California Court Rejects "Inevitable Disclosure Doctrine" But Acknowledges Availability of Injunctive Relief for the Almost Indistinguishable "Threatened" Disclosure of Trade Secrets

1. Introduction
   
   

The so-called "inevitable disclosure doctrine" assumes that if an employee has knowledge of trade secrets, and accepts a similar job with a direct competitor in a highly competitive industry, he or she will "inevitably" disclose the trade secrets in the course of performing his or her new employment duties. On September 12, 2002, the California Court of Appeal for the Fourth Appellate District, in Schlage Lock Company v. Whyte (2002) 101 Cal. App. 4^th 1443, issued the first published California decision rejecting the inevitable disclosure doctrine, which the court characterized as a rule that "permits a trade secret owner to prevent a former employee from working for a competitor despite the owner's failure to prove the employee has taken or threatens to use trade secrets."[1] The court found the doctrine incompatible with California Business and Professions Code Section 16600, which broadly prohibits "non-competes." The court reasoned that preventing a former employee from going to work for a competitor through application of the inevitable disclosure doctrine amounts to an "after-the-fact covenant not to compete restricting employee mobility" [Schlage Lock, 101 Cal. App. 4^th at 1447].

Despite this holding, the court recognized that the Uniform Trade Secrets Act ("UTSA") permits injunctive relief against former employees for actual or "threatened" trade secret misappropriation [see Cal. Civ. Code § 3426.2(a)[2]]. Significantly, in establishing "threatened" trade secret misappropriation, employers may rely on the same type of evidence used to support application of the inevitable disclosure doctrine, including the degree of similarity between the departing employee's former and current positions, the degree of competition between the former and current employers, the current employer's efforts to safeguard the former employer's trade secrets, and the former employee's "lack of forthrightness both in his activities before accepting the job . . . and in his testimony" [PepsiCo, Inc. v. Redmond (7^th Cir. 1995) 54 F.3d 1262, 1269].

This Article briefly traces the history of the "inevitable disclosure" doctrine in California and elsewhere, summarizes the Schlage Lock decision, and argues that the line between "threatened" and "inevitable" disclosure of trade secrets is fine. As a result, and pending possible California Supreme Court review, California employers may still be able to enjoin former employees' "threatened" misappropriation without resort to the inevitable disclosure of trade secrets doctrine.

1. The Brief But Tortured History of the "Inevitable Disclosure Doctrine"
   
   

The Seventh Circuit Court of Appeals, in PepsiCo., Inc. v. Redmond (7^th Cir. 1995) 54 F.3d 1262, articulated the modern version of the inevitable disclosure doctrine. The court applied the Illinois Trade Secrets Act to affirm the district court's injunction preventing a Pepsi general sales manager, William Redmond, from assuming similar duties with Pepsi's chief rival, Quaker Oats Company, in the fiercely-competitive "sports drinks" industry. Pepsi manufactured and sold All Sport and its rival, Quaker, manufactured and sold the dominant brand, Gatorade. Mr. Redmond was a 10-year Pepsi veteran who had access to significant trade secret information, including Pepsi's sales and marketing plans and "pricing architecture" [PepsiCo, 54 F.3d at 1264-65]. Redmond advised Pepsi that he was leaving for a similar position with Quaker. The district court issued an injunction preventing Redmond from working for Quaker for six months, and the Seventh Circuit affirmed the injunction based on the inevitable disclosure doctrine.

Importantly, Pepsi did not contend that Redmond and/or Quaker actually stole its trade secrets, but asserted that Redmond "cannot help but rely on [Pepsi's] trade secrets as he helps plot [Quaker's] new course" [Id. at 1270]. The Seventh Circuit noted the tension between protection of an employer's trade secrets and employee mobility/fair competition. This tension becomes more pronounced when there is merely a "threat" of trade secret misappropriation, as opposed to "actual" misappropriation. However, the Seventh Circuit concluded that Illinois law – based on the UTSA – permits courts to enjoin employment based upon inevitable disclosure of trade secrets [Id. at 1269]. The Seventh Circuit also agreed with the district court finding that "unless Redmond possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions about [Quaker's products] by relying on his knowledge of [Pepsi's] trade secrets" [Id.]. As the Schlage Lock court framed the issue, "the employee will necessarily rely – consciously or subconsciously – upon knowledge of the former employer's trade secrets in performing his or her new job duties" [Schlage Lock, 101 Cal. App. 4^th at 1459 (citing PepsiCo, 54 F.3d at 1269]. "Such inevitability of disclosure, coupled with Redmond's and Quaker Oats' 'lack of candor on their part and proof of their willingness to misuse [PepsiCo's] trade secrets,' led the Seventh Circuit to affirm the injunction barring Redmond from working for Quaker Oats" [Id. at 1460 (quoting PepsiCo, 54 F.3d at 1270-71)].

