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Legal doctrine protects company trade secrets

Rochester Business Journal
June 21, 2002
In the service sector of the economy, employees are frequently a service company's most valuable assets. Their skills contribute to growth, profitability and customer relations.

Many of these employees possess confidential and proprietary company information, a concern among employers who view their employees as movable assets. Recognizing the mobility factor, employers will typically use certain protections to guard the knowledge possessed by their employees.

Many companies have become familiar with such protections as confidentiality agreements and covenants not to compete-although some have been slow to actually use them.

What is not widely known in the business community-although it is getting attention in the legal profession-is a doctrine that precludes former employees from disclosing confidential information to a competitor, even if the employee has never signed a non-disclosure or non-compete agreement. In effect, this doctrine of "inevitable disclosure" can provide companies with paperless protection under certain circumstances.

The basic concept is that an employee is necessarily exposed to proprietary information throughout the course of employment, and if that employee is hired by a competitor he or she will "inevitably disclose" that critical information to the new employer. The employee has everything to gain by pleasing the new boss (who may very well prompt the employee for such information) and little to lose by disclosing the crown jewels of the former employer.

An American Bar Association subcommittee recently compiled statistics concerning courts nationwide that have addressed the inevitable disclosure doctrine. It did not find any states where courts have unanimously rejected the doctrine.

States that have accepted the doctrine include Connecticut, Delaware, Florida, Massachusetts, Michigan, New Jersey, Ohio, Texas and Wisconsin. States that are divided on the issue are California, Illinois, Minnesota, New York and Pennsylvania. Many states have not addressed the issue.

In 71 cases in which inevitable disclosure was addressed, 45 held it was indeed inevitable-meaning that the employee could not use knowledge he or she had gained through previous employment on behalf of a new employer who was a direct competitor. Significantly, in half of these cases, there were no valid non-compete agreements.

Additionally, bad faith or theft by the employee was not an absolute requisite for applying the doctrine, although it does help since bad faith was found in one-third of the cases where the doctrine was applied to stop disclosure.

It must be kept in mind that when courts analyze the facts in determining whether to apply inevitable disclosure, and whether to issue an injunction, they apply equitable principles and determine the outcome by applying standards of reasonableness in the totality of the circumstances.

It is no surprise, therefore, that reasonable judges might reasonably differ in applying reasonableness standards. Several cases provide useful examples, including two from New York that illustrate the issue.

In DoubleClick v. Henderson, individuals while still employed at DoubleClick made plans to start their own Internet advertising business. When DoubleClick discovered this, it terminated them and confiscated their laptops. The seized hard drives revealed the employees were preparing a detailed business plan using DoubleClick's confidential trade secret information regarding advertising pricing and customer information, among other things.

A New York State Supreme Court justice issued an injunction based on the actual misappropriation of trade secrets, but also went on to state that a likelihood of success on the merits of DoubleClick's lawsuit (a necessary finding in order to issue the injunction) existed because of the "high probability of inevitable disclosure."

Of course, prior to the ultimate application of the inevitable disclosure doctrine, the company seeking injunctive relief must establish to the court's satisfaction that the information it is seeking to protect qualifies as a trade secret. And it must show that disclosure is inevitable disclosure, not merely possible disclosure. In this respect, courts have generally been loath to apply the doctrine in the absence of actual misappropriation, or, less politely, theft by the employee.

Another New York court emphasized this important point in Earthweb Inc. v. Schlack, a case in which a software company executive took a job with a company that competed with a portion of the former employer's business.

The judge identified four factors to be used in determining the appropriateness of injunctive relief when applying the inevitable disclosure doctrine:

-- Whether the employers are direct competitors providing the same or very similar products or services;

-- Whether the employee's new position is nearly identical to his former job such that he could not reasonably be expected to perform his new job without using trade secrets of his previous employer;

-- Whether the trade secrets alleged are of great value to both companies; and

-- The nature of the industry and trade secrets at issue.

The judge denied the request for an injunction, stating that "absent evidence of actual misappropriation by an employee, the doctrine should be applied in only the rarest of cases."

The inevitable disclosure doctrine is an additional arrow in the quiver that m ay be used by an employer in support of injunctive relief even in the absence of stronger ammunition, such as written non-compete or confidentiality agreements.

Nevertheless, while disclosure may be inevitable, success is not. Despite its all-encompassing description, the doctrine will generally be applied in cases in which disclosure is either proven or truly inevitable, rather than just possible or even probable.

(Justin P. Doyle is a partner with Nixon Peabody LLP. His partner, Jerome P. Coleman, assisted with this article.)

06/21/02 (C) Rochester Business Journal


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