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March 28, 2014

Unraveling the Doctrine of Inevitable Disclosure

Linda K. Stevens – March 28, 2014

As employee mobility continues to increase, the same situation occurs throughout today's business world:  A key employee has defected for the competition, and management is upset . . .  and worried. The employee knows competitively sensitive information, such as the coming year's marketing strategies and details about the company's important new product-development efforts. The employee has no noncompete agreement, although the company did obtain her signature on its standard confidentiality agreement when she started her job several years ago. The employee swears that she will live up to her confidentiality obligations, and her new employer disclaims any interest in any "trade secrets" she might know. Still, management does not trust the employee's ability to respect confidentiality, especially because her new job looks to be substantially the same as her old job. Whether inadvertent or on purpose, misappropriation seems inevitable. Management asks, "What can be done?  Can't we stop her from taking this job?"

In the past, many lawyers would have advised this employer that, absent a valid noncompete agreement, the employee is free to switch jobs, even to join the competition. The former employer most likely would have been advised to wait and watch the employee's conduct, and the marketplace, for evidence of trade-secret misappropriation. It might not be necessary to wait for the proverbial horse to leave the barn, however. Some jurisdictions provide a way to prevent the loss of trade secrets before it happens—by invoking the doctrine of  "inevitable disclosure" of trade secrets to prevent the employee from performing competitively sensitive duties for the competitor, even in the absence of any noncompete and without any evidence of actual trade-secret misappropriation.

What Is the Inevitable-Disclosure Doctrine?
Generally speaking, courts following the inevitable-disclosure approach will enjoin, not only the use or disclosure of a trade secret but the competitive employment or other activity that would make disclosure or use of that trade secret "inevitable" —in essence imposing a competitive restriction as a means to protect the secret. The doctrine is most often applied when an employee possessing trade secrets of her employer defects to the competition, taking a job with duties so similar to her former position that the court believes she cannot perform her new duties without making use of her former employer's trade secrets, i.e., use or disclosure of the information is "inevitable" under the circumstances. 

The most-cited case regarding the inevitable-disclosure doctrine is PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) (Disclosure: The author's firm represented PepsiCo in this case.)  Redmond, a high-level PepsiCo manager possessing competitively sensitive information regarding PepsiCo's sports drink and "new age" beverages, defected to join Quaker Oats, which at the time constituted PepsiCo's main competition for those products. Redmond's departure coincided with an important marketing initiative, and he knew a large amount of confidential and competitively sensitive information, including strategic plans for marketing, manufacturing, production, packaging and distribution; promotional event calendars and plans; operational plans and strategies; and pricing architecture. Redmond had not signed a noncompete, and he professed his intent to maintain the confidentiality of this information. However, due to the competitive posture of the two companies and the similarity of the positions held and to be held by Redmond, PepsiCo filed a suit. In addition to temporary, preliminary, and permanent injunctive relief prohibiting Redmond from disclosing PepsiCo's trade secrets, PepsiCo also sought temporary and preliminary injunctive relief prohibiting him from assuming his duties at Quaker Oats. After hearing the evidence of PepsiCo's trade secrets, Redmond's access to and familiarity with these secrets, the similarity between his duties for PepsiCo and his duties for Quaker Oats, and Redmond's lack of candor, the district court ruled that it was inevitable that Redmond would use or disclose PepsiCo's trade secrets, and it preliminarily enjoined Redmond from assuming his proposed position at Quaker Oats for six months. The Seventh Circuit affirmed, confirming that inevitable disclosure was a valid justification for the issuance of such injunctive relief.

