The Cutting Edge of Trade Secret Law

We live in a technological revolution. Computers have fundamentally altered our business and personal lives, and the Internet has reinvented the way we communicate, transact commerce and obtain information. Intellectual property law plays an integral role in this revolution. Fierce competition for talented labor has caused companies to invoke intellectual property law, particularly trade secret law, to prevent former employees and competitors from capitalizing on their innovations. This article discusses two cutting edge issues in this context. (1) Whether a former employee can be stopped from using trade secrets retained in memory-"misappropriation by memory." (2) Whether a former employee can be prevented from working in a job that would result in the inevitable use of trade secrets-"inevitable disclosure."

A central goal of trade secret law is to foster incentives for businesses to innovate. Companies invest substantial time and capital to develop innovations, which are often not patentable. If not protected by trade secret law, competitors could harvest the fruits of others without bearing the risks or costs of sowing the seeds themselves. That principle, however, runs contrary the competitive values of a capitalistic society. Trade secret law denies to the public the full benefits of innovations by limiting their distribution and exploitation. Society also places a high value on the freedom to market one's knowledge and skills to earn a living in one's area of expertise. When it comes to the doctrines of misappropriation by memory and inevitable disclosure, these interests can seem irreconcilable.

A. Misappropriation by Memory-Memorized Trade Secrets Are Protectable-The Difficulty Is In Differentiating Between Protectable Trade Secrets and Non-Protectable Knowledge and Skills of the Former Employee

In times past, courts distinguished secrets in written or other tangible form from those retained in memory, and refused to protect the latter. Courts prioritized the concerns for employee mobility and unfettered competition, and placed the burden on employers to protect themselves with non-compete agreements. Over the past fifty years, society's interest in fostering innovation has gained favor, rather than requiring companies to enter into agreements that restrain trade and are disfavored. Thus, the distinction between tangible and memorized secrets is now nearly universally rejected.

The difficulty is in differentiating between a protectable trade secret and non-protectable knowledge and skills retained in a former employee's memory. The employee's knowledge and skills are often so intertwined with the employer's trade secret that it is difficult to differentiate between the secret and the knowledge and skills related to it. The starting point is the definition of "trade secret." A trade secret is information that derives economic value from not being "generally known" or "readily ascertainable" by others who could obtain economic value from using the information. Thus, the question is whether the knowledge and skills retained in the employee's memory are known or readily ascertainable by competitors in the industry.

If the knowledge and skills are similar to those possessed by others in the industry, then the former employee cannot be prevented from utilizing them for a new employer, because the knowledge and skills are generally known. But what about when the former employee's knowledge and skills are superior or unique? Though such advanced knowledge and skills are not generally known, they are protectable only if also not readily ascertainable. This situation raises the most severely conflicting interests. Employees have a right to exploit their most valuable knowledge and skills. But employers have an equally strong interest in preventing former employees and competitors from unfairly using knowledge and skills developed through their investment of time and capital in training their employees. Society also has a strong interest in fostering the dissemination of advanced knowledge and skills to promote further innovation. But that interest is at odds with the need to protect such knowledge and skills so that employers will continue to develop these attributes in their employees.

Courts are reluctant to enter injunctions in these cases, but will do so in limited circumstances. Various factors influence the determination. If the knowledge and skills are obtainable from studying manuals, texts or literature available in the industry, or by attending formal or informal education or training, they are not protectable. Likewise, the knowledge and skills are less likely to be protected if they concern technology available in the industry, or the application of principles known or discernable in the industry, unless competitors have tried and been unsuccessful in developing such knowledge and skills using these resources. Finally, courts have hesitated to enjoin the use of knowledge and skills that the former employee started to develop before working for the employer but enhanced during employment, or developed largely through his or her own initiative during employment.

B. Inevitable Disclosure-The Company Must Show that the Former Employee Will Inevitably Use a Specific Trade Secret in the Course of an Identified Job Duty

The inevitable disclosure doctrine is not new. Rather, it was reinvigorated in 1995 by the Seventh Circuit in PepsiCo, Inc. v. Redmond. The Court acknowledged that the doctrine lies at the heart of a basic tension in trade secret law. It nonetheless adopted the rule that a company can prove threatened trade secret misappropriation by showing that the employee's new employment will inevitably lead him or her to rely on the company's trade secrets.

Since that decision, courts in many other jurisdictions have considered whether to adopt the doctrine. Because of significant policy ramifications, the doctrine has received heavy criticism, and courts in California, Virginia, and Florida have rejected it completely. The ramifications of the doctrine are so serious because of the impact that they have on the interests of employees, competitors and society. The employee is foreclosed from performing the exact job that best utilizes his or her specific talents. Competition is squelched by preventing those specific talents from being utilized by the competitor that can exploit them for great public benefit. And the most important policy ramification is that the doctrine creates an ex post facto restrictive covenant. The doctrine creates a non-compete agreement from whole cloth, or converts a confidentiality agreement into a restrictive covenant. This is a powerful weapon, the mere threat of which chills employee mobility. The inevitable disclosure doctrine therefore treads a narrow path through judicially disfavored territory.

The doctrine applies to the narrow situation in which the former employee will use a specific trade secret in the course of performing an identified job duty that is inherent in the person's new position. This requires a company to identify the trade secrets and new job duties with specificity, and to provide a detailed explanation of why the former employee's use of those trade secrets would be inevitable in the course of performing those duties. This narrow application of the doctrine has a place in trade secret law. Both the Uniform Trade Secrets Act and the Restatement of Unfair Competition permit courts to enjoin threatened misappropriation, which is often important to prevent former employees and competitors from using a trade secret before such exploitation occurs. This narrow rule also shields only an employer's legitimately protectable interests, while precluding the employee from only a limited number of jobs.

Courts and practitioners should proceed cautiously when considering whether to apply the doctrines of misappropriation by memory and inevitable disclosure. They are narrow standards that strike a careful balance between severely conflicting policy interests, and therefore result in the imposition of an injunction in only rare cases.