The Internet Applications of the Inevitable Disclosure Doctrine


Published in The Cyberspace Lawyer, February 1998

Overview

The inevitable disclosure doctrine is a judicial doctrine generally associated with a 1995 Seventh Circuit decision, PepsiCo, Inc. v. Redmond.1 Where recognized, the doctrine may provide authority under state trade secret law for restraining a former employee from assuming responsibilities for a competitor comparable to those which she previously held, where the nature of her new position is such that, regardless of her intent, she would inevitably (or even inadvertently) use, rely upon or disclose trade secrets belonging to her former employer, in performing her new duties.

Alternatively, where a court is not inclined to prevent an employee from working for a competitor, the risk of inevitable disclosure may justify an order screening out the employee from working on specific technologies or business plans. In Internet-related litigation, the doctrine is increasingly cited by companies with new technologies or market plans as a basis for protecting the value of lead-time when an employee knowledgeable about time-sensitive trade secrets departs to work for a competitor.

Doubleclick, Inc. v. Henderson

In Doubleclick, Inc. v. Henderson,2 the first widely circulated inevitable disclosure ruling involving an online business, an Internet advertising firm obtained a preliminary injunction prohibiting two former Doubleclick executives from competing with their ex-employer for a period of six months. The court found that Doubleclick was likely to prevail on claims of breach of the defendants' duty of loyalty, misappropriation of trade secrets and unfair competition based on evidence that the two defendants had openly planned to form a competing Internet advertising agency while still employed by Doubleclick, which undoubtedly colored the court's assessment of the inevitability of defendant's use or disclosure of trade secrets.

Defendant Dickey, who had been based in California, had been Doubleclick's Vice President of Business Development and had access to Doubleclick's "1996 Business Plan, its revenue projections, plans for future projects, pricing and product strategies, and its various databases with information concerning Doubleclick's clients." Although Dickey had entered into a noncompete agreement, it was a narrow one that did not clearly apply to the case. Defendant Henderson had been Vice President for North American Advertising Sales, based in New York, and had access to the same confidential information as Dickey, as well as other documents distributed only to top management. Both men had entered into confidentiality agreements with the Doubleclick.

In July 1997, Dickey and Henderson met at an industry conference in Colorado and agreed to form their own company, Alliance Interactive Network. Thereafter, while still employed by Doubleclick, the two men began work to form their competing business, drafting a business plan, seeking out investors and customers and entering into discussions with at least one other Doubleclick employee.

Plaintiff argued that the rates it charged its customers and its site shares, or the percentage it earned from customers, constituted trade secrets. Important to the court's ruling was its accurate finding that the Internet advertising business is "an extremely competitive one, with a variety of companies using different software and sales techniques to maximize the effectiveness of its clients' advertising."3 In this context, defendants' work for their own competing agency would have, in the court's view, inevitably resulted in their use of Doubleclick trade secrets because, given their importance to Doubleclick's operations, the court found it "unlikely that they could 'eradicate [Doubleclick's] secrets from [their] mind.'"4

The Development of the Doctrine

The inevitable disclosure doctrine arose out of section 2 of the Uniform Trade Secrets Act which authorizes injunctive relief in cases involving "actual or threatened misappropriations."5 In PepsiCo, Inc. v. Redmond, the defendant, a 10-year veteran employee with intimate knowledge of pricing, marketing and distribution plans for Pepsi's "All Sport" drink who was subject to a confidentiality (but not a noncompete) agreement, accepted a comparable position with Quaker Oats Co., overseeing "Gatorade," a rival sports drink. Even though defendant Redmond testified that he would not draw upon his past knowledge in his new position, promised to confer with in-house counsel if he perceived a potential conflict, and signed an agreement with his new employer agreeing not to divulge third party trade secrets, the district court did not believe his testimony was credible. It concluded that there was a clear threat of misappropriation.

