Got a New Job? Better Check That Non-Compete Clause

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The court granted the requested injunction based upon "evidence of actual misappropriation" of DoubleClick? s trade secrets. That part of the decision was not controversial. But in a move that was chilling for employees across the nation, the court also found that the actual misappropriation claim was "bolstered by the fact that there is a high probability of inevitable disclosure of trade secrets in this case."

Based upon these findings, and despite the fact that neither employee had a non-compete agreement or even a valid confidentiality agreement with DoubleClick, the court entered an order that prohibited the defendants from starting a competing business for at least six months.

"The inevitable disclosure doctrine seeks to prevent a former employee from working for a competitor under the theory that an individual cannot help but exploit knowledge from his previous employer and put it to work for a competitor," says Wells. "There? s no ? Chinese wall? to segregate information in your head."

He observes that courts are more likely to apply inevitable disclosure, or enforce a non-compete agreement, if the former employee takes a position that? s is similar to his or her previous job, particularly if the position pays considerably more than the old one even though the responsibilities are not very different.

"If an employee leaves company A where she was northeast regional sales manager and goes to company B as a regional sales manager in the southwest, a court might say she? s not subject to a non-compete covenant or the inevitable disclosure doctrine," says Wells. "She might also be safe if she works for a company that? s in a different kind of business. But if she? s in a similar line of work the court may be suspicious."

He said concerns over that kind of outcome probably fueled a recent decision by Redmond, Washington-based Crossgain Corp. to ax about 25% of its employees, including the start-up? s two founders and chief executive officer, in response to pressure from Microsoft. Crossgain develops Internet-based standards and tools for software developers and, according to a recent report in the Wall Street Journal, the terminated individuals were all ex-Microsoft employees who had previously signed non-compete agreements with the Redmond-based giant.

The inevitable disclosure doctrine is at the heart of a court case currently being argued by an attorney in a Philadelphia-based law firm in which Wharton legal studies lecturer Bob Borghese is a principal.

The firm is representing a seller of specialized medical products that hired two salespeople who formerly worked for a competitor. Alleging misappropriation of trade secrets, the former employer says the two ex-employees improperly left with customer lists and should be enjoined from contacting the customers.

"Even though there were no restrictive covenants preventing the employees from joining the new firm, the former employer is utilizing the doctrine of inevitable disclosure in its argument," says Borghese. "It? s like a warning shot aimed at all of the company? s competitors. While it may not dissuade employees from leaving their company, it can certainly give them, as well as a prospective employer, pause."

In this instance, notes Borghese, a key concern is whether the customer list really constituted a trade secret. "The ex-employer has rights, since it incurred the costs of developing the customer list," he says. "But the real question is whether the list was maintained as a trade secret."

In this case, at least, Borghese predicts that the former employer will not prevail because it failed to maintain adequate safeguards to protect the information as a trade secret. "The customer list was maintained on an open network where it was easily accessible," he says. "If a company wants to maintain the information as a trade secret, then it needs to properly safeguard the asset to maintain its secrecy."

Meanwhile, Wells says that courts are walking a tightrope as they weigh a company? s right to protect its trade secrets against an individual? s right to work. And he thinks the courts may be coming down too hard against the individual. "Courts are striving for balance, but there are other options," he says. "For example, a court could permit an ex-employee to work for a competing firm, but the new employer would pay monetary damages to the former employer."

Under the Uniform Trade Secrets Act, which has been adopted by most states, an injunction may "condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited." So why don? t courts sack the inevitable disclosure doctrine and instead levy monetary sanctions?

Maybe because it? s easier to tell a person he or she can? t take on a new job than it is to gain enough of an understanding of a company? s business to equitably award monetary damages or a royalty - especially when the companies are involved in high-tech ventures where today? s cutting-edge solution can be rendered obsolete in a heartbeat.

Ian N. Feinberg, an attorney in the Palo Alto office of Gray Cary Ware & Freidenrich LLP, calls the doctrine of inevitable disclosure a "seductive" one that "permits the overburdened and non-technically trained judge to avoid the seemingly impossible task of understanding asserted technical trade secrets, or worse, determining which of them are actually secret and have been misappropriated or are threatened with misappropriation."

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