Inevitable disclosure of trade secrets: employee mobility v. employer's rights.

Author:Godfrey, Eleanore R.
Position:PepsiCo Inc. v. Redmond - Law overview - Report - Case overview
 
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  1. INTRODUCTION

    Trade secret law possesses increasing importance with the globalization of the economy and the increase in employee mobility. (2) State law, rather than federal law, governs trade secrets and most states follow the Uniform Trade Secrets Act (U.T.S.A.), created in 1979 by the National Conference of Commissioners on Uniform State Laws. (3) States, therefore, exhibit a high degree of consistency in their definitions of a trade secret, including the elements of which a trade secret is comprised. (4)

    Despite the adoption of the U.T.S.A., the range of remedies available to the trade secret holder after misappropriation of his or her trade secret remains unclear. (5) Most commonly, a trade secret plaintiff will obtain injunctive relief, prohibiting the disclosure or use of the trade secret. (6) Where injunctions prohibiting the use or disclosure of the trade secret do not suffice to correct the misappropriation, courts grant injunctions preventing competition entirely, even in the absence of non-competition agreements. (7) Finally, some courts apply the doctrine of inevitable disclosure, which allows for an injunction against competition, even in the absence of actual misappropriation, based on the presumption that the defendant employee's new duties cannot be performed without disclosure of the plaintiff's trade secret. (8)

    Courts remain inconsistent in defining the required elements of inevitable disclosure. (9) Some courts require a finding of bad faith on the part of the defendant or a showing of irreparable harm by the plaintiff before granting injunctive relief, while others merely require the inevitable disclosure or use of the plaintiff's trade secret. (10) Further complicating the situation, the standard for determining the inevitability of disclosure varies from jurisdiction to jurisdiction. (11) This note will examine and discuss the various approaches taken by the courts and suggest possible alterations to the doctrine of inevitable disclosure that would simplify its application.

  2. GENERAL OVERVIEW OF TRADE SECRET LAW

    Every one of the U.S. states offers some form of trade secret protection. (12) Trade secret law exists only as state law, and each state develops its own definitions and rules. (13) The Restatement (First) of Torts, published in 1939, provided the first uniform model of trade secret law. (14) The Restatement (First) of Torts defined a trade secret as "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to gain an advantage over competitors who do not know or use it." (15) The Restatement (First) of Torts provided the model for state trade secret law until the approval of the Uniform Trade Secrets Act in 1979 by the National Conference of Commissioners on Uniform State Law. (16)

    Although each state creates its own trade secret laws, most states model their laws after the Uniform Trade Secrets Act. (17) According to the U.T.S.A., the term trade secret refers to information, including a formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value, actual or potential, from not being generally known to, and not being generally ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (18) In other words, to qualify as a trade secret something must consist of information with economic value derived from the fact that it is not known or readily ascertainable, and the trade secret holder must take reasonable security measures to protect the trade secret. (19) A trade secret claim consists of three essential elements: qualification of the subject matter for trade secret protection, misappropriation of the trade secret by the defendant, and the exercise of reasonable security measures by the plaintiff. (20)

    Trade secret protection accrues automatically when its owner protects valuable information. (21) Trade secrets holders may bar an employee from disclosing trade secrets even in the absence of an express confidentiality contract. (22) Commonly, however, trade secret holders use non-disclosure or non-competition agreements to secure the secrecy of their trade secret. (23)

  3. TRADE SECRET MISAPPROPRIATION AND POSSIBLE REMEDIES

    1. Misappropriation Defined

    A trade secret owner has the right to prevent others from misappropriating and using his trade secret. (24) Not all use of another person's trade secret constitutes misappropriation. (25) Certain circumstances exist under which use of another person's trade secret information does not represent misappropriation. (26) Misappropriation consists of the acquisition, disclosure, or use of a trade secret by improper means or breach of duty of confidentiality. (27)

