Managing the risk of trade secret loss due to job mobility in an innovation economy with the theory of inevitable disclosure.

Author:Reder, Margo E. K.
Position:I. Introduction through II. Trade Secret Law, p. 373-449
  1. INTRODUCTION II. TRADE SECRET LAW A. Doctrine of Inevitable Disclosure B. Pre-trial Issues in Inevitable Disclosure Cases i. Jurisdiction, Venue and Choice-of-Law a. Jurisdiction b. Venue and forum selection c. Choice of law ii. Motions for equitable relief: temporary restraining orders and preliminary injunctions in trade secret cases III. REPRESENTATIVE INEVITABLE DISCLOSURE CASES A. IBM v. Papermaster--Federal District Court in New York Applying New York Law B. Bimbo Bakeries v. Botticella--Court of Appeals for the Third Circuit applying Pennsylvania Law C. Aspect Software, Inc. v. Barnett--Federal District Court in Massachusetts Applying Massachusetts Law D. Degussa Admixtures v. Burnett--Court of Appeals for the Sixth Circuit Applying Michigan Law IV. THE DEVELOPING GAPS: OPPORTUNITY, COMPETITIVENESS AND INNOVATION A. Introduction B. The Decision of Whether to Recognize or Repudiate the Inevitable Disclosure Doctrine C. The Lack of Judicial Standards and Predictability as to the Meaning of 'Inevitable' is Especially Detrimental to Departing Employees D. A Major Effect of the Inevitable Disclosure Doctrine: A Developing Regional Innovation Gap Between the East and West Coasts E. Employee Mobility May Be Indicative of a More Productive Direction F. Complementary Strategies for Managing Trade Secrets V. CONCLUSION Employment relationships in the Internet and technology sectors are highly dynamic in which change and churn as the norms. Employees are now knowledge workers: highly educated, mobile, often with multiple cultural links, possibly exceeding other company assets in their comparable institutional value. These employees create the intangible intellectual property that now constitutes more than three-fourths of the assets in knowledge businesses whose main value derives from innovation, know-how, brand and reputation.

    This article focuses on the ever-more valuable trade secrets and how job mobility impacts trade secret protection. Employers have few options when confronting the loss of key employees who are closely associated with those trade secrets. This article examines the controversial theory of inevitable disclosure--that use or disclosure of the former employer's trade secrets is inevitable and therefore actionable, despite the fact that there is no evidence of actual misappropriation. Some states have adopted this theory, while others steadfastly refuse to, and this has created notable differences in employment patterns, job mobility, innovation and more. Courts consider this theory on motions for equitable relief but the outcomes are usually anything but equitable. To the extent courts adopt this theory, departing employees become unemployed and unemployable, the new employers are negatively impacted, and further the effects to the general public are felt in the rate of innovation, and in regional development such as where it is that jobs are created. Remedies and procedural issues are of critical importance too, because these cases predictably involve a series of pre-trial motions including requests for temporary restraining orders and preliminary injunctions. Further challenges immediately arise related to jurisdiction, forum, venue and conflict of laws since trade secret law is the only form of intellectual property still largely governed by states and the differences are pronounced, important, often outcome-determinative.

    The authors present a series of representative inevitable disclosure cases as a means to highlight the differences and tangle of relative equities. To the extent courts expand trade secret protections to broadly adopt the inevitable disclosure doctrine at the pre-trial stage before a full trial on the merits, courts hazard overprotecting employers to the detriment of departing employees, innovation and the general public. The authors propose alternative approaches to protect against trade secret loss including use of forfeiture for competition agreements along with improved employee incentive and retention strategies. We further suggest that this is part of the creative destruction process and employers should consider the possibility that these departing employees may actually be leads to new opportunities and sectors that are worthy of consideration.

  2. Introduction

    Employment relationships in the internet and tech sectors are highly dynamic in which change and churn are the norms. Employees are now knowledge workers: highly educated, mobile, often with multiple cultural links, possibly exceeding other company assets in their comparable institutional value. Intangible IP constitutes more than three-fourths of the assets in knowledge businesses whose main value derives from innovation, know-how, brand and reputation. (1) Employers confront rapidly changed work environments as well: the creative destruction cycle is faster, complex supply chains leverage assets further, with workers worldwide simultaneously blurring personal and work resources, space and time. Employers are less eager to offer long-term employment training and other incentives, while at the same time employees comprise more of the value quotient than ever, but are less loyal and less tethered to their workplaces. Work projects are stored on personal devices since everything is networked and portable--and the boundaries between work and personal have vanished with notable losses in employer control, hierarchy and secrecy.

    Assets are defined more by brilliant restless employees and their coding creations than by legacy physical company assets. These paradigm shifts, from physical to intellectual assets and mobile work environments are hallmarks of the information age and talent economy. In this era, it is all about the talented individual. With personal contributions commensurately higher, such outstanding employees are highly prized. Their skill sets are attractive to competitors, near-competitors and increasingly to companies that suddenly, because of market changes or an acquisition, find themselves in that market. The extraordinary impact of individual talent means that any employee departure produces outsize implications. Consider just a few high profile and explosive departures: a Microsoft executive leaves for Google, an IBM executive departs for Apple, HP's CEO defects for Oracle. Beyond the evident employee attrition, key employees leaving for arch-competitors elicits added animus in these cases. In each instance, employers filed motions for preliminary injunctions on a theory that the employee's new job creates a risk that disclosure of the former employers' trade secrets is inevitable.

    Approved by various courts as a substitute for evidence of actual disclosure and thus, misappropriation of trade secrets, the doctrine of inevitable disclosure raises a number of policy concerns for it significantly impacts a number of interests. (2) As well it triggers broader concerns of competition and innovation policy. For employers, managing the risk of trade secret loss due to job mobility is an urgent priority. It is crucial to recognize employers' legal rights in their proprietary assets and trade secrets. For employees in a free market economy offering a nominal social net, earning a living by maximizing their value and leveraging their skills are paramount. To the extent this doctrine is recognized, mobility, competition for labor and competition between businesses, as well as innovation are all impeded. Competition, both for employees and between companies, is impaired because the doctrine acts to an extent as an after-the-fact non-competition agreement without the employee's assent. Finally, innovation suffers to the degree courts recognize this doctrine since job mobility is directly correlated to increased innovation. (3) Trade secret law and the legal theory of inevitable disclosure are the focus of this work. Containing and managing risks associated with the uncertain and inconsistent recognition of the doctrine of inevitable disclosure are addressed in this article, along with strategies for navigating issues related to job mobility, loss of additional employees and further knowledge spillover.

    To sense what is at stake for companies in intensely competitive sectors whose very existence is attributable to innovation, (4) consider one such recent case. Hewlett Packard's CEO departed for Oracle, and less than a day later HP filed its lawsuit against Mark Hurd, (5) asserting that "he cannot perform his duties for Oracle without necessarily using and disclosing HP's trade secrets and confidential information to others." (6) Oracle has been a marketing partner of HP and they now have a complicated relationship since Oracle expanded into HP's core areas and now the two are more akin to rivals due to changes in markets as well as mergers and acquisitions. (7) Hiring Hurd "upped the ante" between the companies, in which talented employees, trade secrecy and innovation are all that matter. (8)

    In its complaint, HP indicated that trade secrets are an indispensable factor in its success and that it takes every precaution against trade secret loss. (9) Further, Hurd had access to "direct reports from each of HP's business units ... confidential information regarding research and development, marketing, strategy, customer contact, target acquisitions, merger...

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