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:III. Representative Inevitable Disclosure Cases through V. Conclusion, with footnotes, p. 408-449
 
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  1. Representative Inevitable Disclosure Cases

    The doctrine of inevitable disclosure is best considered in the context of a representative sample of decisions. The cases illustrate how courts' reliance on the doctrine often overprotects trade secrets while simultaneously leaving departing employees out of work. (180) Courts agreeing with an employer's perspective construe the balance of equities in favor of employers over employees. (181) Even when employees sign a hygiene agreement with a new employer, each agreeing not to use or disclose the former employer's trade secrets, the doctrine of inevitable disclosure forecloses the employee's ability to work for a competitor, without any reasonableness standard governing review of allegations concerning inevitable disclosure. (182)

    1. IBM v. Papermaster--Federal District Court in New York Applying New York Law

      IBM v. Papermaster (183) illustrates the significance of one court's excessively broad interpretation of inevitable disclosure and the outsize impact choice of law has on the outcome. (184) In this case the employee departed IBM, based in New York, for Apple, based in California, for a job unlike the IBM work and where the degree of competition between the two companies was questionable. (185) The case highlights the significant prohibitions on employee mobility resulting from issuance of a temporary restraining order based on New York's recognition of the inevitable disclosure doctrine. (186) The case was brought in federal district court in New York, which had diversity jurisdiction on IBM's motion for a preliminary injunction. (187)

      Mark Papermaster worked primarily in product design and development roles in IBM's systems and technology group from 1991 until 2006. (188) His positions included that of Vice President of the Microprocessor Technology Development where he became the top expert in IBM's "Power" architecture, and later as Vice President of IBM's Blade Development Unit within Systems and Technology. (189) In 2006, when Papermaster joined IBM's elite Integration and Values team that developed corporate strategy, he had access to confidential information including strategy and marketing, product development and business opportunities, and consequently he was required to sign a non-compete agreement restricting him from working for a competitor for one year after termination of employment within the same geographic areas for which he had job responsibilities at IBM. (190) He also agreed to a two-year non-solicitation covenant requiring him to forego soliciting IBM customers with which he had done business in the year prior to termination and also prohibited from soliciting IBM employees for two years after termination. (191) Papermaster also served on a leadership team that recruited IBM's talented technical workforce. (192) Immediately following his departure on October 24, 2008, IBM secured a temporary restraining order prohibiting Papermaster from starting at Apple due to the risk of inevitable disclosure of IBMs trade secrets. (193)

      IBM immediately filed a motion for a temporary restraining order after it became aware of Papermaster's employment at Apple. (194) IBM asserted that Papermaster's employment at Apple would irreparably harm IBM due to his possession of trade secrets and sensitive information. (195) The court noted the following factors associated with a trade secret determination:

      (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the business to guard the secrecy of the information; (4) the value of the information to the business and its competitors; (5) the amount of effort or money expended by the business in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. (196)

      The court next weighed whether the risk of disclosure of trade secret information by Papermaster through his work at Apple was inevitable. (197) Here the court considered the following factors:

      (1) the extent to which the new employer is a direct competitor of the former employer; (2) whether the employee's new position is nearly identical to his old one, such that he could not reasonably be expected to fulfill his new job responsibilities without utilizing the trade secrets of his former employer; (3) the extent to which the trade secrets at issue would be valuable to the new employer; and (4) the nature of the industry and its trade secrets. (198)

