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LEGAL ISSUES

De Facto Non-Competition Agreements: The Inevitable Disclosure Doctrine

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It has long been established that a party can procure injunctive relief and/or damages based on the misappropriation of its trade secrets. What is less well known is that relief can be sought for inevitable disclosure of trade secrets in order to prospectively enjoin someone -- in most instances a former employee -- from engaging in activities (such as working for a new employer) that may lead to inadvertent improper disclosure or use of trade secrets. Given the need for hiring highly skilled employees to develop and market today's complex technologies, and the sometimes competing need to protect valuable proprietary inventions and ideas from walking out the door and into the hands of competitors, this inevitable disclosure doctrine takes on particular importance.

The doctrine of inevitable disclosure is based on the proposition that an employee should not work for a competitor of his former employer under circumstances where the employee inevitably will use or disclose the former employer's trade secrets in the course of his duties -- even if acting in the utmost good faith. The operative theory is that no matter what good intentions someone may have vis-à -vis his former employer's trade secrets, it may simply be impossible for that person to segregate and "lock up" proprietary information in his head when he performs the same or similar work for a new employer that competes with the former employer. This is particularly true in the case of trade secrets comprised of "negative" information (i.e., knowledge gleaned as to ideas, processes or methods that do not work). For example, a biotech company that invests tens of millions of dollars into research that proves fruitless in developing a cure for a particular disease may well have reason for concern when one of its researchers, with detailed knowledge of the unsuccessful paths pursued, departs to work for a competitor on developing a cure for the same disease. That former employee certainly would avoid pursuing the same dead-end research previously pursued, thereby potentially avoiding expenditure by the new employer of millions of dollars and countless hours on fruitless research and development.

The inevitable disclosure doctrine is often applied in conjunction with a claim to enforce a non-disclosure agreement in an employment contract. Under such circumstances, an employer may be able to establish that the likelihood of inevitable disclosure of its trade secrets forms a legitimate business reason for enforcing a non-competition agreement against its former employee. This was the case in Marcam Corp. v. Orchard, 885 F. Supp. 294 (D. Mass. 1995). There, the U.S. District Court for the District of Massachusetts enforced a non-competition agreement and enjoined a former employee of plaintiff Marcam Corporation from working for a competitor in a position that was similar to the position he had held while at Marcam. The court found that the defendant "inevitably, even if inadvertently, [ would] be influenced by the knowledge he possesses of all aspects of [ his former employer's] development efforts," which would "provide an advantage to" the new employer. Id. at 297. The court therefore decided to enforce the non-competition agreement and enjoined the defendant former employee from working for the competitor.

The inevitable disclosure doctrine does not operate solely in conjunction with the enforcement of non-competition agreements, however. In fact, the doctrine has been applied in many jurisdictions essentially as a de facto non-competition agreement in order to preclude employees from working for competitors of their former employers -- even where their former employers failed to procure non-competition agreements. One well-known example of such an application of the inevitable disclosure doctrine is the case of PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). In PepsiCo, defendant William Redmond had departed his position in marketing plaintiff PepsiCo's struggling All Sport sports drink in order to work for Quaker Oats Company in marketing its industry-leading Gatorade and Snapple drinks. The district court found that Redmond had detailed knowledge of PepsiCo's trade secrets pertaining to pricing, market strategy and selling/delivery systems. Id. at 1265-66. The court further found that Redmond inevitably would disclose PepsiCo's trade secrets to Quaker in his new position. Thus, despite the fact that Redmond had not signed a non-competition agreement with PepsiCo, the court enjoined him from working for Quaker.

The court acknowledged the tension between the question of threatened misappropriation of trade secrets and the right of workers to "[ pursue] their livelihoods when they leave their current positions." Id. at 1268. However, the district court ultimately concluded, and the appellate court confirmed, that the risk of inevitable disclosure of trade secrets (as distinguished from general knowledge and skills) can -- and in that case did -- outweigh the right of a worker to pursue particular employment.

Although a claim of inevitable disclosure of trade secrets need not be based on any showing of wrongdoing or even any intent to steal trade secrets, a plaintiff asserting an inevitable disclosure claim still must bear a heavy burden of proof. A plaintiff not only must demonstrate the traditional criteria for obtaining injunctive relieve (i.e., a likelihood of success on the merits, the potential for irreparable harm, and a balance of the equities in favor of the plaintiff), but also must demonstrate that (i) it has valuable, proprietary, confidential information that is the subject of reasonable measures to preserve its secrecy (i.e., trade secrets); (ii) the departing employee has knowledge of at least one of its trade secrets; and (iii) the departing employee's new employment puts him in a position to exploit the trade secret(s) to the detriment of the former employer. See, e.g., Campbell Soup Co. v. Giles, 47 F.3d 467, 469-70 (1st Cir. 1995); Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310, 316 (S.D.N.Y. 1999) (denying an injunction on the basis that there was no imminent risk of improper trade secrets disclosure, and noting that the inevitable disclosure doctrine, while viable, "should be applied in only the rarest of cases" absent evidence of actual misappropriation), remanded for clarification by, 205 F.3d 1322 (2d Cir. 2000), aff'd by 2000 WL 1093320 (2d Cir. June 12, 2000).

In attempting to invoke -- or defend against -- the inevitable disclosure doctrine, employers also should take into consideration the circumstances of the employee's departure. Although there appears to be a dearth of reported cases addressing the applicability of the inevitable disclosure doctrine where an employee has been terminated, it is likely that a different standard should be applied in the event an employee has been involuntarily terminated, particularly if that employee has been terminated without cause. In view of strong public policy favoring each individual's right to pursue employment in his or her field of choice, an employee who has been involuntarily terminated without cause is likely to be afforded substantial latitude in selecting a new employer, notwithstanding the risk of inevitable disclosure of trade secrets.

Finally, it is important to keep in mind that the inevitable disclosure doctrine is applied prospectively, not retroactively, and may vary from state to state. It is intended to preclude opportunities for improper disclosure of trade secrets. As such, employers who seek to invoke the doctrine to preclude a former employee from working for a competitor must act quickly in seeking injunctive relief.

Copyright © 2001 Goodwin Procter LLP. All Rights Reserved.

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