"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."
A court that applies the inevitable disclosure doctrine, he adds, can prevent an employee from "performing specified duties without having to identify precisely what trade secrets are threatened with disclosure by the performance of those duties. In addition, of course, it is much easier to monitor compliance with an injunction which prohibits specified work than an injunction which prohibits use or disclosure of specific trade secrets."
Interestingly enough, the roots of the inevitable disclosure doctrine did not spring from a high-tech court battle. Instead, the guiding case, PepsiCo v. Redmond (1995), involved a defendant, Redmond, who had worked for Pepsico for 10 years, rising through the ranks to become the general manager of the business segment covering California that generated annual revenues in excess of $500 million and provided 20% of Pepsi? s U.S. profits.
In the course of his employment the general manager had gained access to PepsiCo? s annual operating and three-year strategic plans containing financial goals and strategies for manufacturing, production, marketing, packaging and distribution. This included especially vital pricing models and marketing plans for particular beverages in various markets.
In 1994, Redmond left PepsiCo to join Quaker Oats (which at the time sold such products as Gatorade and Snapple) as chief operating officer. PepsiCo sued and won a preliminary injunction preventing Redmond from marketing Snapple and Gatorade for a specific period. The new position, PepsiCo claimed, required him to anticipate and respond to PepsiCo? s trade secret marketing plan, a plan which Redmond had helped create while at the company. The injunction was upheld on appeal.
While the court emphasized that the mere fact that a person assumes a similar position at a competitor does not make it "inevitable that he will use or disclose trade secret information," it went on to rule that "[ a] plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant? s new employment will inevitably lead him to rely on the plaintiff? s trade secrets." The court cited the "fierce competition" between PepsiCo and Quaker Oats, particularly in the "sports beverage" (Gatorade) and "new age beverage" (Snapple) product lines.
Could the court have ruled differently?
Wells says yes. He cites another case in which a limited injunction was crafted by a court in AllisChalmers Manufacturing Co. v. Continental Aviation & Engineering Corp. That court also found that it was impossible for a former developer of fuel injection pumps not to use the former employer? s trade secret information. However, in an attempt to maintain the employee? s "right to pursue his chosen vocation," the injunction was designed to be "as restricted as possible to protect the secrets involved without undue restraint."
"This goal was accomplished by permitting the engineer to perform any work except development of the particular type of engine pump he had been working on at AllisChalmers," says Wells. "It was a truly balanced opinion."
Feinberg argues that courts should be using scalpels, not clubs, when "the mere threat of an ? inevitable disclosure? injunction can result in a decision not to hire an employee of a competitor, chilling employee mobility," he says. "For the same reason, widespread application of the doctrine could adversely affect the creation of new companies by people who are disenchanted with their present employer or who think they have invented a better mousetrap."
So will America? s technology drive sputter, a victim of its own anti-theft devices? Perhaps not. Because even as the noose appears to tighten around employee rights in some states, it is being loosened in others, like California, where Feinberg says the courts "have historically recognized the fundamental right of an employee to earn a living and have denied injunctive relief that interfered with this right."
Quoting from a California Supreme Court decision, Continental Car-Na-Var Corp. v. Moseley, Feinberg notes the decision stated that "...equity will to the fullest extent protect the property rights of employers in their trade secrets and otherwise, but public policy and natural justice require also that" the right of people to follow any of the "common occupations" of life should be respected as well. Every individual, the opinion added, "possesses as a form of property, the right to pursue any calling, business or profession he may choose." That last phrase echoes a similar one made a long time ago concerning Life, Liberty, and the pursuit of Happiness.
All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.