    "Improper means" includes any conduct below reasonable standards of commercial morality, including bribery. (28) A duty of confidentiality may arise in several ways. Commonly, a duty of confidentiality is created through contract. (29) For example, an employer may have employees sign a contract for confidentiality. (30) A long-standing business relationship between two parties may also establish a duty of confidentiality. (31) Finally, a duty of confidentiality may be evaluated according to the "reasonable person standard." (32) If a reasonable person would know that there was a duty of confidentiality then such a duty exists. (33)

    When a trade secret misappropriation occurs, the owner of the trade secret has several remedies available. If an express confidentiality or non-compete contract exists, the trade secret owner can bring a breach of contract claim. (34) Regardless of the existence of an express contract, the trade secret owner can bring an action for the misappropriation of the trade secret under applicable state law. (35) In a successful action for misappropriation, the court may grant relief in the form of monetary damages or an injunction prohibiting use or disclosure of the trade secret. (36) The plaintiff may also seek a preliminary injunction prohibiting use or disclosure of the trade secret pending the trial. Courts, however, infrequently grant preliminary injunctive relief in most jurisdictions. (37)

  4. INTRODUCTION TO THE DOCTRINE OF INEVITABLE DISCLOSURE

    The courts use the doctrine of inevitable disclosure as an equitable tool to grant injunctions on competition in the absence of actual misappropriation. (38) Section 2 of the U.T.S.A. provides legislative support for the doctrine of inevitable disclosure, stating, "actual or threatened misappropriation may be enjoined." (39) In applying the doctrine of inevitable disclosure, courts often cite the U.T.S.A.'s prohibition of threatened use for statutory support. (40)

    As a rationale for the doctrine of inevitable disclosure, employers argue that in many situations unavoidable disclosure or use of their trade secrets would occur if employees with knowledge of trade secrets enter the employ of competitors. (41) The doctrine first applied to employees in technical fields, but courts expanded the doctrine to apply to employees with knowledge of any trade secret, including financial information, as well as strategies for manufacturing, production, and marketing. (42) Although the doctrine prohibits employees from using or disclosing any trade secrets of a former employer, it does not prevent employees from using any skills or general knowledge that they acquired through their work experience. (43)

    Not surprisingly, states do not enforce the doctrine consistently and jurisdictions never developed a consistent set of criteria for its application. (44) Some states clearly subscribe to the doctrine, others apply a restricted version of the doctrine, and others reject the doctrine entirely. (45) A small group of states possess too little relevant case law to come to any definitive position on the issue. (46)

    Public policy concerns relating to employee mobility and freedom of employment provide the primary opposition to the doctrine of inevitable disclosure. (47) By nature, the American economy depends on competition, which in turn depends to some degree upon employee mobility. (48) Without the doctrine of inevitable disclosure, companies might hire employees based on their loyalty rather than their ability, in order to protect company trade secrets. (49) This result would defeat the purpose for which intellectual property laws exist: the promotion of innovation. (50)

    In applying the doctrine of inevitable disclosure, courts must balance employers' interests in protecting their trade secrets against the interests of the employees in working at the company of their choosing. (51) Despite the public interest in favor of employee mobility, the public also has a strong interest in the protection of trade secrets, as evidenced by the passage of a trade secret statute in almost every state. (52)

  5. CASE LAW ON INEVITABLE DISCLOSURE

    Traditionally, the courts favored employee mobility over the rights of employers to protect their trade secrets. (53) When an employer identifies a specific trade secret which a former employee has learned of by reason of his employment, and the employee's subsequent employment will necessarily disclose such trade secret, the courts will, however, grant an injunction prohibiting the employee from commencing his subsequent employment. (54) For decades, courts have recognized that relief in the form of an injunction against use or disclosure does not offer effective relief in some situations. (55)

    1. Eastman Kodak Co. v. Power Film Products, Inc. (1919)

      The doctrine of inevitable disclosure originated in the 1919 New York state court decision Eastman Kodak Co. v. Power Film Products, Inc. (56) The defendant, Harry Warren, worked as an employee of the plaintiff, Eastman Kodak Co. (57) Eastman Kodak brought an action to...

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