Fostering Economic Growth in the High-technology Field: Washington Should Abandon Its Recognition of the Inevitable Disclosure Doctrine

• Publication year: 2006
• Citation: Vol. 30 No. 02

SEATTLE UNIVERSITY LAW REVIEWVolume 30, No. 2WINTER 2007

Fostering Economic Growth in the High-Technology Field: Washington Should Abandon its Recognition of the Inevitable Disclosure Doctrine

Sarah J. Taylor(fn*)

I. Introduction

Business in the high-technology field moves at the speed of light. A highly competitive innovation rapidly loses its edge within a matter of months of its debut.(fn1)'The people who develop software, crucial marketing schemes, and who otherwise deal with sensitive, valuable information are often highly skilled employees commanding top dollar for their services.(fn2) The main asset to a high-tech company is the know-how, or "intellectual capacity" of the company's employees;(fn3) accordingly, employers have a significant incentive to keep the know-how within their domain of property ownership.(fn4)

There are two well-defined areas of law that have been used by employers to protect this valuable know-how: contract law and trade secret law. An additional method of protection, however, has been developed- the inevitable disclosure doctrine. This Comment discusses these three methods, and argues that the modern application of the third method should be abandoned by the State of Washington before it gains prominence in this jurisdiction.

The first method used to restrict employee mobility, the noncompetition agreement, has its roots in contract law.(fn5) A noncompetition agreement is a contract in which an employee promises that, after the termination of employment, he will refrain from competing with his former employer's business for a specific amount of time and in a specific geographical region.(fn6) Noncompetition agreements protect employers by preventing proprietary information from leaking into the hands of a competitor.

Distinct from the contractual solution is the second legal tool that protects employer-owned information from being stolen-the law of trade secrets. Trade secrets are inherently difficult to define,(fn7) but can be generally regarded as secret business information that has value based on the fact that it is not widely known.(fn8) Trade secrets can come in the form of a customer list, a process for manufacturing, or even a particular marketing scheme.(fn9) All that is required is that the information be valuable while simultaneously being stored as a secret.(fn10) The owner of the valuable, secret information must regard the information as valuable by keeping it a secret from competitors, and by leading other employees to believe that the information is to be kept under wraps.(fn11) Regardless of the existence of a noncompetition agreement, current and past employees are under a duty to refrain from disclosing the trade secrets that their employer owns.(fn12)

Aside from the existence of a noncompetition agreement and trade secret misappropriation litigation, another way to retain the legal ownership of secret information is through the doctrine of inevitable disclosure.(fn13) This doctrine allows a former employer to prevent a former employee from working for a new employer in a position where the former employee would inevitably disclose the former employer's trade secrets.(fn14) The employer does not have to show that proprietary information was actually disclosed in order to obtain relief, but merely has to show that there is a very real possibility that such a disclosure would occur.'(fn15) This doctrine succeeds in containing proprietary information within the employer's domain of ownership because both employees and new employers do not want to run the risk of costly litigation by the former employer.(fn16) Thus, the doctrine of inevitable disclosure operates as a de facto noncompetition agreement and limits employee mobility from one high-tech job to the next.

This Comment reviews Washington's trade secret law as well as its stance on noncompetition agreements and argues that Washington should abandon its prior recognition of the inevitable disclosure doctrine. The reasonableness standard used to judge the legality of noncompetition agreements should be applied with proper regard to the fast-paced nature of technological innovation. Technology-based industries have continued to lead the economy in Washington, and such industries "now account for the largest share of employment, business activity, and labor income of any major sector in the state's economic base."(fn17) As compared to the rest of the country, Washington is "a center of technology-based employment and [research and development] activity,"(fn18) and such industries are a growing sector in the Washington economy.(fn19) The importance of such industries to the Washington economy makes it crucial that Washington courts continue to uphold reasonable noncompetition agreements. However, to allow for the continued growth and expansion of technology-based industries, the inevitable disclosure doctrine should not gain precedential value. Washington's recognition and enforcement of reasonable noncompetition agreements provides employers with sufficient protection of their legitimate business interests, and therefore the doctrine of inevitable disclosure is an overbroad restriction on employee mobility. The ability for high-tech employees to rapidly change jobs has been recognized as a key component to the creation of a successful, expansive technology-based economic community.(fn20) Overly restrictive noncompetition agreements and the inevitable disclosure doctrine together risk chilling high-tech growth by quelling employee mobility.(fn21)

Part II of this Comment discusses the history and need for trade secret law, while providing an overview of Washington's current application of trade secret law. This Part also notes the risks associated with enforcing a valid trade secret misappropriation claim. Part III addresses the history and importance of noncompetition agreements, as well as their inherent conflict with the notion of employee mobility. Washington's recognition of reasonable noncompetition agreements is also discussed. Part IV discusses the modern application of the doctrine of inevitable disclosure, as well as the benefits and costs of recognizing the doctrine in Washington. Finally, Part V argues that Washington should abandon its recognition of the inevitable disclosure doctrine and maintain its reliance on the enforcement of reasonable noncompetition agreements.

II. Trade Secret Law

The law of trade secret protects valuable secret business information from misappropriation by others.(fn22) A misappropriation of a trade secret requires a showing that (1) the information is a "trade secret" and that (2) the appropriator disclosed, acquired, or used the secret information in a way that is recognized as legally wrongful.(fn23) Misappropriation occurs when improper means are used to acquire the secret knowledge.(fn24)

Trade secrets are one of the most valuable assets that a company can own.(fn25) In regard to the high-technology field, the majority of the valuable, secret information classified as a trade secret is "'tacit' knowledge and know-how."(fn26) An employee's knowledge of how a specific firm's technology works or how the marketing is effective comes from the hands-on experience that the employee obtains while performing his daily duties on the job. An employee's worth to a firm is derived, in part, from the possession of such information.(fn27) When an employee changes jobs, the information that he used at his prior job is transferred to the employee's new employer, for better or for worse. It is this "knowledge spillover"(fn28) that contributed to the success of the high-tech industry in Silicon Valley.(fn29) Naturally, the employer who has spent effort and money on recruiting, educating, and cultivating the employee seeks to protect the tacit knowledge from leaking into the competitor's domain.(fn30)

A. The Formulation of Trade Secret Law in the United States

American trade secret law owes its heritage to the English common law.(fn31) In the early 1800s, the English Courts of Equity first considered the misappropriation of secret subject matter.(fn32) The U.S. courts turned to these English decisions when confronted with complex commercial disputes that arose out of the Industrial Age.(fn33) The 1868 Peabody v. Norfolk(fn34) decision by the Massachusetts Supreme Judicial Court is considered the first legal opinion to firmly establish the law of trade secrets in the United States.(fn35) Since then, state law has continued to amorphously define trade secret law.(fn36) To that end, three model acts have been codified in order to create a definitive definition of "trade secret" and promote uniformity amongst the states.(fn37)

The first codified model act dealing with trade secret protection is the Restatement of Torts, first published in 1939.(fn38) The Restatement defined the subject matter that constituted trade secret, as well as outlined the elements for a cause of action based on the misappropriation of a trade secret.(fn39) Section 757 defined 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 obtain an advantage over competitors who do not know or use it."(fn40)

The second model act dealing with trade secret protection is the Uniform Trade Secret Act (UTSA), which was published in 1979 by the National Conference of...