Trade secrets and inevitable disclosure

Introduction

Trade secret disputes are literally blowing up in California. With the rise of the internet, cryptocurrency, AI, and software technologies, companies are fighting playing musical chairs with employees that learn the business and may learn certain confidential, proprietary, or trade secret information to leave and compete with the business (often knowing a better way to serve the Golden Goose client of the former company). This represents progress, and fair competition in many respects, however, well funded companies that lose their employees who take their business often do not see it this way.

Legal Issue: Understanding the Inevitable Disclosure Doctrine 

The inevitable disclosure doctrine is a legal theory used primarily in the context of trade secrets. It allows an employer to prevent a former employee from working for a competitor if it is deemed that the employee will inevitably disclose the former employer’s trade secrets, even if there is no evidence of an actual intent to disclose such information. This doctrine is rooted in the idea that certain employees, due to their intimate knowledge of trade secrets, cannot help but rely on or reveal this information in their new employment.  If this doctrine applies, a Court can actually enjoin a departing employee from working for a competitor.

See PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995). See more below. Here were the basic facts:

The facts of this case lay against a backdrop of fierce beverage-industry competition between Quaker and PepsiCo, especially in “sports drinks”¹  and “new age drinks.”²  Quaker’s sports drink, “Gatorade,” is the dominant brand in its market niche. PepsiCo introduced its Gatorade rival, “All Sport,” in March and April of 1994, but sales of All Sport lag far behind those of Gatorade. Quaker also has the lead in the new-age-drink category. Although PepsiCo has entered the market through joint ventures with the Thomas J. Lipton Company and Ocean Spray Cranberries, Inc., Quaker purchased Snapple Beverage Corp., a large new-age-drink maker, in late 1994. PepsiCo’s products have about half of Snapple’s market share. Both companies see 1995 as an important year for their products: PepsiCo has developed extensive plans to increase its market presence, while Quaker is trying to solidify its lead by integrating Gatorade and Snapple distribution. Meanwhile, PepsiCo and Quaker each face strong competition from Coca Cola Co., which has its own sports drink, “PowerAde,” and which introduced its own Snapple-rival, “Fruitopia,” in 1994, as well as from independent beverage producers.

Federal Perspective 

Under federal law, the inevitable disclosure doctrine is connected to the Defend Trade Secrets Act (DTSA) of 2016. The DTSA provides a federal cause of action for trade secret misappropriation and allows for the possibility of injunctions to prevent actual or threatened misappropriation of trade secrets. The DTSA does not explicitly mention the inevitable disclosure doctrine, but courts have interpreted it in ways that incorporate this concept.  Many times, a Plaintiff will sue under both the STATE trade secret law (ex. CUTSA in California) and the DTSA (Federal trade secret law).

See 18 U.S.C. § 1836(b)(3)(A)(i)(I) 

Example of the Inevitable Disclosure Doctrine  

Imagine a chef, Alex, who works at a prestigious restaurant known for its unique and highly confidential recipes. These recipes are considered the restaurant’s trade secrets, and they contribute significantly to its competitive advantage. Alex has spent years perfecting these recipes and knows every detail about the ingredients, techniques, and presentation. 

Now, let’s say Alex decides to leave the restaurant and join a rival restaurant in the same city. Even though Alex has no intention of revealing the secret recipes, the nature of their knowledge makes it almost impossible to avoid using those techniques and insights gained from the previous restaurant. In every dish Alex prepares, there’s a risk that elements of the confidential recipes might be utilized, even unintentionally. 

Under federal law, specifically the Defend Trade Secrets Act (DTSA) of 2016, the original restaurant could seek an injunction to prevent Alex from working at the rival restaurant, arguing that Alex’s intimate knowledge of the trade secrets would lead to inevitable disclosure. The DTSA provides a framework for protecting trade secrets and allows for legal actions against actual or threatened misappropriation. While the act does not explicitly mention the inevitable disclosure doctrine, courts have interpreted it in a manner that can apply this concept to such scenarios. 