In the seven plus years following the PepsiCo v. Redmond decision, many California federal and state trial courts had applied the inevitable disclosure doctrine in unpublished opinions and had enjoined departing employees from taking on new jobs or new job duties with direct competitors. One California Court of Appeal ended years of speculation by adopting the inevitable disclosure doctrine in the case of Electro Optical Industries Inc. v. White. However, on April 12, 2000, the California Supreme Court ordered Electro Optical depublished, which is not a reflection on the merits but which means the case cannot be cited for as legal precedent. As a result of the California Supreme Court's decision to depublish Electro Optical, the viability of the inevitable disclosure doctrine in California had remained unsettled.

The court in Schlage Lock surveyed the state and federal decisions addressing the inevitable disclosure doctrine, confirming that "the majority of jurisdictions addressing the issue have adopted some form of the inevitable disclosure doctrine"; "[s]ome other courts, though agreeing with the doctrine, have distinguished it or decided their cases on other grounds"; and "[a] smaller but growing band of cases rejects the inevitable disclosure doctrine" [Schlage Lock, 101 Cal. App. 4^th at 1460-62 (citations omitted)]. As the Schlage Lock court noted, published federal district court decisions interpreting California law almost uniformly have rejected the inevitable disclosure doctrine, relying primarily on Cal. Bus. & Prof. Code § 16600 [Id. at 1460 (citing Globespan, Inc. v. O'Neill (C.D. Cal. 2001) 151 F. Supp. 2d 1229, 1235 (Baird, J.) ("The Central District of California has considered and rejected the inevitable disclosure doctrine"); Bayer Corp. v. Roche Molecular Sys., Inc. (N.D. Cal. 1999) 72 F. Supp. 2d 1111, 1120 (Alsup, J.) ("California law does not recognize the theory of inevitable disclosure"); see also Danjaq LLC v. Sony Corp. (C.D. Cal. 1999) 50 U.S.P.Q. 2d 1638, 1640 n.1 (inevitable disclosure doctrine "is not the law of the State of California or the Ninth Circuit"); Computer Sciences Corp. v. Computer Assocs., Int'l. (C.D. Cal. 1999) 1999 WL 675446 at *15 (same)].

Although several published federal district court decisions have rejected the inevitable disclosure doctrine as inconsistent with California law, Cal. Bus. & Prof. Code § 16600 does not necessarily compel this result. For example, the stated goal of the California Legislature in adopting the UTSA in 1984 – consistent with the title of the statute, i.e., "Uniform" – was to harmonize the divergent common law of trade secrets.[3] In fact, the National Conference of Commissioners on Uniform State Laws proposed the UTSA in August 1985 after years of study and debate [see Comment, "Theft of Trade Secrets: The Need for a Statutory Solution," 120 U.Pa.L.Rev. 378, 380-81 (1971) ("Under technological and economic pressures, industry continues to rely on trade secret protection despite the doubtful and confused status of both common law and statutory remedies. Clear, uniform trade secret protection is urgently needed . . . ."); Pooley, "The Uniform Trade Secrets Act: California Civil Code § 3426," 1 Santa Clara Computer & High Tech L.J. 193 (1985).]

Cal. Civ. Code § 3426.8 (adopted as part of the UTSA) expressly provides that "[t]his title shall be applied and construed to effectuate its general purpose to make uniform the law with respect to this title among states enacting it." Thus, it is hardly surprising that cases interpreting the UTSA from other jurisdictions may be persuasive guidance in California UTSA actions [see Morlife, Inc. v. Perry (1997) 56 Cal. App. 4th 1514, 1520]. And as the Schlage Lock court acknowledged, "the majority of jurisdictions addressing the issue have adopted some form of the inevitable disclosure doctrine" [see Schlage Lock, 101 Cal. App. 4^th at 1460 (collecting cases); see also E. Sommer, "Inevitable Disclosure Doctrine," IP Litigator (Nov./Dec. 2002)].