Although PepsiCo brought the doctrine of inevitable disclosure into the spotlight, the doctrine is not a recent invention. Case law in many jurisdictions, over many decades, addressed these problems and came to the same conclusion as that reached in PepsiCo: Trade secret information necessary for the performance of an employee's job will often be in peril of improper use or disclosure if that employee departs to perform the same job for a competitor.  See, e.g., FMC Corp. v. Varco Int'l, Inc., 677 F.2d 500, 504–5 (5th Cir. 1982); Allis-Chalmers Mfg. Co. v. Cont'l Aviation & Eng'g Corp., 255 F. Supp. 645, 654 (E.D. Mich. 1966); Fountain v. Hudson Cush-N-Foam Corp., 122 So. 2d 232, 234 (Fla. App. 1960).  Courts facing this type of situation have long wrestled with the difficulty in policing "nonuse" injunctions, particularly when use of the trade secret is not discernible from inspection of the finished product or from marketplace observation. The problem is compounded by the very nature of trade secrets—their value is both difficult to calculate and vulnerable to loss, forever, upon disclosure —which will often render post-misappropriation relief illusory.

The legislature, too, has attempted to address the inadequacy of post-misappropriation relief to address trade-secrets misappropriation. The Uniform Trade Secrets Act (UTSA) provides for injunctive relief from both actual and "threatened" misappropriation of trade secrets. Some version of the UTSA has been adopted in almost all states, and courts examining the inevitable-disclosure doctrine after adoption of the UTSA often have cited this provision as support for the doctrine's application. See, e.g., Bimbo Bakeries USA, Inc. v. Botticella, 613 F.2d 102, 110 (3d Cir. 2010); Teradyne, Inc. v. Clear Commc'n Corp., 707 F. Supp. 353, 356–57 (N.D. Ill. 1989).

Application of the Doctrine
The inevitable-disclosure doctrine has not been universally embraced. At one end of the spectrum, the Third Circuit appears to have gone even farther than the Seventh Circuit did in PepsiCo with its recently issued opinion in Bimbo Bakeries USA, Inc., holding that something less than "inevitability" can support the issuance of an injunction. 613 F.2d at 114 ("[T]he 'proper inquiry' in determining whether to grant an injunction to prevent the threatened disclosure of trade secrets is not whether a defendant inevitably will disclose a trade secret in the absence of injunctive relief, but instead whether 'there is sufficient likelihood, or substantial threat, of defendant doing so in the future.'"). At the other end of the spectrum is California, which has flatly rejected the doctrine of inevitable disclosure altogether. See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 125 Cal. Rptr. 2d 277, 293–94 (Cal. Ct. App. 4th Dist. 2002) ("[T]he inevitable disclosure doctrine cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets.").

Arrayed between these two approaches is a voluminous—and dissonant—body of case law addressing the inevitable-disclosure doctrine. Even courts applying the inevitable-disclosure doctrine have differed over its reach and the circumstances required for its application. For example, the focus—at both the trial court and appellate levels—on the defendant's lack of candor in PepsiCo has raised some questions about the elements of "inevitable disclosure." Some courts seem to have construed PepsiCo to require evidence of bad-faith conduct on the part of the defendant. See, e.g., Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 633 (E.D.N.Y. 1996) ("Seventh Circuit emphasized that the district court found a 'lack of forthrightness' and 'out and out lies' by the former employee, and that he could not be trusted to act with the necessary good faith") (quoting PepsiCo, 54 F.3d at 1270). Other courts have viewed the bad-faith finding in PepsiCo to be merely additional support for the trial court's ruling and have treated bad faith, not as a requirement for a finding of inevitable disclosure, but as an aggravating factor or one of the many possible circumstances that might support a finding of inevitable disclosure. See, e.g., Cacique, Inc. v. V&V Supremo Foods, Inc., No. 03 C 4230, 2004 WL 2222270 (N.D. Ill. Sept. 30, 2004); Maxxim Med., Inc. v. Michelson, 51 F. Supp. 2d 773, 785-87 (S.D. Tex.), rev'd, 182 F.3d 915 (5th Cir. 1999).