      The testimony as to whether IBM and Apple are competitors was mixed. (199) IBM's experts testified that the two companies were competitors. (200) Yet Papermaster and others testified that IBM focused on high performance business systems such as IT infrastructure and providing specialized hardware and software to corporate clients. (201) Apple, in contrast, designs, manufactures and sells consumer electronics. (202) In fact, when Apple initially spoke with Papermaster in 2008, concerns arose at Apple that his expertise developed at IBM would not readily translate to the work outlined at Apple: in the iPod and iPhone division where Apple was seeking a successor to the Senior Vice President, and thus an offer to Papermaster was delayed for a month. (203) In many ways, it was a confounding case. Judge Karas wrote, "[o]f course the Court recognizes that IBM does not sell MP3 players or cellphones that compete with the iPod or iPhone." (204) Papermaster was hired by Apple to make the iPhone and iPod more profitable by improving storage and processing speed all with less power, hence microprocessor design was crucial and he had design knowledge of this from IBM. (205) Then the Judge wrote, "[i]t is conceded that Mr. Papermaster has spent the last two years working on a product, the blade server, that competes directly with Apple's 'Xserve,' and this alone establishes that IBM and Apple directly compete. Mr. Papermaster, however, has not been hired by Apple to work on the 'Xserve." (206) With such mixed facts, this case was hardly a candidate for emergency relief or a preliminary injunction.

      The court's conclusion that Apple was a significant competitor of IBM, that the non-compete agreement was reasonable, and that the "balance of hardships tips decidedly in [IBM's] favor." (207) Characterizing IBMs intellectual property as "its most valuable asset," the court had to weigh this, along with the fact that IBM employs 400,000 people worldwide, against Papermaster's "offer from Apple ... a once-in-a-lifetime opportunity." (208) While the court noted Papermaster would suffer a hardship by the enforcement of the non-compete agreement, it found IBM would be likely to suffer incalculable damages by the inevitable disclosure of its trade secrets. (209)

      Ultimately, the parties settled in January 2009, with stipulations requiring Papermaster to report to IBM prior to his disclosure or use of any potentially confidential or proprietary IBM information with IBM being the sole and final arbiter of whether a technique derives from its intellectual property. (210) Papermaster was permitted to commence work at Apple on April 24, 2009, effectively six months after his departure from IBM. (211)

      Nonetheless, in subsequent cases from the southern district of New York and even upon appeal to the Court of Appeals for the Second Circuit, there appears to be some narrowing of this jurisdiction's approach to the inevitable disclosure doctrine. (212) In another IBM case, the federal district court for the southern district of New York refused to grant a preliminary injunction against Johnson, a former vice president of corporate development at IBM, where he was reluctant to sign a non-competition agreement and consequently he signed on the line provided for the employer rather than the line designated for the employee. (213) The IBM v. Johnson court found that Johnson had not signed the agreement and refused to enforce it when he went to work for Dell, admittedly a competitor of IBM. (214) In one other case from the southern district of New York, Metito v. General Electric, the federal district court refused to apply the inevitable disclosure doctrine at the summary judgment stage, noting that "[a]bsent evidence of actual misappropriation by an employee, the doctrine should be applied in only the rarest of cases." (215)

      Other jurisdictions have refused to apply the inevitable disclosure doctrine even when the departing employee signed a non-compete agreement. (216) In Oce North America v. Brazeau, the Federal District Court for the Northern District of Illinois refused to enforce a non-compete against a salesman who went to work for a competitor, noting that the facts did not support such a finding of inevitable disclosure merely because a person assumes a similar position at a competitor. (217) The court noted that inevitable disclosure "is a viable, but exacting, method of proving misappropriation." (218) The evidence indicated that defendant Brazeau worked for a number of competitors without disclosing confidential information and evidence of misappropriation was "scant, circumstantial, and dwarfed in probative value by evidence to the contrary." (219) Further, the court refused to enforce the Oce agreement, finding it was too broad and patently unfair; further the court refused to "blue pencil" the agreement. (220) Clearly, some jurisdictions find the doctrine's effect too punitive and detrimental to the departing employee to allow a virtual presumption that a departing employee will not keep his word to protect trade secrets and confidential information, particularly where the accompanying non-compete agreement is overreaching. (221)

    2. Bimbo Bakeries v. Botticella--Court of Appeals for the Third Circuit applying Pennsylvania Law

      In another case involving a non-competition and confidentiality agreement that resulted...

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