Trade Secret Litigation: The Inevitable Disclosure Doctrine in New York — Alive or Dead?

Trade Secret Litigation: The Inevitable Disclosure Doctrine in New York: Alive or Dead? by Richard Friedman

In my September 15 article, I identified certain steps that companies seeking and defending against preliminary injunction motions under the Defend Trade Secrets Acts of 2016 (“DTSA”) should consider. We left the discussion of whether the inevitable disclosure doctrine could be relied upon when seeking a preliminary injunction for a later day. Today is that day.

The Basics

Where applicable, the inevitable disclosure doctrine allows a plaintiff company to establish a claim of trade secret misappropriation by demonstrating that a former employee’s prospective or new job will inevitably lead him to disclose the plaintiff’s trade secrets to his future or new employer or to rely on such information even where there is no evidence of actual disclosure. The underlying justification is that, once proprietary information is obtained, it is virtually impossible for a person to not use such information in a subsequent similar position. If a former employee who holds knowledge of trade secrets is hired by a competitor for a similar position, courts that have adopted the inevitable disclosure doctrine have considered such facts sufficient to find threatened or actual misappropriation and have enjoined the prospective or new employer from employing the person in a position similar to the one he previously had.

The factors courts have considered in determining whether to apply the inevitable disclosure doctrine include:

1. the level of competition between the past employer and the new employer;

2. whether the former employee’s prospective or new position with the new employer is similar to his former position; and

3. the steps that the new employer has taken to prevent the employee’s reference to and use of trade secrets belonging to the prior employer.

State courts have had mixed reactions to the doctrine’s application. While it has been accepted by courts under state trade secret law in several jurisdictions such as New Jersey, Delaware, and Illinois, other states – including Maryland, California, and Florida, to name a few – have explicitly rejected the doctrine, typically to safeguard employee mobility.

There are legitimate policy considerations that fall on both sides of the debate over the inevitable disclosure doctrine. On the one hand, application of the doctrine could be seen as essential to protect the confidentiality of trade secrets that companies have a genuine right to protect and an interest in protecting. On the other hand, the doctrine may serve to constrain valuable economic productivity and prevent someone from doing what he does best, and therefore prevent him from achieving his income potential without any actual evidence of bad faith or misconduct on his part.

The Doctrine’s Origins and Heyday in New York

Inevitable disclosure is not a new doctrine. In New York, its origins date back almost one hundred years to Eastman Kodak Co. v. Powers Film Products, Inc., 189 AD. 556 (4th Dep’t 1919). The doctrine’s heyday was in the 1990s as demonstrated by the decisions in Lumex, Inc. v. Highsmith, 919 F.Supp 624 (E.D.N.Y. 1996) and DoubleClick, Inc. v. Hendersen, 1997 WL 73143, at *4 (N.Y. Co. Ct. Nov. 7, 1997). In Lumex, the United States District Court for the Eastern District of New York concluded that the doctrine was sufficient to offer the missing evidence of actual proof of use of trade secrets on a preliminary injunction motion simply because a former employee had signed a noncompete agreement, even in a situation in which the departing employee acted with genuine good faith. In DoubleClick Inc., the New York State Supreme Court in New York County held that, even in an instance where there was no noncompete agreement, when the departing employee had left with physical or electronic data files, the employee’s inevitability of use or disclosure of trade secrets was demonstrated by the already established misconduct.

The Doctrine Falls Out of Favor in New York

The decisions in these two cases reflected an accepting approach to the inevitable disclosure doctrine by New York courts. That did not last long. The doctrine quickly withdrew from its peak when employers began to use it as an alternative to a noncompete agreement. In Earthweb v. Schlack, 71 F.Supp 2d 299 (S.D.N.Y. 1999), for example, the employer attempted to enjoin a former employee from taking a position with a competitor even though the parties’ agreement did not contain a noncompete provision. The U.S. District Court for the Southern District of New York held that, absent actual evidence of misappropriation of trade secrets, the inevitable disclosure doctrine could not be applied to recognize a de facto noncompete agreement and prevent an employee from accepting the new job altogether.

International Business Machines Corp. v. Visentin

International Business Machines Corp. v. Visentin2011 WL 672025 (S.D.N.Y. Feb. 16, 2011) provides a relatively recent example of a situation in which a New York federal court refused to find that a former senior executive would inevitably use or disclose the former employer’s trade secrets. The court recognized that the inevitable disclosure doctrine could be used as the grounds upon which an injunction may be granted in the proper context. However, after a lengthy analysis of the employee’s responsibilities in his former position, the nature of the purported confidential trade secrets, and the alleged reasons why the former employee would inevitably use or disclose trade secrets to his new employer, the court denied the motion for a preliminary injunction.

