Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Still in its relative adolescence, the “inevitable disclosure” doctrine refuses to sit still long enough for someone to take a focused snapshot. The latest fidgeting may have been further encouraged by two recent decisions of the federal courts in New York, in which injunctions based on the doctrine have been denied in part because employers had required their employees to sign confidentiality agreements. Thus, the well-crafted confidentiality agreement, long a staple among measures to protect an employer’s trade secrets, may now be a strike against the employer seeking an injunction based on the doctrine. In order to accommodate what may be a fresh nuance to the doctrine, employers might consider revising their approach to the traditional confidentiality and nondisclosure agreement. INEVITABLE DISCLOSURE: UNDERLYING PRINCIPLES The inevitable disclosure doctrine presumes that an employee who has had access to an employer’s confidential information or trade secrets will “inevitably” use or disclose that information if he or she takes a comparable job with a comparable or competitive new employer. It assumes that certain confidential information and trade secrets may have been absorbed by the employee in such a way that he or she cannot avoid using, calling on or benefiting from them in the service of a new employer. Indeed, the doctrine has been argued to extend even to the “negative trade secret,” which has been defined as “information about what not to do, or what doesn’t work optimally.” James Pooley, Trade Secrets, � 4.02[3], at 4-17 (2000). As explained by one Utah court, the inevitable disclosure doctrine “is used to show that the probability of a threatened injury or misappropriation is so high that it becomes ‘inevitable.’ It is not … a separate basis for action, but rather is used to establish the existence of a threatened misappropriation.” Novell Inc. v. Timanogos Research Group Inc., 46 U.S.P.Q.2d 1197, 1216 (D. Utah 1998). In one of the milestone decisions, PepsiCo Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), the 7th U.S. Circuit Court of Appeals affirmed an injunction restricting a PepsiCo manager’s acceptance of a comparable position at Quaker Oats because he had knowledge of PepsiCo’s strategic marketing plans and beverage pricing. The manager had signed an agreement that he would not disclose confidential information, but he had not signed a formal noncompetition agreement with PepsiCo. Nonetheless, in enjoining the manager for a period of six months, the court allowed that a “plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id.at 1269. PepsiCo is considered significant because, among other reasons, it was among the first holdings to allow an inevitable disclosure remedy when the employee had signed a confidentiality agreement but was not bound by a written noncompete agreement. The presence of a post-employment confidentiality agreement, a written covenant in which the employee agrees to maintain the secrecy of the employer’s confidential information, has been a factor in the majority of reported inevitable disclosure cases. Among other things, whether the employer has caused the employee to execute a post-employment confidentiality agreement is material to the court’s determination of whether the employer has taken reasonable steps to maintain the confidentiality of the information at issue, and whether that information is thereby deserving of heightened protection as a statutorily defined “trade secret.” Uniform Trade Secrets Act. � 1, 14 U.L.A. 433, 438 (amended 1985). An employer’s failure to bind an employee to a written confidentiality agreement can sound the death knell for a plea for injunctive relief based on the doctrine because it can suggest a lack of diligence in preserving the secrecy of the information. Most recently, last year’s holding by the Arkansas Supreme Court in ConAgra Poultry Co. v. Tyson Foods Inc., 30 S.W.3d 725 (Ark. 2000), reversed the grant of an injunction that had been based on the inevitable disclosure doctrine in part because the employer had failed to bind the employee to a post-employment confidentiality agreement. The court observed that the employer “had in place no protection against post-employment revelation of confidential information by [its former employees].” Id.at 730. ‘PSC’ AND ‘EARTHWEB’ DEPART FROM DOCTRINE Two recent federal court decisions from New York are in apparent discord with the traditional understanding of the role a confidentiality agreement plays in the inevitable disclosure analysis. In PSC Inc. v. Reiss, 111 F. Supp. 2d 252 (W.D.N.Y. 2000), PSC, a manufacturer of retail self-checkout systems, invoked the inevitable disclosure doctrine and sought to enjoin Martin J. Reiss, its former sales manager, from working for a direct competitor and from disclosing its alleged confidential information and trade secrets to his new employer. Specifically, Reiss was alleged to have attended PSC sales strategy meetings and learned confidential development plans for a new self-checkout product that would compete directly with the product of Reiss’ new employer. In denying the motions for injunction, and rejecting the application of the doctrine, the court relied in part on the fact that Reiss was bound by a written confidentiality agreement with PSC and was otherwise bound by law requiring confidentiality in the employment relationship. Accordingly, the court reasoned that it “need not ‘order’ Reiss to do that which he is required by law to do by dint of his employment contract with PSC and the legal requirements resulting from that employment.” Id. at 255. In other words, the PSC court declined to provide a predisclosure equitable remedy because the employer had preserved its right to pursue a contractual damages remedy after any such harmful disclosure: “If Reiss violates these obligations, he can be held accountable in provable damages.” Id. at 256. The PSCcourt was influenced by a 1999 decision of the U.S. District Court for the Southern District of New York, EarthWeb v. Schlack, 71 F. Supp. 2d. 299 (S.D.N.Y. 1999), remanded for clarification by, 205 F.3d 1322 (2d Cir. 2000), in which the court commented on the impact of a confidentiality agreement in the inevitable disclosure analysis. In that