No Inevitable Disclosure of Trade Secrets in CaliforniaFourth Quarter 2009 – Newsletters California UPDATE Employment Law
All states (with the exception of New Jersey, New York, Texas and Massachusetts) have adopted some variation of the Uniform and Trade Secrets Act (UTSA) created in 1979 by the National Conference of Commissioners on Uniform State Laws. Despite almost nationwide adoption of the UTSA, state laws vary in how they define a “trade secret,” how a trade secret violation is proven and the type of remedies available to a trade secret holder.
Increasingly utilized in nondisclosure agreements is an “inevitable disclosure” provision. The theory of “inevitable disclosure” allows an employer to seek an injunction to prohibit former employees from working for a competitor because the former employees will necessarily rely upon knowledge of the former employer's trade secrets in performing their new job duties. The doctrine of inevitable disclosure is typically used as an alternative to proving actual or threatened trade secret misappropriation. While this doctrine is relatively new and untested, it has been rejected in California. Under California law, an employer must produce evidence of an actual or threatened misappropriation in order to obtain an injunction against a former employee. The employee's mere knowledge of a trade secret and his or her change of employment will not suffice.
In Les Concierges, Inc. v. Robeson, 2009WL 1138561 (N.D. Cal.Apr. 26, 2009), a California-based concierge service provider sought to enjoin a former employee from submitting proposals and soliciting business from Les Concierges' customers and prospective customers. Les Concierges argued that the former employee immediately began working for a direct competitor and appeared to be performing for his new employer the same or similar job duties he performed while employed by Les Concierges. The court determined that California does not recognize the inevitable disclosure doctrine and refused to grant an injunction merely because of the “employee's knowledge of trade secrets and subsequent change of employers.”
At least two other California federal district courts and one California Court of Appeals have also rejected the inevitable disclosure doctrine. Those courts have found that the doctrine is directly contrary to California's public policy prohibiting an employer from entering into a noncompetition agreement with its employees. These courts found that the inevitable disclosure doctrine would create an “after-the-fact covenant not to compete” restricting employee mobility. See e.g., Schlage Lock Co. v. Whyte, 101 Cal.App.4th 1443 (2002); Globespan Inc. v. O'Neill, 151 F.Supp.2d 1229 (C.D. Cal. 2001); Bayer Corp. v. Roche Molecular Sys. Inc., 72 F.Supp.2d 1111 (N.D. Cal. 1999).
In comparison, other states have utilized the inevitable disclosure doctrine to prevent employees from working for competitors. For example, a Texas court, applying Pennsylvania law, granted an injunction without any evidence that the former employee had actually used or disclosed the former employer's trade secrets; the court reasoned that an injunction was warranted because it is “impossible for [the former employee] not to disclose [the] trade secrets.” Indus. Insulation Group LLC v. Sproule, No. 08-3482, 2009WL 211077 (S.D.Tex. Jan. 28, 2009). Similarly, a New York federal district court found that a former employee may be enjoined from joining a competitor even before a trade secret has been disclosed because irreparable harm may be found based upon a finding of inevitable disclosure when the two employers are in direct competition and the employee possesses “highly confidential or technical knowledge concerning marketing strategies or the like.” IBM v. Papermaster, 2008 WL 4974508 (S.D.N.Y. Nov. 21, 2008).
While California has rejected the inevitable disclosure doctrine, employers can still take measures to protect their valuable trade secrets, such as seeking injunctions or other legal remedies based on an actual or threatened trade secret violation. Given the interstate variations in trade secret law, employers should also have counsel review and routinely update confidentiality and nondisclosure agreements to ensure compliance with California or other applicable state laws.