Trade Secrets/Unfair Competition

THE INEVITABLE DISCLOSURE DOCTRINE

An Emerging Weapon To Protect An Employer’s Competitive Advantage

Companies are becoming more and more dependent upon confidential information to maintain their share of the marketplace. Such confidential information can take many forms, from scientific technical information to customer lists. A departing employee who has knowledge of such information may pose a significant threat to the lifeblood of a company should he or she accept employment with a competitor. In many such situations noncompete agreements may be absent or arguably unenforceable. Then what?

Even though such a situation may appear, at first blush, to be hopeless, there still exists an avenue of recourse. At an increasing rate, companies are seeking, and in some cases obtaining, court injunctions to prevent former employees who have not signed noncompete agreements from unfairly competing. Such injunctions are based upon the Uniform Trade Secrets Act ("UTSA"), which has been adopted in 44 states, including Wisconsin, since it was drafted in 1980.

The UTSA defines a "trade secret" as:

• Information, including a formula, pattern, compilation, program, device, method, technique, or process that;
• derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertained by proper means by other persons who can obtain economic value from its disclosure or use; and
• is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

As a practical matter, the generality of the statutory definition prevents it from being particularly useful in resolving concrete issues. Somewhat more guidance is provided by the six factors set forth in comment b to section 757 of the Restatement (First) of Torts:

Some factors to be considered in determining whether given information is one’s trade secret are:

The UTSA allows a court to enjoin actual or threatened misuse of a trade secret, and the court may continue the injunction for a reasonable period of time to eliminate unlawful commercial advantage. See Wis. Stat. § 134.90(3). These injunctions are based on the theory that the departing employee will inevitably make use of the former employer’s trade secret. This article will examine the history and emergence of the inevitable disclosure doctrine, and provides some suggestions to minimize the risk of litigation.

The doctrine first appeared in the 1960’s with the case of B.F. Goodrich v. Wohlgemuth, 117 Ohio App. 493, 192 N.E.2d 99 (1963). B.F. Goodrich was the original developer of the NASA space suit for the Apollo program. Wohlgemuth was an executive at B.F. Goodrich in charge of its space suit team and did not have a non-compete agreement. International Latex ("Latex") was a competitor of B.F. Goodrich, but technologically behind B.F. Goodrich in the development of its space suit. After obtaining the contract from NASA to manufacture a space suit, Latex hired Wohlgemuth as the head of its space suit development program. As parting words in response to B.F. Goodrich executives’ concern regarding trade secrets, Wohlgemuth stated that "loyalty and ethics have their price; insofar as [I am] concerned, International Latex was paying the price." 192 N.E. 2d at 104.

B.F. Goodrich filed an action seeking a permanent injunction barring Wohlgemuth from performing any work for Latex relating to the space suit manufacture or design. The trial court denied B.F. Goodrich’s request, but the court of appeals reversed, relying at least in part on Wohlgemuth’s threatened misappropriation of trade secrets.

After B.F. Goodrich and until 1995, the inevitable disclosure doctrine appeared in only a handful of cases having similar fact patterns. This reoccurring fact pattern contained a plaintiff corporation who was an industry leader, a competitor that lacked technology and a technical employee without a noncompete agreement who was hired away by the competitor.

In 1995 the doctrine was expanded by the well-publicized case of Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995). William Redmond was a Senior Vice President at Pepsico, which had developed a beverage called All-Sport to compete with Gatorade (owned by Quaker Oats). Redmond had detailed knowledge of Pepsico’s marketing plans for All-Sport. Quaker Oats offered, and Redmond accepted, employment as Vice President of Sales for Gatorade and Snapple products. Pepsico sued seeking to enjoin Redmond from working for Quaker Oats.

The court in Pepsico entered a six-month injunction to prevent Redmond from working in any capacity relating to the pricing, marketing or distribution of competing products. The court specifically stated that the UTSA permits a plaintiff to "prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on plaintiff’s trade secrets." 54 F.3d at 1269. The court accepted the argument that Redmond "cannot help but" use trade secret information of Pepsico in his new job.