In the appellate court's view, Redmond did not simply have knowledge of PepsiCo trade secrets; because of his past and present positions, the court found that it would have been extremely difficult for Redmond to have disregarded PepsiCo's trade secrets in deciding how to price and market competitive products. The Seventh Circuit explained:

[T]he danger of misappropriation in the present case is not that Quaker threatens to use [PepsiCo's] secrets to create distribution systems or co-opt [PepsiCo's] advertising and marketing ideas. Rather, PepsiCo believes that Quaker, unfairly armed with knowledge of [PepsiCo's] plans, will be able to anticipate its distribution, packaging, pricing, and marketing moves . . . 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. Quaker and Redmond's protestations that their distribution systems and plans are entirely different from [PepsiCo's] are thus not really responsive. . . 6

Since PepsiCo, the inevitable disclosure doctrine has served as the basis for injunctive relief in cases where a former employee had signed a noncompetition agreement,7 although the existence of such an agreement is by no means required. Since restrictive covenants may be independently enforceable under state contract law,8 the doctrine more commonly is invoked where a defendant did not sign a noncompete contract and relief is premised on the enforcement of a confidentiality agreement.9

A number of courts have declined to apply the inevitable disclosure doctrine in individual cases,10 but none has expressly rejected it. Injunctive relief under, or consistent with, the inevitable disclosure doctrine has been entered by courts pursuant to section 2 of the UTSA in Arkansas, Delaware, Illinois, Indiana, Iowa, North Carolina and Wisconsin,11 and in one state, New York, which has not adopted the UTSA.12 The UTSA has been adopted by forty states and the inevitable disclosure doctrine is therefore likely to continue to gain favor.

The Diminished Role of Misconduct in Internet-Related Cases

The inevitable disclosure doctrine has been most frequently applied where there is direct evidence of past misconduct by either the former employee or new employer, which makes the risk of future reliance on or use or disclosure of trade secrets seem more likely. Misconduct alone, however, will not justify application of the doctrine.13 Conversely, evidence of past misconduct is not a prerequisite to obtaining relief since there is more than one way to prove that there is a threat of future misappropriation by use or disclosure.14

For certain jobs or categories of information, the mere fact that an employee assumes a comparable position for a competitor may justify the entry of injunctive relief. For example, where two companies formulate bids on government contracts for which there are only a limited number of competitors and an employee from one of the two companies, who knows the bidding methodologies, strategies, procedures and cost assumptions used by that company and in fact formulated some of its bids, assumes a comparable position for the other competitor, it may be argued that, regardless of the employee's intentions, his inevitable use of or reliance on his former employer's trade secrets may be presumed. 15

Evidence of some motivation for future disclosure also should be unnecessary in cases involving Internet-related industries where technology is rapidly changing and a new employer, by hiring a particular employee, may in reality be purchasing valuable lead-time to develop a competing product. In such cases, evidence of prior misconduct or a predisposition towards disclosure should not be required if the plaintiff can establish that merely by assuming a competing position the former employee inevitably would use or rely upon plaintiff's trade secrets.

Inevitable Disclosure and the Concept of Internet Time

Internet-related inevitable disclosure cases typically involve new technologies or business plans. Where a trade secret is a confidential Internet technology, the doctrine has particular application where a new employer has, in effect, sought to purchase a competitor's technology by hiring away one or more critical employees. For example, absent other facts, the doctrine could appropriately be applied in a case where the leading engineers on a particular project involving a company's unique technology are all hired by a competitor that does not have its own, comparable technology, at salaries well above market levels. In cases involving Internet-related business plans, the doctrine also may be applicable where a market is not yet developed, such that a given business model may be highly confidential, or where the market is defined by the former employer (or is one in which the new employer may not yet be a participant).

Given the way time is measured in "dog years" online,16 an injunction in an Internet-related case may be limited to a very short period of time. For example, where a new generation of technology may be developed in a matter of months, an injunction (or stipulated stand-down agreement) intended to last for that period of time may be sufficient. In other industries, or in cases involving other technologies, a longer period of time may be required. The exact length of time of an injunction (or negotiated agreement) should be based on the amount of time required to make the key employee's particularized knowledge of his former employer's business be a generation of technology out of date, so that that individual's mere employment no longer poses as grave a threat to his or her former employer.

The phenomenon of Internet time also may account for the fact that many emerging companies do not adequately document their trade secrets. This is especially true when the secrets constitute business plans, since unlike technology (which may be patentable), the value of marketing and other business information as intellectual property may not be fully appreciated by the owners of rapidly growing companies. In addition, many businesses maintain electronic records, which are frequently updated but not necessarily retained at specific historic moments which would be relevant in litigation.

Narrow Relief

Given the dynamic nature of Internet technology and business models, relief under the inevitable disclosure doctrine may be more easily obtained where it is narrowly tailored. For example, in Doubleclick Judge DeGrasse prohibited defendants from operating a competing business for a six month period but did not prohibit them entirely from working in the field of Internet advertising. He wrote that "[t]here can be no objection to defendants working for companies that engage in advertising in an array of media, including the Internet, so long as they do not get involved in the company's Internet advertising projects."