The latter approach would appear to hold more closely to the original rationale for the doctrine of inevitable disclosure: A defendant might be expected to use or disclose the plaintiff's trade secrets—regardless of his or her intentions and even if he or she were to act in the utmost good faith. See, e.g., Bimbo Bakeries USA, Inc., 613 F.3d at 107 n.4 ("We are quite uncertain as to how an individual can block out information from his head for a human mind does not function like a computer from which, through an electronic process, materials may be deleted."); Fed. Trade Comm'n v. Exxon Corp., 636 F.2d 1336, 1350 (D.C. Cir. 1980) ("it is very difficult for the human mind to compartmentalize and selectively suppress information once learned, no matter how well-intentioned the effort may be to do so").

Most recently, New York seems to be viewing the doctrine with increasing disfavor. Long treated in New York as a criterion for the enforcement of noncompetes, the doctrine was recently and expressly addressed as such by the Southern District of New York. Janus et Cie v. Kahnke, No. R-CIV-7201-WHP (S.D.N.Y. Aug. 29, 2013) (explaining that the application of the inevitable-disclosure theory would permit "the parties' confidentiality agreement [to] be wielded as a restrictive covenant. . . . This can be a powerful weapon in the hands of an employer; the risk of litigation alone may have a chilling effect on the employee. Such constraints should be the product of open negotiation.").

These examples give just a taste of the complex stew that is the inevitable-disclosure doctrine—and the strong influence of local flavor. It is critically important to research applicable law and to know the particular approach of the local courts. And because the judges within a particular state or federal district can vary in their approach to and application of the inevitable-disclosure doctrine, it is also important to identify and review (once suit has been filed) all past rulings by your assigned judge in inevitable-disclosure-type situations.

Understanding the Limits
It is important for trade-secret owners to keep in mind the limits of the inevitable disclosure doctrine. Even in situations and jurisdictions in which the doctrine of inevitable disclosure is applied, the duration of an injunction issued under the doctrine is unlikely to be very long (the injunction issued in PepsiCo v. Redmond was for six months). Anda plaintiff must plead and prove facts indicating true "inevitability"—feared or suspected misappropriation is insufficient to invoke the doctrine, and allegations that a defendant knows the plaintiff's trade secrets and has joined forces with a competitor are not enough. Rather, courts commonly require some showing as to why disclosure is inevitable; for example, that a particular bid is outstanding, that a new product launch is imminent, or that the employee engaged in dishonest or inequitable conduct and should not be trusted. There is no set formula for pleading and proving an inevitable-disclosure case, but the court must be convinced that the employee cannot be expected to perform the new job without making reference to or disclosing the plaintiff's trade secrets.

Evaluating a Claim
In considering whether the plaintiff has made such a showing, courts applying the doctrine consider a variety of factors, and success will depend on the particular facts and equities of the situation. For this reason, there is no universally accepted formula for crafting an effective inevitable-disclosure claim, which is more an art than a science, or for predicting the success of such a claim, which is difficult. That being said, a review of the case law and commentary regarding the doctrine suggests that the factors often considered by the courts in determining whether to enjoin competitive activity to prevent inevitable disclosure include:

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 or she held with the former employer;

3. the nature of the employee's former position (e.g., the security clearance and pay grade of his or her position);

4. the employee's familiarity with the claimed trade secrets;

5. the relevance or usefulness of the trade secrets in the employee's new position;

6. actions taken by the new employer to prevent the former employee from using or disclosing trade secrets of the former employer;

7. whether the employee (or the new employer) has engaged in inequitable or bad-faith conduct, such as misrepresentations or the taking of paper or electronic documents;

8. the existence of a noncompete (particularly in New York);

9. in jurisdictions that have not rejected the doctrine, the degree to which judges in that jurisdiction have applied it.

A court may not consider all of these factors, and no one factor is universally determinative.  Which leads to only one "inevitability" in a case of this type: The likelihood of success will depend on choice-of-law principles and local approach, and each case's resolution will be as unique as the matter's particular facts. 

Keywords: litigation, intellectual property, doctrine of inevitable disclosure, noncompetes, trade secrets, injunction, misappropriation, competitor, PepsiCo, inevitability, bad-faith, Uniform Trade Secrets Act (UTSA), employee mobility

Linda K. Stevens – March 28, 2014