Moreover, and as the Schlage Lock court also acknowledged, '[n]early 40 years ago, the California Supreme Court recognized covenants not to compete are enforceable notwithstanding Business and Professions Code section 16600 if 'necessary to protect the employer's trade secrets" [Schlage Lock, 101 Cal. App. 4^th at 1462 (quoting Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal. 2d 239, 242)].

1. The Schlage Lock Company v. Whyte Decision Rejected the "Inevitable Disclosure" Doctrine as Inconsistent with California Business & Professions Code Section 16600
   
   
   1. The Facts of Schlage Lock
      
      

The facts and procedural history of Schlage Lock will seem familiar to practitioners who have litigated trade secrets disputes. Schlage Lock presents the classic case of the high-level executive who leaves Company A to work for Company B in a highly competitive industry. The case illustrates the competing public policies of employee mobility and fair competition on the one hand, and protection of employers' trade secrets and against unfair competition on the other hand.

Schlage Lock Company, a subsidiary of Ingersoll-Rand Company, and Kwikset Corporation manufacture and sell locks and related products. In the court's words, "[t]hey are fierce competitors and vie intensely for shelf space at The Home Depot, which is the major seller of locks and alone accounts for 38 percent of Schlage's sales. Doug Whyte worked as Schlage's vice-president of sales, responsible for sales to The Home Depot and other large retailers. Mr. Whyte signed an agreement to protect Schlage's proprietary information and agreed to abide by Schlage's code of ethics, which forbids disclosure of confidential information. Whyte did not sign a non-compete. The Home Depot periodically reviews the products it stocks, and invites vendors such as Schlage and Kwikset to submit proposals for new product information and product changes, pricing, marketing concessions, promotional discounts and advertising funds. As part of this product line review, The Home Depot followed Schlage's recommendation to remove Kwikset's "Titan" brand of locks and to expand Schlage's presence on its shelves. Whyte participated in this product line review, and in drafting the product line agreement with The Home Depot [Schlage Lock, 101 Cal. App. 4^th at 1447].

Kwikset's president, Christopher Metz, realized that Whyte "was killing my team," and asked him "what it would take to get him to leave" Schlage [Id. at 1448]. Whyte accepted employment with Kwikset as its vice-president of sales for national accounts, with "substantially similar" job duties as he had had at Schlage [Id.]. The evidence regarding Whyte and Kwikset's actions was conflicting. Schlage claimed that Whyte participated on behalf of Schlage in confidential meetings with The Home Depot on June 5, 2000, two days after accepting a position with Kwikset. Schlage also claimed that Whyte left to revenge belittling comments made by Schlage's president, Robert Steinman, disavowed his confidentiality agreement, stole trade secret information (including a copy on computer disk of the product line review agreement with The Home Depot), and lied about returning Schlage's confidential information. Whyte denied taking any trade secrets, claimed he reaffirmed the confidentiality agreement, and contended that in his "exit interview" Mr. Steinman vowed to destroy his career [Id.].

As sometimes happens when high-level employees defect to work for fierce competitors, Whyte's resignation "ignited a firestorm of litigation" [Id. at 1448].[4] Schlage sued Whyte in Colorado state court, seeking an injunction prohibiting Whyte from working for Kwikset based on the "inevitable disclosure" doctrine. The Colorado state court denied Schlage's request for injunctive relief.

Whyte then sued Schlage in California state court, seeking damages for interference with contract and a declaration of his right to work for Kwikset. Schlage then filed a cross-complaint for unfair competition, misappropriation of trade secrets, breach of contract, breach of fiduciary duty, intentional and negligent interference with economic relations, and conversion. The next day, Schlage brought an ex parte application to restrain Whyte temporarily from using or disclosing its trade secrets, pending a hearing on its application for a preliminary injunction. The California trial court granted Schlage's ex parte application and enjoined Whyte from using or disclosing 20 categories of trade secret information and ordering Whyte to return any such information in his possession. In response, Whyte turned over "a kitchen-sized garbage bag of shredded documents and a Ziploc bag containing seven destroyed 'floppy disks' and nine destroyed 'zip' disks" [Id. at 1448].