Pepsico was a clear expansion of existing case law. For the first time the inevitable disclosure doctrine was expanded beyond technical scientific information, sophisticated engineering data and secret chemical formulas to include more general, everyday business information common to most companies such as pricing, marketing plans, sales strategies and customer information.

Since Pepsico there have been a number of reported decisions discussing the inevitable disclosure doctrine. In La Calhene, Inc. v. Spolyar, 938 F. Supp. 523 (W.D. Wis. 1996), Judge Crabb relied upon Pepsico in issuing an injunction prohibiting a former employee from disclosing trade secret information. The La Calhene decision is important for two reasons. First, the court found that the plaintiff’s marketing plans were a trade secret under the UTSA. Second, and more importantly, the court held that under the UTSA a plaintiff need not show actual misappropriation of a trade secret, only that "the threat of misappropriation is very real." The court found that the defendant, Spolyar, had such intimate knowledge of the plaintiff’s business that he could not engage in a competing business without inevitably relying on his knowledge of the plaintiff’s trade secrets. This met the "very real" threat standard.

In a criticized case that some commentators have suggested goes too far, the Northern District of Iowa, in Uncle B’s Baker, Inc. v. O’Rourke, 920 F. Supp. 1405 (N.D. Iowa 1996), gave a bagel making process trade secret status and enjoined a former manager from working as a plant manager for a competitor. While the plaintiff did have a unique bagel making process, the record in Uncle B’s showed that O’Rourke’s new employer requested that he not divulge trade secrets; and in fact O’Rourke disclosed no trade secrets, even though the opportunity was abundant, since their was a difference in the companies’ recipes and processes. Nevertheless, the court found a threat of irreparable harm to the plaintiff.

The main criticism of Uncle B’s is that the case fails to distinguish the general skills and knowledge of an employee from true confidential and proprietary information. While Uncle B’s may be an aberration, it does show how far some courts will go in utilizing the inevitable disclosure doctrine to stop perceived unfair competition.

With the advent of cases such as Uncle B’s, it is certainly apparent that when a key employee with knowledge of a "trade secret" goes to a competitor, the risk of litigation is present. What steps can be taken to minimize this risk?

From the point of view of the hiring employer, documentation should be created indicating that the new employee is being hired for his or her general skills and knowledge, and there exists no interest in confidential information of the prior employer. The new employer should also request from the new hire a copy of all pertinent restrictive covenant agreements, and request that the new hire return all documents and information to the former employer prior to the start date.

The departing employee should make sure all company property is returned to the employer. Additionally, if questioned, the departing employee should document that he or she has no company property, does not intend to use the old employer’s trade secrets and merely intends to use his or her general skills and knowledge in the new employment. If threats of claims remain, and since the stakes in such litigation can be very high, the departing employee may want to seek a declaratory judgment.

Besides utilizing enforceable restrictive covenant agreements, employers with "trade secret" information to protect should take steps to safeguard the confidentiality of such information, and document such efforts. Once a key employee leaves, the employer should put the departing employee on notice of the parameters of the UTSA and request his or her adherence to the law. In certain circumstances, it may be appropriate to put prospective employers on notice of concerns under the UTSA. Such letters need to be drafted with great care to avoid tortious interference claims. If the employer determines that injunctive relief through the court system is the desired route, the employer must move fast with a prompt investigation followed by a court action. Each passing day waters down the employer’s argument that it has a protectable interest at stake.

The right of the American worker to freely move from job to job in an open market is not an absolute right. This right can be limited by contract and by the provision of the UTSA. While the inevitable disclosure doctrine itself is not new, Pepsico and its progeny have recently expanded the doctrine and make it a prevalent weapon for employers seeking to protect confidential business information.

Posted 5/21/1999