepsiCo employee’s promise not to use the knowledge was not enough because the information may be used subconsciously)[3].

The inevitable disclosure doctrine allows a court to grant immediate relief by prohibiting a departing employee from taking a competitive job based on a prediction of future trade secret misappropriation. The controversy lies in the fact that the prediction requires no evidence of the employee’s actual or threatened disclosure.

 

States vary in their adoption of the Doctrine

 

Many courts in states such as New Jersey and Pennsylvania apply the inevitable disclosure doctrine as applied in PepsiCo. The New Jersey court applied the doctrine in National Starch & Chemical Corp. v. Parker Chemical[4], where the court upheld a preliminary injunction to stop a high-level employee, who was knowledgeable in the results of the company’s expensive trial and error processes, from moving to a competitor. The court stated “there was sufficient likelihood of inevitable disclosure, with consequent immediate and irreparable harm to the Plaintiff.”[5]

Some courts in states such as Connecticut apply the inevitable disclosure doctrine only when the former employee is bound by a covenant not to compete. The Connecticut court in Branson Ultrasonics Corp. v. Stratman[6] granted a preliminary injunction, holding that “when, as here, a high degree of similarity between an employee’s former and current employment makes it likely that the former employer’s trade secrets and other confidential information will be used and disclosed by the employee in the course of his new work, enforcement of a covenant not to compete is necessary to protect against such use and disclosure.”[7]

Alternatively, some courts in states such as Michigan apply the inevitable disclosure doctrine only where the plaintiff proves bad faith conduct on the part of the former employee or the new employer. In Liebert Corp. v. Mazur[8], the court found a preliminary injunction necessary to prevent the inevitable disclosure of trade secrets when the defendant copied the employer’s confidential files and tried to delete evidence of wrongdoing.[9]

Lastly, courts in states such as California, Georgia, Maryland, Virginia, and Louisiana courts have rejected the inevitable disclosure doctrine. California is especially adamant in protecting a strong public policy favoring employee mobility. The California court in Whyte v. Schlage Lock Co.[10] emphasized that the doctrine is contrary to California law and policy because it created an after-the-fact covenant not to compete by restricting employee mobility.[11]

 

The Defend Trade Secrets Act and the Doctrine.

 

The Defend Trade Secrets Act (DTSA), a federal law passed in 2016, provides plaintiffs a federal cause of action for trade secret misappropriation. The Defend Trade Secrets Act (DTSA), at first glance, appears to reject the inevitable disclosure doctrine. The Act forbids injunctions that would “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”[12]

Some people have suggested that this provision would prohibit the application of the inevitable disclosure doctrine because the doctrine is premised on information only known by the employee that may be used. However, there is both a lack of precedent and a lack of uniformity in this area. There is a lack of precedent because the DTSA is limited only to acts that occurred after the date of enactment. There is a lack of uniformity because with the few cases we have, courts have been divided, state-by-state, on whether the theory is viable for claims under the DTSA. It remains to be seen how this provision will be applied uniformly in practice.

[1] PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

[2] Id. at 1266.

[3] Id. at 1269.

[4] National Starch & Chemical Corp. v. Parker Chemical Corp., 530 A.2d 31 (N.J. Super. Ct. App. Div. 1987).

[5] Id. at 33.

[6] Branson Ultrasonics Corp. v. Stratman, 921 F. Supp. 909 (D. Conn. 1996).

[7] Id.

[8] Liebert Corp. v. Mazur, 357 Ill. App. 3d 265 (Ill Ct App 2005).

[9] Id. at 267.

[10] Whyte v Schlage Lock Co., 125 Cal Rptr 2d 277 (Cal Ct App 2002).

[11] Id. at 293.

[12] Defend Trade Secrets Act of 2016, Pub Law No 114-153 § 2(b)(3)(A) (codified at 18 USC § 1836(b)(3)(A)).