Proposed legislation creating a federal cause of action for trade secret misappropriation is on the fast track to becoming law, as described in James Pooley’s excellent post What You Need to Know About the Amended Defend Trade Secrets Act [link], January 31, 2016 Guest Post, Patently-O. Referred to as the Defend Trade Secrets Act (“DTSA”), the legislation was favorably reported out of the Senate Judiciary Committee on January 28, 2016.
For those seeking to catch up on these developments, the recent posts and articles by Mr. Pooley and his colleagues are a great place to start learning the salient characteristics of the new law, including the rejection of the idea that an employee should be blocked from taking a new job based on the doctrine known as “inevitable disclosure.” The DTSA’s rejection of “inevitable disclosure” warrants a closer look; it means the DTSA embraces California’s robust policy favoring free mobility of employees between jobs. Let’s break this down.
Previously: door left open to inevitable disclosure doctrine
The DTSA as originally proposed as well as current laws allow the court to block threatened misappropriation of trade secrets. (“Current laws” consist of the Economic Espionage Act (“EEA”) and various state versions of the Uniform Trade Secret Act (“UTSA”) – see Mr. Pooley et al for the criticism of this status quo, the gist of which is that they provide an uneven patchwork of legislation and no civil remedies at the federal level and thereby do not adequately address the reported loss by US companies of hundreds of billions of dollars annually as a result of trade secret theft.)
Blocking threatened misappropriation is a well-intentioned goal, but without greater explanation it leaves the door open to blocking an employee from taking competitive employment based on the inevitable disclosure doctrine. The inevitable disclosure doctrine permits a plaintiff to prove trade secret misappropriation by showing that the defendant’s new employment will inevitably lead to reliance on plaintiff’s trade secrets. PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir.1995). Injunctions granted on the basis of inevitable disclosure presuppose that “the employee will necessarily rely—consciously or unconsciously —upon knowledge of the former employer’s trade secrets in performing his or her new job duties.” Id. In other words, the employee is enjoined from taking the new job just because of what he or she knows.
California sides with authority closing the door to inevitable disclosure doctrine
The California court in Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1461-1462 (2002), rejected the argument that the inevitable disclosure doctrine was an alternative to proving actual or threatened misappropriation. The gist of the court’s rationale was that application of the doctrine results in the after-the-fact imposition by the court of a covenant not to compete that unduly infringes California’s strong policies favoring employee mobility.
The decisions rejecting the inevitable disclosure doctrine correctly balance competing public policies of employee mobility and protection of trade secrets. The inevitable disclosure doctrine permits an employer to enjoin the former employee without proof of the employee’s actual or threatened use of trade secrets based upon an inference (based in turn upon circumstantial evidence) that the employee inevitably will use his or her knowledge of those trade secrets in the new employment. The result is not merely an injunction against the use of trade secrets, but an injunction restricting employment.
Id. at 1461-1462.
Business and Professions Code section 16600 generally prohibits covenants not to compete, and California public policy strongly favors employee mobility. (Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 900, 72 Cal.Rptr.2d 73.) Business and Professions Code section 16600 protects a person’s right to “follow any of the common occupations of life”(Continental Car–Na–Var Corp. v. Moseley (1944) 24 Cal.2d 104, 110, 148 P.2d 9) and to pursue the “ ‘business or profession he may choose’ ” (American Credit Indemnity Co. v. Sacks (1989) 213 Cal.App.3d 622, 633, 262 Cal.Rptr. 92, italics omitted). We agree the doctrine of inevitable disclosure “creates a de facto covenant not to compete” and “runs[s] counter to the strong public policy in California favoring employee mobility.” (Bayer Corp. v. Roche Molecular Systems, Inc., supra, 72 F.Supp.2d at p. 1120; accord, Globespan, Inc. v. O’Neill, supra, 151 F.Supp.2d at p. 1234; PSC, Inc. v. Reiss, supra, 111 F.Supp.2d at p. 256 [inevitable disclosure doctrine binds employee to implied-in-fact restrictive covenant that “runs counter to New York’s strong public policy against such agreements”].)
Id. at 1462.
The court in Whyte acknowledged that California law also protects trade secrets and that a non-compete agreement may be enforceable notwithstanding the general prohibition of such covenants where necessary to protect the employer’s trade secrets. But in the court’s view this does not save the inevitable disclosure doctrine:
The chief ill in the covenant not to compete imposed by the inevitable disclosure doctrine is its after-the-fact nature: The covenant is imposed after the employment contract is made and therefore alters the employment relationship without the employee’s consent. When, as here, a confidentiality agreement is in place, the inevitable disclosure doctrine “in effect convert[s] the confidentiality agreement into such a covenant [not to compete].” (PSC, Inc. v. Reiss, supra,111 F.Supp.2d at p. 257.) Or, as another federal court put it, “a court should not allow a plaintiff to use inevitable disclosure as an after-the-fact noncompete agreement to enjoin an employee from working for the employer of his or her choice.” (Del Monte Fresh Produce Co. v. Dole Food Co., Inc., supra, 148 F.Supp.2d at p. 1337; see also Matheson, Employee Beware: The Irreparable Damage of the Inevitable Disclosure Doctrine (1998) 10 Loyola Consumer L.Rev. 145, 162 [“the inevitable disclosure doctrine transforms employee access to trade secrets into a de facto non-competition agreement”].)