IBM senior executive Giovanni “John” G. Visentin had declared his intention to resign to accept a position working for Hewlett-Packard Company (“HP”). Despite Visentin’s offer to remain at IBM for a transition period, IBM rejected his offer and immediately retrieved Visentin’s laptop from his home. The next day, it filed a complaint against Visentin for breach of contract and misappropriation of trade secrets and sought for a preliminary injunction. At the end of a four-day hearing, the court denied IBM’s motion.

Visentin had entered into a noncompete agreement with IBM which provided that he would not work for a competitor for one year after the cessation of his employment at IBM. The court in Visentin stated that Visentin’s efforts to act in ‘good faith’ reduced the likelihood that his employment at HP could risk harm to IBM. For instance, Visentin’s commitment not to take any documents electronically or otherwise from IBM and to provide HP with a list of clients for whom he was banned from working supported his claims that he had no intention of using or disclosing any of IBM’s confidential information. Visentin’s demonstrated good faith in his resignation essentially provided the court with the basis to conclude that he would not ultimately be motivated to violate his agreement or break the law.

Free Country Ltd. v. Drennen 

In Free Country Ltd. v. Drennen, 2016 WL 7635516 (S.D.N.Y. 2016), decided in December of 2016, the U.S. District Court for the Southern District of New York refused to use the inevitable disclosure doctrine to prevent a departing employee from soliciting customers using his former employer’s “Master Contact List” for its clients in his new position at a competitor in the absence of a proper noncompete agreement.

The DTSA has spurned the use of the inevitable disclosure doctrine as a means of preventing an employee from accepting a new employment offer. While the DTSA provides for injunctive relief to be granted to prevent threatened or actual misappropriation of trade secrets, any conditions placed on a person’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information that the person knows.”

Practical Pointers: How, if at all, can a New York employer use the inevitable disclosure doctrine to protect itself from competition from former employees who have knowledge of trade secrets?

The cases discussed above provide several valuable instructions for both employers seeking to maintain the confidentiality of their trade secrets and those who wish to extend-hire personnel from competitors for similar positions.

At the risk of stating the obvious, a narrowly drafted noncompete agreement is the most effective way to prevent misappropriation of trade secrets. In such situations, the inevitable disclosure doctrine can be invoked to bolster an employer’s motion for a preliminary injunction in reliance on the noncompete provision. The narrower the scope of the noncompete provision, the more likely most courts will be to enforce it as drafted.

To maximize the likelihood of successfully enjoining a former employee, a noncompete provision should, if possible, explicitly list the competitors by whom the employee is barred from accepting a job offer working in the same or a comparable capacity and/or explicitly list clients whose solicitation is prohibited. It would be beneficial for an agreement to include a provision specifying that the employee would inevitably use or disclose confidential information if he were to work for one of the specified competitors or solicit a particular client. A departing employee, especially one with access to legal counsel to review and negotiate the noncompete agreement, would likely find it extremely difficult to successfully later challenge the terms to which he explicitly accepted.

When an employee announces his intent to accept a new position working for a competitor, employers should avoid acting prematurely, because such a response may encourage a court to find that the former employer has acted spitefully in an effort to punish the departing employee. In Visentinfor example, IBM failed to create a record showing that it had acted prudently, consciously, and purposefully in the interests of protecting its trade secrets and not punitively to punish Visentin or HP.

On the converse, companies should make demonstrated efforts to ensure that any employee hired from a competitor refrains from taking any electronic or other confidential information from his former employer to minimize any appearance that the employee plans to use or disclose trade secrets of the former employer in his new position. The hiring employer and the departing employee should document and implement safeguards in order to try to avoid misappropriation of trade secrets, such as client lists, so that they can demonstrate those safeguards in any future litigation that may result.

Where possible, which will not always be the case, an employer should devote time and effort to structure a new employee’s position to reduce the probability that it appears to be in substantial conflict with the employee’s position at his former employer, if it is a competitor.

Going Forward

Employers are encouraged to utilize narrowly constructed noncompete agreements for a relatively limited group of valuable employees whose resignation could cause harm to the company’s genuine business interests. Given the fact-intensive application of the inevitable disclosure doctrine, employers cannot derive universally applicable one-size-fits-all instructions to ensure the protection of trade secrets or to avoid violating the noncompete agreements of a competitor. Both Visentin and Free Country, however, provide meaningful guidance as to ways in which the equities, taken in the aggregate, can influence a court’s application of the doctrine. While New York courts no longer invoke the doctrine to create a de facto noncompete provision, the inevitable disclosure doctrine can still be an effective tool in a company’s arsenal while seeking to enforce a noncompete agreement.

Moreover, while a court cannot enjoin an individual based on inevitable disclosure under the DTSA, a trade secret owner may nevertheless allege inevitable disclosure in a complaint under the DTSA, along with relevant facts, and, if the complaint withstands a motion to dismiss, proceed with discovery, which could eventually reveal additional evidence needed to fully validate the claim.

Richard B. Friedman
Richard Friedman PLLC

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