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The inevitable-disclosure doctrine allows a firm to obtain an injunction prohibiting a former employee from working for — or, at least, performing certain tasks for — a competing firm if that employee would necessarily use or disclose the first employer’s proprietary information in the course of fulfilling the employees’ job duties for the new firm. However, a recent decision has put a chink in this powerful shield against misappropriation of the firm’s proprietary information, suggesting that an employer waives its rights under the doctrine if it has required the employee to sign a restrictive covenant. Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310 (S.D.N.Y. 1999), remanded on other grounds, 205 F.3d 1322 (2d Cir. 2000), aff’d after remand, 2000 U.S. App. LEXIS 1446 (2d Cir. May 18, 2000). As a result of Earthweb, the employer is caught in a dilemma: The employer must choose to either (a) protect its proprietary information by requiring its key employees to sign restrictive covenants and risk losing the benefits of the inevitable-disclosure doctrine, or (b) preserve its right to assert the inevitable-disclosure doctrine by relinquishing its contractual rights to restrict its key employees’ post-employment activities. How did this predicament arise? How can an employer avoid it? First, a look at how the inevitable-disclosure doctrine developed. Although there has been a recent spate of published and unpublished opinions addressing and, frequently, adopting the doctrine, it has been recognized in New Jersey for more than a decade. In National Starch & Chemical Corp. v. Parker Chemical Corp., 219 N.J. Super. 158 (App. Div. 1987), the Appellate Division affirmed a preliminary injunction barring a former employee who was intimately familiar with National Starch’s envelope adhesives from performing any services on behalf of the employee’s new employer that “in any way relate to or involve envelope adhesives.” Id. at 159. The employee had signed a confidentiality agreement, providing that upon the termination of his employment he would not disclose National Starch’s confidential information. The employee, however, was not subject to a restrictive covenant that expressly limited his employment after the termination of his employment relationship with National Starch. The Appellate Division nevertheless affirmed the employment restriction imposed by the lower court because “under the circumstances there was a sufficient likelihood of ‘inevitable disclosure’” of National Starch’s proprietary information concerning envelope adhesives. Id. at 162. Nearly 10 years later, the doctrine appeared to gain nationwide currency when the 7th U.S. Circuit Court of Appeals relied on it to affirm an injunction barring a former PepsiCo employee from accepting employment with one of PepsiCo’s competitors, even though the employee was not subject to a restrictive covenant. PepsiCo, Inc. v. Redmond, 54 F.3d 1252 (7th Cir. 1995). The employee was a general manager and had access to PepsiCo’s business plans and marketing strategies for specific markets. As in National Starch, the employee had signed a confidentiality agreement but never signed a restrictive covenant. Id. at 1264. Upon resigning from PepsiCo, the employee commenced working for one of PepsiCo’s direct competitors, the Quaker Oats Company, as vice president of field operations. Relying on the inevitable-disclosure doctrine, the district court enjoined the PepsiCo employee from serving Quaker Oats in that capacity or in any other capacity “relating to beverage pricing, marketing and distribution.” Id. at 1269. The 7th Circuit upheld the injunction, finding that the employee would inevitably use confidential information concerning PepsiCo’s business plans and strategies when making strategic decisions on behalf of Quaker Oats. Id. at 1269-70. As the 7th Circuit put it: “PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.” Id. at 1270. Under such circumstances, the 7th Circuit determined that PepsiCo did not need to prove actual use and disclosure of its confidential information in order to be entitled to an injunction. Rather, because it is the rare employee who possesses the “uncanny ability to compartmentalize information,” the district court’s finding that the employee would necessarily use his knowledge of PepsiCo’s business plans and strategies when making strategic decisions on behalf of Quaker Oats was justified. Id. at 1269. A STOPPER FOR LEAKY COVENANTS Since PepsiCo, the inevitable-disclosure doctrine has been adopted by courts around the country. Maxxim Med., Inc. v. Michelson, 51 F. Supp. 2d 773, 786 & n.15 (S.D. Tex. 1999) (collecting cases adopting the doctrine), rev’d without opinion, 182 F.3d 915 (5th Cir. 1999). Notably, the District of New Jersey has recently relied on the doctrine in issuing a preliminary injunction. IDT Corp. v. Kaplan, No. 99-1370 (MTB), slip op. at 17 (D.N.J. May 21, 1999). Because the doctrine may be used to create an “implied-in-fact restrictive covenant,” it can be invaluable in efforts to protect a firm’s proprietary information when a key employee leaves to work for a competitor. Obviously, it can prove most useful when a firm, through neglect or otherwise, fails