Corporate Counsel Magazine
The days when loyalty alone was enough to keep employees in the fold, sometimes for their entire careers, have long since passed. Lured by creative compensation packages, nowadays employees think nothing of jumping from company to company. Although no industry has been immune to this phenomenon, the practice is particularly prevalent in the high-technology arena where start-ups abound. Unfortunately, all of this mobility has produced an expensive and sometimes debilitating by-product: an explosion in trade secrets-related litigation. Recently, a new doctrine has emerged which threatens to fan the litigation flames.
Known as the "inevitable disclosure" doctrine, courts have issued injunctions and ordered other relief on the grounds that given the former employee's new position the disclosure of trade secrets is "inevitable." In other words, relief has been granted even where there has been no showing that trade secrets were misappropriated or disclosed.
The seminal case in this emerging area is PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). There a PepsiCo general manager who was privy to PepsiCo's marketing plans for its All Sport and other new beverages left PepsiCo and took essentially the same position in the Gatorade division of the Quaker Oats Company. The court upheld the lower court's injunction (1) permanently enjoining the employee from disclosing PepsiCo's trade secrets, and (2) enjoining him for six months from assuming his new job responsibilities. Stating that "unless [the employee] possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about Gatorade," the court concluded that the employee's new duties would "inevitably" lead him to rely on PepsiCo's trade secrets despite assurances given by the employee and Quaker Oats that the employee's prior confidentiality agreement with PepsiCo would be observed.
While the best way to avoid running afoul of the doctrine would be to adopt a policy of never hiring a competitor's employees, such a course of action is obviously unrealistic when businesses confront the periodic need to hire senior management or other employees with industry experience, and in light of the high degree of specialization and acute shortage of qualified, experienced personnel in many growing industries.
If your company must consider hiring a competitor's employee for these or other reasons, the following are some suggested guidelines, in light of PepsiCo and other inevitable disclosure decisions, for reducing your company's risk of being sued for trade secret infringement:
1. Avoid cherry picking.
Even if an executive or personnel search eventually leads to an employee of a competitor, the risk of being sued may be reduced by creating and preserving documentation that shows that your company was not specifically targeting the competitor's employee for his or her knowledge of trade secrets but was simply conducting a search for the most qualified individual for an open position. The PepsiCo court took note of Quaker Oats' seemingly "unnatural interest" in hiring PepsiCo employees.
2. Document the reasons for hire.
The court in PepsiCo also distinguished between the particularized marketing plans that constituted PepsiCo's trade secrets and the "general skills and knowledge" acquired over the course of employment that were not trade secrets. The court observed that skilled employees simply taking their skills elsewhere does not amount to a violation of the trade secret laws. Accordingly, well intentioned companies should take steps to document that a candidate is being hired for his or her general skills and not their knowledge of any competitor's trade secrets.
3. Honesty is the best policy.
In upholding the trial court's grant of an injunction, the PepsiCo court also noted the trial court's finding that the former PepsiCo executive had not been forthright about his activities before accepting the job with Quaker and in subsequent sworn testimony. The court then recognized this finding as an appropriate ground for the trial court to conclude that the threat of disclosure of PepsiCo's trade secrets was real and warranted injunctive relief. For this reason, both your company and its potential recruit should be honest and up-front in all dealings and ommunications with your company's competitor.
4. Exercise care with communications.
In several trade secret cases, careless and seemingly incriminating electronic mail messages between companies and their prospective recruits have served as both damaging evidence and as fodder for embarrassing news articles about possible trade secret theft. Accordingly, care should be exercised in all communications to avoid any misimpressions or embarrassment.
5. Comply with confidentiality obligations.
Without prying into details that may lead to an inadvertent disclosure of trade secrets, your company should ask the candidate at the outset whether he or she is privy to any trade secrets of his present or former employer, and whether the candidate previously signed a confidentiality agreement with his or her employer. Preferably this should be done in writing, and the candidate should be asked to sign a letter or memorandum confirming his or her responses to these questions. If there are any trade secrets, efforts should then be made to help the candidate perform his or her future job duties without divulging or relying upon his or her former employer's trade secrets.
6. Establish a firm policy against the use of trade secrets.
Your company should advise the candidate in writing immediately upon hire to return all property belonging to his former employer, including all documents, diskettes and other records that may contain trade secrets, and that such materials should never be brought to your company's premises or otherwise used in performing work for your company. The new hire should also be informed that any use of his or her former employer's trade secrets in the new position will be grounds for immediate termination of employment. Additional special precautions, such as "clean room" type procedures, may be necessary if your company is engaged in the high technology-field and the employee is being hired in a technical capacity.
Decisions in this area are necessarily going to be fact driven. However, in each case courts will have to balance the interests of the former employer, the departing employee, and the new employer. Otherwise, the inevitable disclosure doctrine may have the unanticipated effect of supplanting loyalty and even compensation as the ties that bind.