Turning Trade Secrets into Non-Compete Agreements

One of the more controversial issues in trade secret law today is the use of the so-called "inevitable disclosure" theory to prevent a former employee from working for a competitor in his or her area of expertise. Companies urging adoption of this theory argue that an injunction prohibiting such employment . not just disclosure of trade secrets . should issue merely upon a showing of three elements. First, that the former employer and the new employer are competitors, second, that the employee's new position is comparable to his prior position or is such that the trade secrets the employee obtained in his prior employment would have to be used in his new position, and third, that the new employer has not taken sufficient, demonstrable steps to prevent any misappropriation from occurring. As a practical matter, courts have provided little guidance regarding what constitutes "comparable employment" or identifying those situations where an employee will "have to use" confidential information in a new position, increasing the guesswork . and the risk . for workers seeking competitive employment.

Increasingly, the inevitable disclosure theory is being used to obtain the benefits of a non-compete agreement (i.e., prohibition against certain types of employment) without the stigma and strict scrutiny applied to such an agreement. Examples of recent cases involving the inevitable disclosure theory include Dow Chemical's successful effort to temporarily enjoin fourteen engineers and sales executives from working for rival General Electric; AMD's efforts to stop several of its engineers from joining Hyundai Electronics; Proctor & Gamble's effort to prevent its vice president for laundry and cleaning products from accepting a similar position with arch-rival Clorox; and a suit by Informix Software to enjoin thirteen former employees from working for its chief database software rival, Oracle Corporation. More generally, the inevitable disclosure theory has become increasingly common in negotiations with departing employees, and an important weapon in the arsenal of a company trying to prevent its former employees from joining a competitor.

The theory has caused particular concern among companies and employees in Silicon Valley and other similar areas containing large concentrations of highly skilled, mobile employees. Often employees in these areas obtain a large amount of technical knowledge in their positions. Such knowledge can be difficult to distinguish from legitimate trade secrets, particularly for those not skilled in the particular technology or field. Yet the diffusion of this technical knowledge has been recognized by scholars as an important factor in the economic success of Silicon Valley and other such areas.//1// If routinely applied by the courts, the inevitable disclosure theory could significantly impede the spread of general technical knowledge that occurs when employees leave one company for another and also inhibit the free flow of ideas that forms the backbone for economic growth.

A. Evolution of the Inevitable Disclosure Doctrine

The inevitable disclosure theory was most clearly enunciated in the early 1980s in two Fifth Circuit cases. //2// Yet the theory was not included in the Uniform Trade Secrets Act ("UTSA"), and declined in popularity as the UTSA was adopted by most states. For example, in one of the first inevitable disclosure cases decided under the UTSA, a district court in Minnesota denied plaintiff's motion for injunctive relief based upon inevitable disclosure, holding that "in the absence of a covenant not to compete or a finding of actual [disclosure] or an intent to disclose trade secrets, employees may pursue their chosen field of endeavor in direct competition with their prior employer."//3// The court further recognized the potential unfairness of the inevitable disclosure doctrine, stating that "a claim of trade secret misappropriation should not act as an ex post facto covenant not to compete."//4(