United States: The Interplay Of The Defend Trade Secrets Act, Inevitable Disclosure, And Non-Competes

Last Updated: December 13 2016
Article by Caroline K. Simons

When it comes to protecting one's trade secrets, one of the most important remedies a trade secret owner may want is a court order enjoining a former employee from going to a competitor and making use the trade secret there, to the detriment of the rightful owner. From the perspective of a trade secret owner, it would be near-impossible for an employee who was privy to the company's secret sauce to simply erase it from her mind and avoid using that knowledge at her new workplace, a concept framed as "inevitable disclosure." Before the advent of the federal Defend Trade Secrets Act (DTSA), employers theoretically could prevent their former employees taking a new job with a competitor in one of two ways: (1) a non-compete on the front end, or (2) an injunction under the inevitable disclosure doctrine on the back end, even if no non-compete is in place. Trade secret owners may rightly be wondering whether and how the availability of either option is affected by the passage of the DTSA.

At the outset, it is important to note that neither non-competes nor the inevitable disclosure doctrine has been uniformly adopted by all 50 states. Many states place restrictions on the bounds of a non-compete; in California, non-competes are unenforceable as a matter of law. In other jurisdictions—like Massachusetts, where yet another attempt at non-compete reform died in the most recent legislative session—non-competes lasting as long as 5 years are routinely enforced. At the same time, numerous states have rejected the inevitable disclosure doctrine, some reasoning that this would effectively function as a backdoor non-compete that the parties had never agreed to. But in some states—most prominently Illinois under the Seventh Circuit Court of Appeals decision in PepsiCo, Inc. v. Redmond—the inevitable disclosure doctrine is recognized and applied.

For companies, this lack of uniformity in how states treat the inevitable disclosure doctrine and non-competes can present starkly different options when it comes to protecting their trade secrets. In Massachusetts, for example, even though its courts do not recognize the inevitable disclosure doctrine, a non-compete may do the trick and block an employee from taking that new job. In California, on the other hand, trade secret owners cannot stop an employee from working for a competitor via a non-compete nor via the inevitable disclosure doctrine, and instead, must seek injunctive relief that is tailored to a defendant's actual disclosure and misuse of the trade secret.

This 50-state spectrum ostensibly is preserved by the new federal DTSA, which expressly does not preempt state law. But the DTSA also expressly rejects adopting a federal inevitable disclosure doctrine and draws the line at prohibiting individuals from taking new positions at competitors of their former employers, proscribing injunctions that "prevent a person from entering into an employment relationship" and mandating that "conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows." Injunctions under the federal DTSA also must not "conflict with applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business." Because the inevitable disclosure doctrine remains available under state law in the states where it has been adopted and unavailable in the states where it has not, this adds a dimension to a would-be plaintiff's decision tree as to whether to bring federal or state law claims for trade secret misappropriation.

Given this landscape, practitioners have been keen to see how federal courts handle the interplay of the DTSA, the inevitable disclosure doctrine, and non-competes. With DTSA decisions beginning to trickle out, we are beginning to see this federal jurisprudence take shape. In Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016), in what appears to be the first written decision dealing with the merits of a DTSA claim, the district court issued a preliminary injunction under the DTSA and California trade secret law against a former employee who left to work at a competitor.  Cook, a former employee of Henry Schein, was enjoined from accessing or using Henry Schein's trade secrets—customer practice reports, customer profiles and preferences, sales histories, and the like—that she downloaded and e-mailed to herself before she left the company. The court had earlier issued a TRO against Cook barring her from using the e-mailed and downloaded information as well as from soliciting Henry Schein's customers, based on the confidentiality and non-solicitation agreements that Cook had entered into with her former employer.  But after an evidentiary hearing, the court lifted the part of the injunction that had barred Cook from soliciting customers, reasoning that such injunctive relief (1) would effectively enforce a non-solicitation agreement that contravened California's public policy and statutory provision disfavoring restraints against trade, and (2) was unnecessary to prevent misuse of the alleged trade secrets because Henry Schein failed to show that Cook was using the trade secrets to solicit customers, given that the customers were also existing customers of her new employer.

The DTSA—flexing its muscles for the first time in a jurisdiction that mirrors its own position on non-competes and the inevitable disclosure doctrine—appeared to function as its drafters envisioned. For trade secret owners in jurisdictions that do enforce non-competes and/or adopt the inevitable disclosure doctrine, prophylactic non-competes and the use of state law to bring trade secret misappropriation claims likely will be more appealing after Henry Schein, even given the unique remedies that the DTSA offers (such as civil seizure). We will be watching the DTSA decisions that emerge from such jurisdictions with great interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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