to have an employee sign a restrictive covenant, as was the case in National Starch and PepsiCo. In such instances, the firm may invoke the inevitable-disclosure doctrine in an effort to enjoin the employee’s subsequent employment when such employment poses an unacceptable risk to the firm’s confidential and proprietary information. Even when the employee has signed a restrictive covenant, invocation of the doctrine may be necessary to save the day. For instance, a firm seeking to enforce a restrictive covenant might be stuck with the law of a state, such as California, which generally refuses to enforce agreements imposing restrictions on employment. See, Cal. Bus. & Prof. Code �16600 (“except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extend void”). If the law of such a state applies and renders the restrictive covenant unenforceable, the employer could possibly obtain the same or similar relief by relying on the inevitable-disclosure doctrine because such relief would issue pursuant to the state’s common law or statutory law concerning the misappropriation of proprietary information and not the state’s law concerning the enforceability of restrictive covenants. Indeed, a California Court of Appeals adopted the inevitable-disclosure doctrine in Electro Optical Indus., Inc. v. White, 90 Cal. Rptr. 2d 680, 684 (Ct. App. 1999). The published opinion of the appellate court, however, was withdrawn by the California Supreme Court, thus depriving the decision of any precedential value. 2000 Cal. LEXIS 3536 (April 12, 2000). Nevertheless, the Electro Optical decision demonstrates the willingness of courts in a state hostile to restrictive covenants to at least consider adopting the doctrine. Additionally, the doctrine may prove useful when the restrictive covenant does not protect against all risks of improper use and disclosure of proprietary information. For instance, a firm may require a salesperson to sign a restrictive covenant providing that, for two years after termination of employment, the salesperson may not solicit any of the firm’s customers on behalf of any other employer. Over the years, however, the salesperson may become intimately knowledgeable of the firm’s pricing and marketing strategies as well as other proprietary information. If that person leaves to join a competitor in a managerial (rather than sales) capacity, the restrictive covenant is probably of little value because the employee will not be asked to solicit customers on behalf of the new employer. Nevertheless, the employee’s prospective employment will pose an unsettling risk to the former employer because the employee can, and most likely will, rely on the former employer’s proprietary information when making strategic decisions on behalf of the new employer. In such a situation, the inevitable-disclosure doctrine could provide a critical additional measure of relief because it will provide a justification for enjoining the employee’s subsequent employment when the restrictive covenant, by its own terms, cannot. Thus, the inevitable-disclosure doctrine may be extremely useful to firms seeking to protect their proprietary information — even to those who are sufficiently diligent to obtain restrictive covenants from their key employees. EARTHWEB CAUSES QUAKES Paradoxically, the recent Earthweb decision from the Southern District of New York suggests that a diligent firm that requires that its key employees sign restrictive covenants may be estopped from relying on the inevitable-disclosure doctrine to limit the subsequent employment of its key employees. An employee and officer of Earthweb, Inc., an online provider of licensed products and services to information technology professionals, resigned to work for a fledgling Web site. The new Web site was intended to be “a single Web site for IT professionals that contains news, product information and editorial opinions written primarily by an internal staff of more than 275 journalists.” 71 F. Supp. 2d at 306. The employee was subject to a restrictive covenant prohibiting him from working for any person or entity (1) “whose primary business is to provide Information Technology Professionals with a directory of third-party technology, software and/or developer resources; and/or an on-line reference library” or (2) “an on-line store, the primary purpose of which is to sell or distribute third-party software or products used for Internet site or software development.” Id. at 307. When Earthweb sought to enjoin the employee’s employment with the new Web site, the employee argued that his restrictive covenant did not prohibit his new employment because the Web site would not be involved in either of the two lines of business expressly identified in the covenant. In response to the employee’s argument, Earthweb argued that, regardless of the scope of the restrictive covenant, the inevitable-disclosure doctrine prohibited the employee’s subsequent employment because he would necessarily use and disclose Earthweb’s proprietary information while performing his job duties for his new employer. The Southern District, however, refused to even consider Earthweb’s inevitable-disclosure argument, concluding that Earthweb should not be permitted to “make an end-run around the [restrictive