Relief may also be more readily granted where a proposed order does not actually prohibit an employee from working in her chosen field or profession. For example, it may not be necessary to prohibit a former employee from working for a competitor in order to protect a company's trade secrets, if there is some mechanism available to screen out the employee from positions where she would inevitably use, rely upon or disclose her former employer's trade secrets. Thus, in Merck & Co. v. Lyon,17 a former Merck employee was merely prohibited from discussing anything related to Merck's product line with his new employer for a period of up to two years. Where it is possible to fashion relief in such a manner that the employee is not prohibited from working for his or her new employer, as in Merck & Co. v. Lyon, a longer injunction may be justified.

In other cases, the nature of Internet time may mandate a shorter period of relief. In Doubleclick, for example, the court implicitly acknowledged the phenomenon of Internet time by limiting the preliminary injunction entered to merely six months (without prejudice to plaintiff's right to apply to extend the order for good cause shown). Judge DeGrasse wrote that "[g]iven the speed with which the Internet advertising industry apparently changes, defendants' knowledge of Doubleclick's operations will likely lose value to such a degree that the purpose of a preliminary injunction will have evaporated before the year is up."

Conclusion

The inevitable disclosure doctrine may be especially important to Internet businesses given the speed with which both web-based technology and business models have been developing, the value of lead-time to the development of both Internet technologies and business models and, in the context of technology-based trade secrets, the possibility that a given new technology may be primarily or exclusively associated with a single employer.

Where applicable, the inevitable disclosure doctrine may provide a remedy where an employee's technical knowledge of his former employer's trade secrets, know-how or technology is so highly specialized, or where the technology is so closely associated with a single inventor or company, that it would be impossible for the employee to work in the same field without inevitably using, relying upon or disclosing his former employer's proprietary secrets.


Endnotes:

1. 54 F.3d 1262 (7th Cir. 1995).

2. Index No. 116914/97 (N.Y. Sup. Ct. Nov. 5, 1997).

3. Id.

4. Id., quoting Lumex, Inc. v. Highsmith, 919 F. Supp. at 631.

5. UTSA ' 2; PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1268 (7th Cir. 1995) (emphasis added).

6. 54 F.3d at 1270-71.

7. See, e.g., Lumex, Inc. v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996); Uncle B's Bakery v. O'Rourke, 920 F. Supp. 1405, 1435, modified, 938 F. Supp. 1450 (N.D. Iowa 1996); LaCalhene Inc. v. Spolyar, 938 F. Supp. 523 (W.D. Wisc. 1996).

8. See, e.g., Branson Ultrasonics Corp. v. Stratman, 921 F. Supp 909 (D. Conn. 1996) (writing, in connection with entering a preliminary injunction, that "a high degree of similarity between an employee's former and current employment makes it likely that the former employer's trade secrets and other confidential information will be used and disclosed by the employee in the course of his new work . . . ."). Such provisions, however, typically are narrowly construed and not universally enforced. The inevitable disclosure doctrine may bolster a plaintiff's case for entry of an order enforcing a restrictive covenant or justify broader relief under trade secrets law than might otherwise be warranted based solely on the employment contract. See, e.g., Ackerman v. Kimball Int'l, 652 N.E.2d 507 (Ind. 1995) (broad non-compete clause barring the employee from working for "any competitor . . . in the veneer lumber business, including any type of consulting . . . ," with no geographic restriction, was enforced pursuant to the UTSA); FMC Corp. v. Varco Int'l, 677 F.2d 500 (5th Cir. 1982) (enjoining a competitor from placing a former employee in any position "that poses an inherent threat of disclosure or use of FMC's trade secrets" because "[e]ven assuming the best of good faith, [the defendant] . . . will have difficulty preventing his knowledge of FMC's . . . manufacturing techniques from infiltrating his work."), cited with authority in PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir.1995); La Calhene Inc. v. Spolyar, 938 F. Supp. 523 (W.D. Wisc. 1996) (the former employee's "position with plaintiff gave him such intimate knowledge of plaintiff's research, product development, finances, market strategies and pricing information that it is all but inevitable that he will utilize that knowledge working with . . . " plaintiff's competitor).

9. See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995); Southwestern Energy Co. v. Eickenhorst, 955 F. Supp. 1078 (W.D. Ark. 1997); Merck & Co. v. Lyon, 941 F. Supp. 1443 (M.D.N.C. 1996); Doubleclick, Inc. v. Henderson, Index No. 116914/97 (N.Y. Sup. Ct. Nov. 5, 1997).

