In a prior blog post, we used the Star Wars Universe as the backdrop for a discussion about obtaining a preliminary injunction in the context of a noncompete agreement. But we left a discussion of the inevitable disclosure doctrine for another day. Today is that day.
By way of background, the inevitable disclosure doctrine typically plays out as follows. A key employee of a company who possesses all manner of company secrets leaves for a competitor without a trail, digital or otherwise, of actually taking records with him or her to the competitor. Nonetheless, even in the absence of physical copying, the company’s secrets are still in the employee’s head. In the words of the Seventh Circuit Court of Appeals in the case of PepsiCo, Inc. v. Redmond, this leaves the company in the predicament of a “coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.”
Common experience tells us that, even assuming good faith, the former employee simply cannot help using confidential information to lure away his/her former employer’s customers or otherwise help the new employer gain a competitive advantage. For example, if the employee knows the confidential pricing for a specific customer, how would he/she not use that information in a sales pitch for the new employer? Indeed, that would likely be a primary reason for the competitor’s recruitment of the employee in the first instance.
As is often the case, however, gut feel of misuse or misappropriation of a trade secret is not necessarily accompanied by direct proof of it. Even when there is proof, using it may not be so easy. For example, when a loyal customer reports an improper solicitation by the former employee, do we really want to drag that customer in to testify in a hearing on a preliminary injunction?
This all begs the question: How can the company convince a judge to issue a temporary restraining order and preliminary injunction barring the employee’s use of confidential information without proof of the employee’s misconduct? Enter the inevitable disclosure doctrine.
The inevitable disclosure doctrine, at its core, is a rule of pragmatics. It recognizes the practical reality that once employees have knowledge of a company’s confidential business information, it is impossible to compartmentalize that knowledge and avoid using it when they go to work for their new employer in the same industry.
The doctrine in New York has roots going back to 1919, in the case of Eastman Kodak Co. v. Powers Film Products, Inc. In the 1990s, the doctrine hit its peak in two contexts. First, in Lumex, Inc. v. Highsmith, the U.S. District Court for the Eastern District of New York held that when the departing employee had signed a noncompete agreement, the doctrine supplied the missing element of actual proof of use of trade secrets on a motion for a preliminary injunction even when the departing employee acted with the utmost good faith. Second, in DoubleClick Inc. v. Henderson, the New York State Supreme Court in New York County held that, even in the absence of a noncompete agreement, when the departing employee left with physical or electronic files, the inevitability of use of the trade secrets in such a circumstance springs from the already proven misconduct of the employee.
The decisions in Lumex and DoubleClick seemed to usher in a more welcoming attitude towards the doctrine. But that was somewhat short-lived. The doctrine receded from its high water mark when employers attempted to broadly use it as a substitute for a noncompete agreement. In Earthweb v. Schlack, decided by the U.S. District Court for the Southern District of New York, the employer sought to enjoin its former employee from working for a competitor even though the parties’ agreement contained no such prohibition. The Court held that in absence of evidence of actual misappropriation of confidential information, it would not essentially draft a noncompete for the parties under the guise of inevitable disclosure. The Appellate Division, Third Department, reached a similar result in Marietta Corp. v. Fairhurst, where the Court refused to use the inevitable disclosure doctrine in a manner that would convert a nondisclosure agreement into a noncompete agreement.
Most recently, on December 30, 2016, the U.S. District Court for the Southern District of New York, in Free Country Ltd. v. Drennen, declined to use the inevitable disclosure doctrine to enjoin the solicitation of customers in the absence of a noncompete agreement.
The issue now is whether the inevitable disclosure doctrine has lost its teeth and, if it hasn’t, how can an employer actually use it to stop its trade secrets from being used when it can’t prove misappropriation. The short answer is that the inevitable disclosure is not dead. It still has its power when used in its proper context.
If a company truly wants to protect itself from competition from former employees who possess its confidential information, there is simply no substitute for a narrowly crafted noncompete agreement. The inevitable disclosure doctrine can be used quite effectively to enforce such a noncompete agreement on an application for a preliminary injunction.
The narrower the scope of the restriction, the more receptive a court will be to enforcing it. Before drafting a noncompete, there ought to be a careful discussion of what the employer is really worried about in terms of an employee leaving. More often than not, the concern is about the employee working for a limited group of competitors and/or soliciting a limited group of major customers. In such circumstances, to increase the likelihood of success of enjoining a former employee, a noncompete agreement should actually list the specific group of competitors where the employee would be prohibited from working in the same or similar capacity and/or a specific list of customers whose solicitation would be prohibited. The noncompete itself may also have a clause stating that if the employee were to work for one of the listed competitors or attempt to solicit a listed customer it would be inevitable that the employee would use confidential information. A high level executive, particularly one with access to legal counsel to review and negotiate the agreement, would be hard pressed to later dispute that which he/she expressly acknowledged.
Finally, for those high level executives for whom it is absolutely critical that a noncompete be enforceable, the agreement should provide for the payment of compensation during the period of noncompetition. This was done effectively in Lumex.
Employers are well served to use narrowly crafted noncompete agreements for a limited class of employees whose departure could damage the company’s legitimate business interests. The inevitable disclosure doctrine, for all of its long and winding permutations, can still be a powerful tool — not a substitute — for enforcing a noncompete agreement.