The Defend Trade Secrets Act of 2016: Reconciling Inevitable Disclosure, 1116 COBJ, Vol. 45 No. 11 Pg. 37

AuthorKris J. Kostolansky, Frances Staadt, J.

45 Colo.Law. 37

The Defend Trade Secrets Act of 2016: Reconciling Inevitable Disclosure

Vol. 45, No. 11 [Page 37]

The Colorado Lawyer

November, 2016

Kris J. Kostolansky, Frances Staadt, J.

Labor and Employment Law

This article discusses the relationship between the Defend Trade Secrets Act and the inevitable disclosure doctrine, as well as the future of the doctrine under state law.

This article examines the Defend Trade Secrets Act of 2016 (DTSA or Act).[1] It analyzes the federal versus state approach to issuing injunctive relief based on the inevitable disclosure doctrine.

Defending Trade Secrets

The DTS A was signed into law by President Obama on May 11, 2016. The Act amends the Economic Espionage Act of 1996[2] to provide a federal civil remedy for the misappropriation of trade secrets. Before the DTSA’s passage, victims of trade secret theft could bring civil actions only under state trade secret laws, which vary widely from state to state. Now, trade secret holders may seek civil redress in federal courts alongside copyright, patent, and trademark owners. The Act authorizes federal courts to issue an injunction “to prevent any actual or threatened misappropriation” of a trade secret.3 Courts cannot, however, issue an injunction that prevents a person from entering into an employment relationship or that otherwise conflicts with an applicable state law prohibiting restraints on employee mobility.4 An injunction may impose conditions on employment, but such conditions must be “based on evidence of threatened misappropriation and not merely on the information the person knows.”5 In addition to injunctive relief, the new Act offers both employers and employees significant protection, including an ex parte seizure remedy and immunity.[6]

The DTS A provisions authorizing injunctive relief have triggered discussion over a controversial trade secret topic: the inevitable disclosure doctrine. The inevitable disclosure doctrine made a name for itself in PepsiCo, Inc. v. Redmond, where the Seventh Circuit, in the midst of a “fierce beverage-industry competition,” enjoined a former PepsiCo employee from joining Quaker’s ranks.7 The doctrine allows an employer to enjoin, either temporarily or permanently, a former employee from entering into an employment relationship with a competitor where the former employee possesses knowledge of a trade secret and reliance on that trade secret is inevitable.8

Following the PepsiCo decision, the doctrine became a divisive issue among state courts.9 Some states, most notably California, rejected the doctrine in the interest of protecting employee mobility.10 Even among the states that accepted the doctrine, there are differences in how courts address inevitable disclosure in the context of enjoining trade secret misappropriation.11 These conflicting views are not surprising given the lack of uniformity among state trade secret laws. Appellate courts in several states, including Colorado, have yet to address the doctrine.

A review of the DTSA and the seminal PepsiCo case confirms that the inevitable disclosure doctrine will not provide a basis for injunctive relief under federal trade secret law. This comparison also gives rise to interesting questions about the future of the doctrine under state law.

The Origins of Inevitable Disclosure: PepsiCo, Inc. v. Redmond

In PepsiCo, the U.S. Court of Appeals for the Seventh Circuit affirmed an injunction preventing William Redmond, a former PepsiCo employee, from assuming a new position with Quaker.12 PepsiCo and Quaker were beverage industry competitors, “especially in ‘sports drinks’ and ‘new age drinks.’”13 Quaker’s sports drink, “Gatorade,” dominated within this market niche.14 In 1994, PepsiCo introduced its Gatorade rival, “All Sport.” All Sport’s sales lagged far behind Gatorade’s.[15] In addition to dominating the sports drink arena, Quaker also led in new age drink sales.16 Thus, “[b]oth companies [saw] 1995 as an important year for their products: PepsiCo [had] developed extensive plans to increase its market presence, while Quaker [was] trying to solidify its lead.”17

Redmond held a relatively high-level position with PepsiCo, giving him access to confidential information and trade secrets.18 After a series of covert negotiations with Quaker, Redmond resigned from PepsiCo on November 10, 1994 and accepted a vice president position with Quaker.19 Within a week of Redmond’s resignation, PepsiCo filed a diversity suit “seeking a temporary restraining order to enjoin Redmond from assuming his duties at Quaker and to prevent him from disclosing trade secrets or confidential information to his new employer.”20

PepsiCo alleged that Redmond, as a senior employee of PepsiCo, had access to a number of trade secrets.21 Specifically, Redmond was privy to PepsiCo’s “Strategic Plan,” “Annual Operating Plan,” “attack plans” for specific markets, and innovations in its selling and delivery systems.22 Based on Redmond’s intimate knowledge of these plans and his new high-level position within Quaker, PepsiCo asserted that Redmond could not help but rely on PepsiCo’s trade secrets when he assumed the Quaker position.23 These secrets would “enable Quaker to achieve a substantial advantage by knowing exactly how [Pepsi-Cola North America (PCNA) would] price, distribute, and market its sports drinks and new age drinks and [be] able to respond strategically.”[24] In response, Quaker and Redmond argued that they had not and did not intend to use any confidential information Redmond had gained during his employment with PepsiCo.[25]

In affirming the trial court’s injunction precluding Redmond from assuming the position at Quaker, the Seventh Circuit concluded that Quaker and Redmond’s argument fell “somewhat short of the mark,” as “PepsiCo [had] not contended that Quaker [had] stolen the All Sport formula or its list of distributors.”26 The court emphasized that the “danger of misappropriation . . . is not that Quaker threatens to use PCNA’S secrets to create distribution systems or co-opt PCNA’S advertising and marketing ideas. Rather, PepsiCo believes that Quaker, unfairly armed with knowledge of PCNA’s plans, will be able to anticipate its distribution, packaging, pricing, and marketing moves.”27 “In other words, PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.”28

The Seventh Circuit therefore underscored an important distinction between evidence of an actual threat or intent to misappropriate a trade secret and evidence of inevitable reliance upon the trade secret.29 According to PepsiCo, injunctive relief is available where there is threatened misappropriation. The existence of a threat or intent to misappropriate...

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