case, EarthWeb, a provider of online information technology products, sought a preliminary injunction against Mark Schlack, a former employee who had left EarthWeb to work for a competitor. EarthWeb had hired Schlack to design and edit the content of all of EarthWeb’s Web sites and had exposed him to allegedly confidential information including strategic content planning, licensing arrangements and technical knowledge. Schlack had signed an employment contract that included an express post-employment confidentiality agreement and a one-year noncompete provision, the latter restricting him from working for any entity that “directly competed” with EarthWeb. In considering the request for a preliminary injunction, the EarthWeb court looked only to the terms of Schlack’s noncompete provision for invoking the inevitable disclosure doctrine and expressly stated that it would not base an injunction on the confidentiality agreement. The court reasoned that basing an inevitable disclosure injunction on a confidentiality agreement was inherently unfair to an employee due to “the imperceptible shift in bargaining power that necessarily occurs upon the commencement of an employment relationship marked by the execution of a confidentiality agreement.” Id. at 310. The court continued that “[w]hen that relationship eventually ends, the parties’ confidentiality agreement may be wielded as a [noncompete] restrictive covenant. …[S]uch constraints should be the product of open negotiation.” Id. Accordingly, the court refused to consider an inevitable disclosure injunction based on “a confidentiality provision conflated with the theory of inevitable disclosure.” Id. at 311-12. The court denied EarthWeb’s motion for preliminary injunction principally because it did not find Schlack’s new employer to belong to one of the categories of proscribed employers enumerated in his noncompete provision. POTENTIAL IMPACT OF ‘PSC’ AND ‘EARTHWEB’ RATIONALES Both the PSCand EarthWebcourts embrace the pre- PepsiCoreasoning, which rejected the confidentiality agreement as a sole basis for prospective injunctive relief. The former did so because the confidentiality agreement was perceived to provide an adequate remedy at law. The latter did so in order to equalize the bargaining power of the employee and employer. Despite the differing rationales, the import of the two decisions is the same: Confidentiality agreements alone should not constitute grounds for injunctive relief under the inevitable disclosure doctrine. Yet the PSCholding delivered a singular sting to employers in that it imposed a virtual penalty on the employer for its having crafted a confidentiality agreement. Finding that the employer had fashioned a protective measure for itself, the PSCcourt determined that it did not need supplemental protection by way of an affirmative injunction. This portion of the PSCholding, in combination with the EarthWebdictum that a confidentiality agreement results in inequitable bargaining positions, heralds a potential new challenge for the employer. At first blush, PSC’s reasoning is consistent with the law of equity in that a litigant is not generally entitled to an injunction or other equitable remedy when there exists an adequate remedy at law. Morales v. Trans World Airlines Inc. , 504 U.S. 374, 381 (1992). The challenge for employers is that this rationale contravenes the reasoning that gave rise to the doctrine as a hybrid of contract law and the traditional law of equity. That rationale holds that proprietary business information and trade secrets can be so specialized in their value that they deserve a recourse for protection that melds the contractual with the equitable. But it could be argued that the potential incalculability of damage caused by the disclosure of confidential information or trade secrets merits a prospective injunction. See Pooley, supra, � 7.02[02], at 7-7. To do otherwise would force the employer to wait until the genie is out of the bottle to seek a remedy. Thus, the inevitable disclosure doctrine contemplates a middle road for protection of confidential information, offering an equitable remedy even though — and sometimes not unless — an employer has taken contractual steps to protect its information. ONE POSSIBLE SOLUTION: ENHANCED AGREEMENTS One potential solution for employers that addresses the concerns expressed by both the PSCand EarthWebcourts would be an enhancement of the traditional confidentiality agreement or noncompete provision with language that expressly contemplates an inevitable disclosure injunctive remedy. For example, a confidentiality agreement could include an acknowledgment that the employee will be exposed to confidential information and trade secrets of such sensitivity and importance to the employer’s core business that subsequent employment with a competitor would inevitably result in a prohibited disclosure of that information. Also, a noncompete provision could include language clarifying that, in addition to the employee being restricted from subsequent employment with particular competitors, the employee would be barred from subsequent employment with any employer when such employment would result in the inevitable disclosure of confidential information. Specifying in the confidentiality clause that the employer may seek to enjoin the employee from working for a competitor would address the concerns of both the courts discussed above. It would ensure that the injunctive remedy was acknowledged as part of the contractual restriction to which the PSCcourt would limit the employer. This approach would also address the concern of the EarthWebcourt about inequitable bargaining power by alerting the employee at the time of hiring to this potential equitable remedy. While the weight of the inevitable disclosure precedent does not require this approach in order to preserve the injunctive remedy for the employer, there are many instances in which it may reduce the employer’s risk of being denied the remedy under the doctrine. Robert T. Quackenboss is a senior associate in the Atlanta office of Hunton & Williams. His practice focuses on labor and employment litigation, related business litigation and trade secrets protection. His e-mail address is [email protected].

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.