In this example, the restaurant might argue that despite Alex’s best intentions, the unique knowledge and skills acquired are so ingrained that Alex cannot help but use them in the new job, thereby risking the disclosure of trade secrets. This is how the inevitable disclosure doctrine operates to protect valuable proprietary information from being unintentionally or inevitably shared with competitors. 

Attorney Steve® Tip: Realize, you need to do a lot of research and understand your jurisdiction before moving for any special relief, such as an injunction.

Key Case: Pepsico, Inc. v. Redmond (7th Cir. 1995) In this landmark case, the Seventh Circuit Court of Appeals applied the inevitable disclosure doctrine to prevent a former PepsiCo executive from working at Quaker Oats. The court found that the executive’s knowledge of PepsiCo’s trade secrets and strategic plans would inevitably be used at Quaker Oats, thus posing a significant risk of disclosure. 

California Perspective 

California, on the other hand, is notably resistant to the inevitable disclosure doctrine. The state’s public policy strongly favors employee mobility and competition. California Business and Professions Code § 16600 explicitly states that contracts restraining anyone from engaging in a lawful profession, trade, or business of any kind are void, which makes enforcing non-compete clauses and the inevitable disclosure doctrine particularly challenging. 

California, on the other hand, is notably resistant to the inevitable disclosure doctrine. The state’s public policy strongly favors employee mobility and competition. California Business and Professions Code § 16600 explicitly states that contracts restraining anyone from engaging in a lawful profession, trade, or business of any kind are void, which makes enforcing non-compete clauses and the inevitable disclosure doctrine particularly challenging. 

Example of the Inevitable Disclosure Doctrine in a California Context 

Imagine Jamie, a software engineer at a leading Silicon Valley tech company, who has developed a cutting-edge AI algorithm considered a trade secret. Jamie decides to join a startup working on similar AI technology. Despite signing a non-disclosure agreement (NDA), Jamie’s former employer worries that Jamie’s deep knowledge of the proprietary algorithm will inevitably influence their work at the new company. 

In many states, the former employer might use the inevitable disclosure doctrine to prevent Jamie from joining the startup, arguing that Jamie’s knowledge will inevitably lead to the disclosure of trade secrets. However, in California, this approach is unlikely to succeed. 

California Business and Professions Code § 16600 makes contracts that restrain anyone from engaging in a lawful profession, trade, or business void, reflecting the state’s strong public policy favoring employee mobility and competition. Consequently, California courts are resistant to enforcing non-compete clauses and the inevitable disclosure doctrine. 

In this case, Jamie’s former employer would struggle to convince a California court to issue an injunction preventing Jamie from working at the startup. The court would prioritize Jamie’s right to pursue new employment opportunities, rejecting the notion that the risk of inevitable disclosure justifies restricting Jamie’s career. 

This example highlights how California’s legal framework emphasizes employee mobility and competition, requiring employers to rely more on robust NDAs and other protective measures rather than the inevitable disclosure doctrine. 

Key Case: Whyte v. Schlage Lock Company (2002) In this case, the California Court of Appeal rejected the inevitable disclosure doctrine. The court held that applying this doctrine would essentially create a de facto non-compete agreement, which is contrary to California’s strong public policy favoring employee mobility. 

Key Differences and Implications 

1. Federal Law (DTSA): 

• Allows for injunctions based on the likelihood of trade secret misappropriation. 

• Courts may apply the inevitable disclosure doctrine to grant such injunctions, depending on the circumstances. 

2. California Law: 

• Strongly disfavors the inevitable disclosure doctrine. 

• Emphasizes the importance of employee mobility and the invalidity of non-compete agreements. 

• Courts are unlikely to prevent an employee from taking a new job based solely on the risk of inevitable disclosure. 

