November 11th, 2014

What is the Inevitable Disclosure Doctrine?

Under the inevitable disclosure doctrine, courts may enjoin a former employee from working in a specific job if doing so would inevitably lead to the disclosure of his former employer’s trade secrets. Courts following the inevitable disclosure doctrine most often apply it where a former employee with knowledge of his former employer’s trade secrets moves to a competitor and takes a job with duties so similar to his former position that the court finds that he cannot perform his new duties without using his former employer’s trade secrets.  Because such disclosure is “inevitable,” the former employer need not sit and wait until there is actual or threatened use of the trade secrets before the former employer takes legal action.

PepsiCo

PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) is the seminal case that discusses inevitable disclosure.  In PepsiCo, PepsiCo sought to enjoin a former high-level managerial employee, Redmond, from accepting the position of “Vice President – Field Operations for Gatorade” with PepsiCo’s competitor, Quaker Oats. PepsiCo and Quaker Oats were in fierce competition, especially in the “sports drink” and “new age” drinks markets.  At that time, Quaker Oats held the market niche with its sports drink Gatorade, and PepsiCo had just introduced its Gatorade rival, “All Sport.”  Quaker Oats also had the lead in the new age drink market. Redmond had signed a confidentiality agreement with PepsiCo but had not entered into any non-competition agreement.

At the preliminary injunction hearing, PepsiCo presented evidence that Redmond, who worked for PepsiCo for ten years, had access to and intimate knowledge of PepsiCo’s financial goals and its strategic planning for the upcoming year. Thus, although Redmond had signed a confidentiality agreement stating he would not disclose confidential information, PepsiCo argued that Redmond inevitably would disclose the trade secrets and confidential information to Quaker in his new position.  The Seventh Circuit agreed with the PepsiCo’s position that:

“Redmond cannot help but rely on [PepsiCo’s] trade secrets as he helps plot Gatorade and Snapple’s new course, and that these secrets will enable Quaker to achieve a substantial advantage by knowing exactly how [PepsiCo] will price, distribute, and market its sport drinks and new agedrinks and being able to respond strategically.”

Accordingly, the Seventh Circuit affirmed the district court order preliminarily enjoining Redmond from taking his position at Quaker Oats and permanently preventing him from disclosing PepsiCo’s trade secrets.

Application of the Doctrine

The inevitable disclosure doctrine has not been universally adopted.  Whether or not the employer can successfully seek an injunction under the inevitable disclosure doctrine depends on which state has jurisdiction over the dispute.  State acceptance and interpretation of the doctrine has been varied and inconsistent, with some states even flatly rejecting the doctrine.  We examine the current state of the inevitable disclosure doctrine in California, Connecticut, New Jersey and New York below.

New York

 New York has been viewing the inevitable disclosure doctrine with increasing disfavor.

Last year, in Janus et Ciet v. Andrew Kahnke,the Southern District of New York rejected the use of the “inevitable disclosure” doctrine as a basis for an independent cause of action. No. 12 Civ. 7201, 2013 WL 5405543 (S.D.N.Y. Aug. 29, 2013).  The case was brought by Janus, a provider of high-end residential and commercial furnishings, against its former employee, Andrew Kahnke, a sales manager in one of its showrooms who was subject to a confidentiality agreement but no restrictive covenants.  Janus commenced an action for inevitable disclosure of trade secrets and sought a permanent injunction barring Kahnke from disclosing any of Janus’ trade secrets or confidential information and from working for his new employer in any area where they are direct competitors, but notably did not allege breach of the confidentiality agreement or any actual misappropriation.

After exploring New York precedent, the Court acknowledged the possible validity of the inevitable disclosure doctrine, but rejected the idea that the doctrine could constitute an independent cause of action without allegations of wrongdoing. In dismissing Janus’s complaint, the Court stated that it refused “to countenance the imposition of an unlimited, unbargained-for restrictive covenant on Mr. Kahnke based on threadbare allegations,” because such a result was against “‘well entrenched state public policy considerations disfavor[ing] such agreements.’”

California 

California has a strong public policy favoring employee mobility and generally rejects any type of restrictive covenant.  Consistent with its public policy, the California Court of Appeal summarily rejected the inevitable disclosure doctrine in Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (Cal. Ct. App. 4th Dist. 2002) (holding that it is “contrary to California law and policy, since it creates an after-the-fact covenant not to compete that restricts employees’ mobility.”).

Connecticut

Connecticut has applied the doctrine of inevitable disclosure to non-compete agreements, even where there is no bad faith on the former employee’s part. In Aetna Retirement Services, Inc. v. Hug, the Superior Court of Connecticut granted an injunction against an employee despite that employee’s “unimpeachable integrity.”  No. CV970479974S, 1997 WL 396212 (Conn. Super. Ct. Jun. 18, 1997). The Aetna court found a one year non-competition agreement to be reasonable because the employee had access to and knowledge of confidential information that may not be protected by a non-disclosure agreement.  The employee’s unimpeachable integrity and honesty was irrelevant since his “decisions, contributions, and strategic insights cannot help but be informed by the framework and knowledge he gained in his employment at Aetna.”

New Jersey

National Starch and Chemical Corp. v. Parker Chemical Corp. has been cited as setting forth New Jersey’s position on the inevitable disclosure doctrine.  219 N.J. Super. 158 (N.J. Super. Ct. App. Div. 1987).  In National Starch, the appellate court held that despite the lack of bad faith by a former employee, his former employer was entitled to a preliminary injunction to prevent the disclosure of alleged trade secrets.  The former employee was “intimately associated with the development of many sophisticated, highly technical envelope adhesives,” and his knowledge of his former employer’s products was “admittedly sufficiently detailed and extensive that he [could] duplicate certain formulas from memory.”  Although the former employee had signed a confidentiality agreement and only 5% of his new work would be related to envelope adhesives, the court still upheld the preliminary injunction because there was “sufficient likelihood of ‘inevitable disclosure,” and that the circumstances justified “more than a ‘mere suspicion”’ of threatened irreparable harm.

Since National Starch,at least one New Jersey court has discussed the limits of the inevitable disclosure doctrine.  In SCS Healthcare Marketing, LLC v. Allergan USA, Inc., the Bergen County Chancery Court evaluated an independent cause of action for inevitable disclosure in a motion to dismiss. C-268-12 (N.J. Super. Ct. Ch. Div. Dec. 7, 2012). The court dismissed the claim for inevitable disclosure, finding that New Jersey does not recognize inevitable disclosure as an independent cause of action. The court went on to clarify that where the doctrine of inevitable disclosure has been discussed (such as in National Starch), it has only been considered a factor for injunctive relief.

On January 9, 2012, New Jersey Governor Chris Christie signed the New Jersey Trade Secrets Act (NJTSA) into law.  The statute expressly states that “actual or threatened misappropriation may be enjoined,” perhaps indicating that New Jersey may prohibit or limit claims based merely on “inevitable disclosure” of trade secrets.  Since the enactment of the NJTSA, it remains to be seen whether the adoption of the NJTSA will alter New Jersey’s stance on the doctrine.[1]


[1] We note that the SCS Healthcare decision rejecting inevitable disclosure as an independent cause of action did not analyze the issue under the lens of the newly adopted NJTSA.

Posted in: Restrictive Covenants 101