Protecting Critical Company Assets – Part 4: The “Inevitable Disclosure” Doctrine
Consider the following hypothetical: Ivan is an important employee of the ABC Company in Virginia. Ivan has been employed by ABC for 4 years and has learned a great deal of proprietary information. He is not subject to a non-compete agreement, but has signed an agreement not to disclose confidential information. With no prior notice, Ivan has unexpectedly tendered his immediate resignation. You have heard from a reliable source that Ivan has accepted employment with XYZ Company in Virginia, an aggressive and fairly new competitor.
ABC’s President is livid. She believes that Ivan will “inevitably” use or disclose ABC’s trade secrets if XYZ employs him. Will ABC be able to stop Ivan from accepting employment with XYZ under an “inevitable disclosure” theory? As explained below, the answer is probably not.
There is a legal doctrine that has been accepted in some states (but not Virginia) known as the “inevitable disclosure” doctrine. The most prominent application occurred in a 1995 case in Illinois. William Redmond was a high-level manager working for Pepsi’s “All Sport” sports beverage division. Redmond resigned to accept a similar management position for Quaker to work for its “Gatorade” division. Both companies agreed that 1995 was a critical year for the highly competitive sports beverage industry. Even though Redmond did not take any tangible documents or threaten to use or disclose Pepsi’s trade secrets, Pepsi sued Redmond (and Quaker) and sought an injunction to prevent Redmond from accepting employment with Quaker on a theory that it was “inevitable” that he would rely upon Pepsi’s trade secrets. Applying Illinois trade secret law, a district court agreed, and an appeals court affirmed on appeal. The appeals court found that Redmond possessed particularized plans and highly confidential strategic information that would enable Quaker to achieve an unfair advantage over Pepsi. Thus, the court held that Redmond could not work for Quaker for six months and could never disclose Pepsi’s trade secrets. Pepsi Co., Inc. v. Redmond, 54 F.3d. 1262 (7th Cir. 1995).
As you may know from other recent articles Gentry Locke has posted, the federal Defend Trade Secrets Act (DTSA) took effect on May 11, 2016. It provides powerful new options in federal court to protect a company’s trade secrets from unlawful use or disclosure. The important point for this article is that the DTSA rejects any attempt to rely on the inevitable disclosure doctrine for any case under the DTSA. Specifically, the law provides, in pertinent part, as follows:
In a civil action . . . with respect to the misappropriation of a trade secret, a court may grant an injunction to prevent any actual or threatened misappropriation . . . provided the order does not prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.
– 18 U.S.C. § 1836(3)(A)(i)(emphasis added).
Some commentators have referred to this as the “no ban on employment” provision.This means that in any action pursuant to the DTSA, an employer such as ABC Company will not be able to prevent Ivan from accepting employment with a competitor under an “inevitable disclosure” theory. In other words, ABC will only be able to stop Ivan if it has evidence of actual or threatened misappropriation – the mere employment by a competitor is not sufficient.
So, what would happen if ABC sought to preclude Ivan’s employment by filing a lawsuit against him in a Virginia state court under the Virginia Trade Secrets Act?
As a threshold comment, Virginia courts hold that non-competition covenants are “disfavored.” Moreover, as noted above, courts applying Virginia law have not adopted the “inevitable disclosure” doctrine. Thus, it is unlikely that a Virginia state court would prohibit Ivan’s employment with XYZ based on the doctrine.
ABC would have been in a better legal position to protects its interests if Ivan had signed a properly drafted employment agreement. Depending on the circumstances of Ivan’s employment, such an agreement could include non-competition, non-solicitation of customers, and/or non-disclosure of trade secrets covenants.
Please contact the Employment Law Team at Gentry Locke if we can assist you with the drafting of agreements that will allow your company to safeguard its business interests, or if you would like us to evaluate your existing employment agreements.