covenant] by asserting the doctrine of inevitable disclosure as an independent basis for relief” and that Earthweb’s right to injunctive relief “must be found to rest, if at all, on the restrictive covenant it drafted, and not on a confidentiality provision conflated with the theory of inevitable disclosure.” Id. at 311-12. In so holding, the court noted that “in its purest form, the inevitable disclosure doctrine treads an exceedingly narrow path through judicially disfavored territory” because it can be used by an employer to turn an employee’s common-law and contractual confidentiality obligations into a restrictive covenant. Id. at 310. According to the Earthweb court, such post-employment restrictions should not be imposed by the employer on a unilateral and after-the-fact basis; rather, “[s]uch constraints should be the product of open negotiation.” Id. Moreover, the court noted that the employee had relied on the express language of the restrictive covenant and “would not have knowingly agreed to a post-employment restraint on his ability to work in the field of [information-technology] journalism on the Internet.” Id. at 311. Thus, the court declined “to re-write the parties’ employment agreement under the rubric of inevitable disclosure and thereby permit Earthweb to broaden the sweep of its restrictive covenant.” Id. The Earthweb decision has at least surface appeal. If an employer, with all of its bargaining power, requires an employee to sign a restrictive covenant containing detailed restrictions on the employee’s post-employment activities, it would seem unfair to the employee to permit the employer to seek even broader restrictions after the employee has resigned. On the other hand, the Earthweb decision has the peculiar and perhaps unintended effect of punishing firms that diligently protect their confidential information by requiring their key employees to sign restrictive covenants. Pursuant to Earthweb, such a firm would forfeit its right to seek relief under the inevitable-disclosure doctrine and would be limited to the relief contained in the restrictive covenant, assuming the covenant is enforceable. In contrast, a firm that does not go to the trouble of obtaining restrictive covenants from its employees could still assert the inevitable-disclosure doctrine and may be able to obtain more relief than the firm with a restrictive covenant. Of course, a firm exhibiting no diligence in protecting its information will have a hard time proving that any of its business information is worthy of protection. See, e.g., Sun Dial Corp. v. Rideout, 16 N.J. 252, 257 (1954) (“a substantial measure of secrecy must exist” in order to have a trade secret worthy of protection). AVOIDING THE EARTHWEB TRAP What should a firm do in light of the Earthweb decision? One short-sighted solution might be to scrap all of its restrictive covenants and choose to rely instead on whatever relief it can get pursuant to the inevitable-disclosure doctrine. That would be a mistake for several reasons. First, notwithstanding its recent popularity, the doctrine indeed “treads an exceedingly narrow path through judicially disfavored territory” and, thus, its boundaries are vague and unreliable. Second, the mere fact that an employee has signed a restrictive covenant might be sufficient to prevent the employee from accepting subsequent employment creating a risk of disclosure of confidential. Third, courts looking favorably upon the doctrine will grant relief under the doctrine only after a showing of inevitable disclosure — a showing that is frequently difficult to make. Thus, a firm should continue to use properly drafted restrictive covenants to protect its confidential information. Still a better alternative is to build the inevitable-disclosure doctrine into the firm’s standard restrictive covenant. For instance, if a firm’s standard restrictive covenant contains a customer restriction prohibiting the employee from doing business with the firm’s customers for two years, it might be worthwhile to add a second restriction prohibiting any subsequent employment by the employee that would result in the inevitable use or disclosure of the firm’s confidential and proprietary information. By doing so, the firm can respond to the estoppel-like arguments raised in Earthweb by arguing that the employee was on notice of and, in fact, expressly agreed to the employment restrictions embodied in the inevitable-disclosure doctrine. Moreover, such a contractual restriction should survive scrutiny under Karlin v. Weinberg, 77 N.J. 408 (1978), because such a restriction would manifestly serve the employer’s legitimate interest of preventing misappropriation of its proprietary information. Thus, through careful drafting of a restrictive covenant, corporate counsel can avoid the Earthweb trap and preserve the firm’s ability to assert the inevitable-disclosure doctrine in the event the firm must resort to litigation to protect its proprietary information when a key employee resigns to join a competitor. Christopher T. Walsh, an associate at Somerset, N.J.’s Collier Jacob & Mills, represents employers in litigation over alleged theft of trade secrets and other confidential information.

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