The California trial court permitted expedited discovery, the results of which the parties submitted in support of and in opposition to Schlage's application for a preliminary injunction. The court first rejected the inevitable disclosure doctrine, but then took the matter under submission to consider issuing an injunction based upon actual or threatened misappropriation of trade secrets. In denying Schlage's application, the trial court stated that the information that Schlage sought to protect was not a trade secret.

The Court of Appeal, Fourth Appellate District, first acknowledged the deferential "abuse of discretion" standard of review. As a result of this standard of appellate review, it was improper to presume from the trial court's comments at the hearing – regarding the non-trade secret status of Schlage's information – that it did not consider Schlage's other arguments supporting its request for a preliminary injunction.

The court then observed that, contrary to the trial court's statements at the hearing on Schlage's application for a preliminary injunction, some of Schlage's information qualified for trade secret protection under California law [Id. at 1453-57 (citing SI Handling Sys., Inc. v. Heisley (3d Cir. 1985) 753 F.3d 1244, 1260 (cost and pricing information trade secret))].

Next the court considered whether Whyte had engaged in "actual or threatened" misappropriation. Schlage relied on direct and circumstantial evidence that Whyte had access to its trade secrets, vowed to get even with Schlage's president, concealed his planned departure from Schlage to attend confidential meetings with The Home Depot, renounced his confidentiality agreement, lied about returning confidential information, lied about destroying Schlage confidential information, retained a copy of The Home Depot product line review agreement downloaded onto disk, sent an e-mail attaching a confidential report to his personal e-mail address, and accepted a position with Kwikset with duties identical to those at Schlage in order to use Schlage's confidential information [Id. at 1457]. However, the court noted that Whyte denied these allegations and the trial court resolved the conflicts in the evidence in favor of Whyte and Kwikset. Thus, the appellate court was constrained by the evidentiary findings implicit in the trial court's order denying Schlage's application for a preliminary injunction. However, the court emphasized that it had "serious concerns over evidence in the record suggesting that Whyte took Schlage's trade secrets or destroyed evidence" [Id. at 1458]. Thus, had the trial court been persuaded by Schlage's evidence of Whyte's "actual or threatened" misappropriation of trade secrets, the appellate court probably would have affirmed the injunction without resort to the inevitable disclosure doctrine.

The court rejected application of the inevitable disclosure doctrine as incompatible with California law. Specifically, the doctrine "creates a de facto covenant not to compete" and "run[s] counter to the strong public policy in California favoring employee mobility" [Schlage Lock, 101 Cal. App. 4^th at 1462 (quoting Bayer Corp. v. Roche Molecular Sys., Inc. (N.D. Cal. 1999) 72 F. Supp. 2d 1111, 1120)]. The court found the "chief evil" in application of the inevitable disclosure doctrine was its "after-the-fact nature" [Schlage Lock, at 1462]. As the court stated, "[t]he covenant is imposed after the employment contract is made and therefore alters the employment relationship without the employee's consent" [Id. at 1462-63]. The court was not inclined to "rewrite" the employment agreement by "converting" a typical confidentiality agreement into a non-compete [id. (citing Matheson, Employee Beware: The Irreparable Damage of the Inevitable Disclosure Doctrine (1998) 10 Loyola Consumer L. Rev. 145, 162 ("the inevitable disclosure doctrine transforms employee access to trade secrets into a de facto non-competition agreement")].

The court observed that its rejection of the inevitable disclosure doctrine was "complete," and that "[u]nder the circumstances presented in this case, an employer might prevent disclosure of trade secrets through, for example, an agreed-upon and reasonable nonsolicitation clause that is narrowly drafted for the purpose of protecting trade secrets" [Schlage Lock, 101 Cal. App. 4^th at 1464]. But at least according to one California Court of Appeal, "the inevitable disclosure doctrine cannot be used as a substitute for proving actual or threatened misappropriation of trade secrets" [id.].