10. See, e.g., Campbell Soup Co. v. Giles, 47 F.3d 467 (1st Cir. 1995) (Massachusetts law); APAC Teleservices, Inc. v. McRae, No. C97-183-MJM, 1997 U.S. Dist. LEXIS 20331 (N.D. Iowa Nov. 19, 1997); Bridgestone/Firestone, Inc. v. Lockhart, Cause No. IP 96-1838-C H/G, 1997 U.S. Dist. LEXIS 19695, at *44-46 (S.D. Ind. Nov. 17, 1997); Glaxo Inc. v. Novopharm Ltd., 931 F. Supp. 1280 (E.D.N.C. 1996), aff'd on other grounds, 110 F.3d 1562 (Fed. Cir. 1997); International Paper Co. v. Suwyn, 966 F. Supp. 246 (S.D.N.Y. 1997); Multiform Desiccants v. Sullivan, Case No. 95-CV-0283E(F), 1996 W.L. 107102 (W.D.N.Y. Mar. 8, 1996); IBM v. Seagate Technology, Inc., 941 F. Supp. 98 (D. Minn. 1992).

11. See Southwestern Energy Co. v. Eickenhorst, 955 F. Supp. 1078 (W.D. Ark. 1997); American Totalisator Co. v. Autotote Ltd., Civil Action No. 7268, 1983 Del. Ch. LEXIS 401 (Del. Ch. Aug. 18, 1983); PepsiCo Inc. v. Quaker Oats Co., 54 F.3d 1262 (7th Cir. 1995) (Illinois); Ackerman v. Kimball Int'l, 652 N.E.2d 507 (Ind. 1995); Uncle B's Bakery v. O'Rourke, 920 F. Supp. 1405, 1435, modified, 938 F. Supp. 1450 (N.D. Iowa 1996); Merck & Co. v. Lyon, 941 F. Supp. 1443 (M.D.N.C. 1996); LaCalhene Inc. v. Spolyar, 938 F. Supp. 523 (W.D. Wisc. 1996).

12. See Lumex, Inc. v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996); Doubleclick, Inc. v. Henderson, Index No. 116914/97 (N.Y. Sup. Ct. Nov. 5, 1997). For an analysis of the applicability of the inevitable disclosure doctrine under California law, which generally prohibits enforcement of noncompetition agreements, see Ian C. Ballon, "Inevitable Disclosure Under California Law," Intellectual Properties, Feb. 1998.

13. See, e.g., APAC Teleservices, Inc. v. McRae, No. C97-183-MJM, 1997 U.S. Dist. LEXIS 20331, (N.D. Iowa Nov. 19, 1997) (although a defendant's lack of trustworthiness on prior occasions could justify a finding of threatened use of plaintiff's trade secrets, "previous untrustworthiness does not compel that result.").

14. See, e.g., Merck & Co. v. Lyon, 941 F. Supp. 1443, 1460 (M.D.N.C. 1996) ("a showing of bad faith or underhanded dealing by the former employee or new employer would not necessarily be required."); Lumex, Inc. v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996) (entering injunctive relief where the employee's good faith was presumed based on the inevitability of disclosure, in a case where the defendant was also bound by a noncompetition agreement).

15. See GTE Government Systems Corp. v. Patrick, Case No. CV 770111 (Santa Clara County, Cal. Sup. Ct. motion for preliminary injunction filed Nov. 14, 1997) (competitive bids on government contracts); American Totalisator Co. v. Autotote Ltd., Civil Action No. 7268, 1983 Del. Ch. LEXIS 401 (Del. Ch. Aug. 18, 1983) (enjoining a former employee who was not bound by a noncompetition agreement from working for a competitor because of concerns that the employee would reveal strategies for bidding on contracts to supply gambling equipment to racetracks).

16. See Ian C. Ballon, "The law of the Internet: Developing A Framework for Making New Law," The Cyberspace Lawyer, Dec. 1997 & Jan. 1998 (measuring time in dog years).

17. 941 F. Supp. 1443 (M.D.N.C. 1996).


Disclaimer
The information provided in this article is public information and is not individualized legal advice.

The presentation of information in this article does not establish any form of attorney-client relationship with our firm or with any of our attorneys.

While we have attempted to maintain the information in this article as accurately as possible, this information may contain errors or omissions, for which we disclaim any liability.

.