Id. at 1462-1463.
So if inevitable disclosure is not a recognized means of establishing a threat of misappropriation, what evidence might be enough to establish such a threat?
This question was answered in a subsequent California decision, Central Valley General Hospital v. Smith, 162 Cal. App. 4th 501 (2008). The court said that evidence of bad behavior by the departing employee, like prior misappropriation, an intention to misappropriate or a refusal to return confidential information, would support a finding of an actionable threat to misappropriate trade secrets. Id. at 527-528. Central Valley has subsequently been interpreted as requiring evidence of the defendant’s “words or conduct” manifesting a threat to misappropriate trade secrets. Edifecs Inc. v TIBCO Software Inc., 756 F. Supp. 2d 1313, 1320 (W.D. Wash. 2010) (applying California law).
Likewise, Mr. Pooley suggests in his post the evidence demarcating actionable threats from nonactionable inevitable disclosure is that the former “focus[es] on the employee’s behavior” and whether this behavior shows the employee “can’t be trusted to honor the integrity” of his or her previous employer’s trade secrets, while the latter is “established merely by the importance of the information that someone knows.”
DTSA closes door: amendments track California rejection of inevitable disclosure
Coming into the recent Senate Judiciary Committee hearings, the DTSA was amended to close the door on inevitable disclosure in much the same fashion as has been done in California. Senator Feinstein successfully proposed the following amendments expressly confirming that threatened misappropriation may not be established merely by the importance of the information that someone knows. The relevant portions of her amendment are highlighted below:
S.1890 as reported to Senate 1/28/2016 (excerpted-emphasis added).
Lest anyone not appreciate that these amendments adopt California’s robust policy favoring employee mobility (i.e. the policy compelling California courts to reject inevitable disclosure to begin with), Senator Cornyn added an amendment expressly incorporating the general prohibition in California and other like-minded states against restrictive employment covenants and similar restraints of trade:
S.1890 as reported to Senate 1/28/2016 (excerpted-emphasis added).
Predicting what is NOT an actionable threat of trade secret misappropriation under DTSA
The factual scenarios where bad employee behavior will be deemed an actionable threat of misappropriation under the DTSA are many, highly varied and not easily categorized. Perhaps the better approach under the circumstances is to predict what will not be actionable threats under the DTSA. In this regard, it’s reasonable to refer to cases rejecting claims based on inevitable disclosure. The following cases provide some bright lines for predicting fact patterns that will not support an injunction under the DTSA blocking an employee from taking a new job:
No injunction where departing employee is merely in possession of trade secrets acquired under proper means. Central Valley General Hospital, 162 Cal App. 4th at 528; see also Norsat Intern., Inc. v. B.I.P. Corp., 2014 WL 2453034 at *6 (S.D. Cal. May 30, 2014).
No injunction under California law merely because new employer, a business software company, had not segregated new employees who had been exposed to trade secrets of previous employer, a competing software development company. Edifecs, Inc., 756 F. Supp. 2d at 1321.
No injunction where employee joined competitor but there was no evidence that new employer was contacting previous employer’s exclusive customers or producing comparative product literature that described previous employer’s products using information that was previously only known to previous employer. Ciena Commc’ns, Inc. v. Nachazel, 2010 WL 3489915 at *4 (D. Colo. Aug. 31, 2010).
Despite employee learning of trade secrets highly relevant to new employer, a “fierce competitor” of the prior employer, no injunction where employee destroyed confidential information in his possession prior to resignation, and had been instructed by new employer to not disclose any trade secrets. Whyte, 101 Cal. App. 4th at 1458.
Fact that employees’ new start-up venture perceived to pose direct competitive threat does not warrant injunction; that employee had downloaded proprietary database to work on at home and did not destroy or return the information prior to departure also not a threatened misappropriation where employee found it impossible to use the database on his home system and where the employee had deleted the database prior to the filing of the lawsuit; and that employee had objected to validity of patent applications filed by previous employer also not a threatened misappropriation. FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270, 1279-1280 (2009).
Merely informing customers of one’s former employer of a change in employment, is not an actionable threat. Neither is being receptive to invitations of the previous employer’s customers to discuss doing business with the new employer. An employee cannot be enjoined simply because he is receiving business from customers of former employer. Aetna Bldg. Maint. Co. v. West, 39 Cal. 2d 198, 204 (1952).