1. The Fine Line Between "Threatened" and "Inevitable" Disclosure of Trade Secrets
   
   

Despite the Schlage Lock court's holding, the court recognized that the UTSA permits injunctive relief against former employees for actual or "threatened" trade secret misappropriation [see Schlage Lock, 101 Cal. App. 4^th at 1457-58 (citing Cal. Civ. Code § 3426.2(a))]. The line between "threatened" and "inevitable" disclosure is not clear. Presumably, the same type of evidence used to establish "inevitable" disclosure – similarity of former and current job duties, degree of competition between the former and current employers, the current employer's efforts to safeguard the former employer's trade secrets and "lack of candor" by the departing employee and his new employer and "their willingness to misuse" the former employer's trade secrets – may be used to establish "threatened" misappropriation. As a result, California employers may still be able to enjoin former employees' "threatened" misappropriation without resort to the inevitable disclosure of trade secrets doctrine [see, e.g., Bayer Corp. v. Roche Molecular Sys. (N.D. Cal. 1999) 72 F. Supp. 2d 1111, 1120 ("[T]hat a high-level employee takes a virtually identical job at the number one competitor in a fiercely competitive industry would be a factor militating in favor of a broader injunction"; but rejecting inevitable disclosure doctrine)]. For example, "threatened" misappropriation of trade secrets might be demonstrated where a former manager leaves to perform the same duties for a direct competitor, and there is evidence of a "lack of candor" regarding his or her departure and/or the new employer has not or will not provide adequate assurances to prevent use or disclosure of the former employer's trade secrets.

The UTSA (and Cal. Civ. Code § 3426.2(a)) does not define "threatened" misappropriation. But the California Legislature's adoption of the UTSA led one federal district court interpreting California law to conclude that a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant's new employment will inevitably lead him or her to rely on the plaintiff's trade secrets [see Maxxim Med., Inc. v. Michelson (S.D. Tex. 1999) 51 F. Supp. 2d 773, 778]. Whether termed "inevitable" or "threatened" disclosure of trade secrets, however, the same type of evidence may be used to persuade California trial courts to issue injunctions to prevent the use or disclosure of the former employer's trade secrets.

1. Conclusion
   
   

The Schlage Lock court emphatically rejected the inevitable disclosure doctrine under California law, but the same type of evidence used to establish "inevitable" disclosure may be used to prove "threatened" disclosure, for which the UTSA and California law provide injunctive relief. Indeed, one might argue that the difference between "inevitable" and "threatened" disclosure of trade secrets is merely a semantic one.

* By Tyler M. Paetkau, Partner, Bingham McCutchen, LLP, Silicon Valley office. Mr. Paetkau represents employers in all aspects of labor and employment law, including trade secrets protection and litigation. His e-mail address is tyler.paetkau@bingham.com.

[1] On April 12, 2000, the California Supreme Court depublished the only California state appellate court decision to have adopted the "inevitable disclosure" doctrine, Electro-Optical Indus., Inc. v.White (1999) 90 Cal. Rptr. 2d 680 (previously published at 76 Cal. App. 4^th 653). Commentators have continued to speculate about the viability of the inevitable disclosure doctrine under California law. See, e.g., Note, "Intellectual Slavery?: The Doctrine of Inevitable Disclosure of Trade Secrets," 26 Golden Gate U.L.Rev. 717, 719 (1996); Comment, "An Overview of Individual States' Application of Inevitable Disclosure: Concrete Doctrine or Equitable Tool?," 55 So. Methodist Univ. L.Rev. 621 (2002).

[2] In 1984, California joined 41 other states in adopting the UTSA [see Cal. Civ. Code §§ 3426 et seq.].

[3] Before the adoption of the UTSA, most courts relied on the Restatement of Torts (1939) for trade secret law. States that have not adopted the UTSA may continue to rely on the Restatement of Torts (1939) or on the Restatement (Third) of Unfair Competition (1995), which replaced the prior discussion of unfair competition found in the original Restatement of Torts (1939).

[4] See, e.g., Advanced Bionics Corp. v. Medtronic, Inc. (2001) 105 Cal. Rptr. 2d 265 (previously published at 87 Cal. App. 4th 1235, rev. granted on June 13, 2001), in which a California Court of Appeal upheld an injunction preventing a Minnesota-based company from enforcing a non-compete in a Minnesota Court. This decision is currently under review by the California Supreme Court.