Practical Considerations for Employers and Employees 

1. For Employers: Balancing Trade Secret Protection Across States 

Employers operating in multiple states face unique challenges in protecting trade secrets due to varying legal standards. Understanding these differences and tailoring employment agreements accordingly is essential. 

• Federal Law and Other States: 

• Defend Trade Secrets Act (DTSA): This federal law provides a unified legal framework for trade secret protection across the United States. It allows for injunctions against actual or threatened misappropriation and can sometimes be interpreted to include the inevitable disclosure doctrine. 

• Inevitable Disclosure Doctrine: Many states allow employers to use this doctrine to prevent employees from joining competitors if it is deemed that they will inevitably disclose trade secrets. Employers in these states can often obtain injunctions to protect their confidential information. 

• California: 

• Business and Professions Code § 16600: This statute makes any contract that restrains someone from engaging in a lawful profession, trade, or business void. This reflects California’s strong public policy favoring employee mobility and competition. 

• Rejection of Inevitable Disclosure Doctrine: California courts are highly unlikely to enforce non-compete clauses or injunctions based on the inevitable disclosure doctrine. Employers must find alternative methods to protect trade secrets. 

Strategies for Employers: 

• Robust Non-Disclosure Agreements (NDAs): Ensure that NDAs are comprehensive and clearly define what constitutes confidential information and trade secrets. While NDAs are generally enforceable, they must be carefully drafted to comply with state-specific laws. 

• Employee Training: Regularly train employees on the importance of maintaining confidentiality and the potential legal consequences of disclosing trade secrets. 

• Exit Interviews: Conduct thorough exit interviews to remind departing employees of their confidentiality obligations and retrieve any company-owned devices or documents. 

• State-Specific Employment Agreements: Customize employment agreements to comply with the trade secret laws of each state where the company operates. This may include different clauses for different states, ensuring maximum enforceability. 

2. For Employees: Understanding Your Rights and Obligations 

Employees, particularly those in California, should be well-informed about their rights concerning job mobility and the protection of trade secrets. 

• California’s Pro-Employee Mobility Stance: 

• Freedom to Change Jobs: California law strongly supports the right of employees to move freely between jobs. Non-compete agreements are generally void, and the state prioritizes employee mobility over employer-imposed restrictions. 

• Protection of Trade Secrets: Despite the emphasis on mobility, employees are still legally obligated to protect their former employer’s trade secrets. This means they cannot use or disclose confidential information from their previous job in their new position. 

• Non-Disclosure Agreements (NDAs): Employees should understand the scope and limitations of any NDAs they sign. While NDAs are enforceable, they cannot contain overly broad restrictions that violate state laws. 

• Avoiding Conflicts of Interest: Employees should be cautious when moving to a new job in a similar field to avoid potential conflicts of interest. It is important to consciously separate prior knowledge of trade secrets from new job responsibilities. 

• Seeking Legal Advice: If unsure about their rights and obligations, employees should seek legal advice to ensure they are compliant with both state laws and the terms of their employment agreements. 

Practical Tips for Employees: 

• Document Your Knowledge: Keep personal records of your professional knowledge and skills acquired through public means, education, or previous employment not covered by NDAs. This can help demonstrate that your expertise is not solely derived from trade secrets. 

• Transparent Communication: When negotiating with a potential employer, be transparent about any existing NDAs or confidentiality agreements. This helps set clear expectations and avoids future legal complications. 

• Respecting Confidentiality: Always respect and uphold the confidentiality obligations from your previous employment. This not only complies with legal requirements but also maintains professional integrity. 

Conclusion 

The inevitable disclosure doctrine plays a significant role in the protection of trade secrets, though its application varies widely between federal law and California law. Understanding these differences is crucial for both employers and employees to navigate the complexities of employment transitions and trade secret protections effectively. If you are dealing with trade secret issues, including non-compete agreements, non-solicitation agreements, misappropriation of trade secrets or are in need of a cease and desist letter. Call us at (877) 276-5084.