Improper Acquisition Requires More Than Just Evidence of Use
The appellate court affirmed the entry of summary judgment. Hooked unsuccessfully argued that Apple had misappropriated two types of its trade secrets by poaching its employees: “(1) technical information, such as algorithms and app recommendation strategies; and (2) information about the makeup and skills of Hooked’s core engineering team.” In rejecting Hooked’s claims, the court reasoned that there was insufficient evidence that former Hooked employees possessed trade secret information, or even that these same employees drew on such knowledge in furthering Apple’s corporate interests. The court explained that under the UTSA, mere possession of trade secrets by a departing employee was simply not enough to “meet the standard for improper use or acquisition.”
The court further relied on public policy considerations of free employee mobility in rejecting Hooked’s arguments. “Allowing an action for trade secret misappropriation against a former employee for using his or her own knowledge to benefit a new employer is impermissible because it would be equivalent to retroactively imposing on the employee a covenant not to compete,” the court opined. In reaching its conclusion, the court followed past precedent in rejecting the “inevitable disclosure” doctrine, “under which a claim for trade secret misappropriation is stated if an employee’s new job will inevitably lead to reliance on the former employer’s trade secrets.”
Learning Lessons the Hard Way
In light of strong public policy considerations favoring employee mobility, in addition to the power disparities often present in trade secret litigation, Litigation Section leaders offer some suggestions and lessons learned from the court’s opinion. “This decision is characteristic of how California has balanced employee mobility versus protection of confidential information—heavily tilted toward employee mobility,” observes Chad S.C. Stover, Wilmington, DE, cochair of the Section’s Intellectual Property Litigation Committee. “One problem with this approach is that it becomes more difficult to prevent a competitor from stealing confidential information by merely hiring away top employees,” explains Stover.
Section leaders advise that companies, especially startups like Hooked, take various precautions to avoid the same fate, such as entering into a nondisclosure agreement prior to negotiations. “Hooked could also implement better policies on protecting trade secrets and limiting the disclosure of the company’s most important trade secrets to a smaller group of employees,” Stover suggests. “Another approach would be to seek patent protection to the extent possible,” he adds, recognizing that such protection would be “limited in duration.”
Having a nondisclosure or nonsolicitation agreement in place is also a mitigation measure that Section Leaders agree can be beneficial in similar situations. “Rejection of the inevitable disclosure doctrine is not good for businesses,” opines James D. Abrams, Columbus, OH, cochair of the Section’s Commercial & Business Litigation Committee. “However, employees cannot unlearn the skills they’ve developed over time so the best way to protect the employer and employee is to require a noncompetition agreement so that a situation like Hooked could not occur,” he explains.
According to Section leaders, the erosion of the inevitable disclosure doctrine in jurisdictions such as California supports the need for caution when entering into negotiations similar to those at issue in this case. “[Hooked] should not have proceeded without a [nondisclosure] or a nonsolicitation agreement,” Abrams observes.
Despite Hooked’s failure to take adequate precautions, the risk of litigation “is not acceptable to most companies, and it will deter this type of conduct in the majority of M&A discussions,” Stover predicts. However, whether this decision potentially functions to chill future acquisition negotiations between startups and established technology companies remains to be seen.