When There Is No Way To Stop Your Trade Secrets From . . . Literally . . . Walking Out The Door

By Steve McDaniel, JD, PhD, Technology Litigators | October 10, 2012

One of your highest level managers, one with complete access to all your inside information and trade secrets, quits and immediately heads over to your direct competitor. He does not have a covenant-not-to-compete, and maybe not even a binding non-disclosure agreement (shame, shame, shame) that you can try and wag over his head. Worse yet, some of the competitive nuggets rattling around in this guy’s head include strategic planning specifically aimed at wresting larger market share away from your competitor/his new employer. Some of this strategic planning includes a launch of new formulations you have innovated that will “cure” the problems that your sales force routinely hears being leveled by customers at the other paint company. While he hasn’t spilled the beans yet as far as you know, and you’ve admonished him not to do so, a duty he swore to uphold, you still have very grave concerns that Mr. I’m-Outta-Here cannot but help but disclose your trade secrets.

Talk about having a bad day in the C-suite—all those golf games, talking through all the strategies you both planned to try, and you never had a clue he was job shopping! It doesn’t get much worse than this if you’re a paint and coatings company and you rely heavily on the trade secret assets surrounding your formulations and marketing program. But, as we enjoy self-inflicted flogging, let’s focus on this worst-case-scenario because, in its severity, it highlights the critical areas of concern when you conduct professional strength trade secret audits.

As discussed in prior articles, it is arguable that you should have tried to get a legally enforceable covenant-not-to-compete out of this employee the day he signed on. Enforceable covenants are approached state-by-state, and must be tailored to specific facts surrounding the employment. You probably are not going to be successful in preventing your chief polymer chemist from becoming a field salesman for your competitor, no matter how much better a salesman he might be due to his in-depth knowledge of the resin systems. And, it goes without saying that this covenant should be paired with a non-disclosure agreement whereby each key employee agrees not to disclose trade secret information he acquired during his employment with you. The departing employee and his new employer should be made aware that you are watching, and if your trade secret information is used, you will hold them liable. There are semi-courteous ways to do this, such as during the requisite exit interview and a follow up letter copying the new employer. All of this should have been routinely re-enforced by periodic training of key employees, including the guy who is just about to take a hike, about how to prevent and detect trade secret misappropriation on the philosophy that he can’t say we never told him so.

Still what are you going to do? Well, there is a ray of hope, albeit a very slim one.  And it is one that you may find peeking out of the paper fortress you have hopefully created to protect your trade secret assets during your routine auditing processes.

But, first, some inclement weather news. If you reside in the “sunshine” states of California or Florida, that little ray of hope has been virtually rained out. In Massachusetts, North Carolina, and New York, you have a slightly better chance of sunshine in certain circumstances. Texas and a handful of other states have yet to give us a clear forecast, so take an umbrella. One thing is for certain. Sorting these jurisdictional issues out BEFORE you hire key personnel is a smart move.

Because it will likely immediately require a temporary injunction, followed by more permanent injunctions, this “slim ray of hope” is based in a very large part on how well you have established your trade secret protection program. You will use this iron-clad program to show the court that the departing employee’s new gig will inevitably lead him to rely on your well-protected and valuable trade secrets—ergo it being called the “Inevitable Disclosure Doctrine” of trade secret law. The court is going to have to weigh your legitimate rights to protect your trade secrets against the employee’s rights to get a job that uses the skills and knowledge he has legally acquired in working for you. Dicey. And, the Court will gladly toss the case out if there is any significant chink in your trade secret protection armor.

But, let’s assume that you have conducted a professional-strength trade secret audit, that you are armed for bear, and that you are not entirely foreclosed from seeking injunctive relief, i.e., your case arises outside California and/or Florida. Can you prevent this guy from gutting your trade secret assets? Maybe. Here are some of the factors that are typically taken into account. As you read down through them, think back on your own trade secret protection program. Do you have information ready at hand to quickly and convincingly provide such evidence to a court?

• What is the degree of competition between you and his new employer?
• How much similarity is there between the two jobs?
• Was the departing employee forthcoming or cagey about the new position and employer?
• Are you able to point with specificity to the trade secrets of concern?
• Has there already been use of the trade secrets by your company, or are they yet to be used to your commercial advantage?
• Were there any contracts between you and the departing employee that gave rise to obligations of confidence or obligations not to compete?
• Does the new employer have a clear-cut policy against the use of others trade secrets?
• Is it going to be possible to “sanitize” the new position by preventing improper use of your trade secrets?

There are a couple of other issues to consider here, which are directly drawn from the efficiency of your trade secret program.

One of these is the rather murky distinction between “inevitable disclosure” and “probable disclosure.” While the distinction probably makes you roll your eyes at the attorney word-smithing that goes on, there is a very real difference in the proof required. Probable disclosure need only be supported with enough evidence and weight of evidence to establish a presumption, while inevitable disclosure is only supportable by a finding that the defendant has the confidential information and that he will not be able to avoid using it to unfairly compete against you. Assume the worst in your preparations for suing a departing key employee and attempt to have on hand evidence sufficient to meet the higher standard of the two.

Another issue that commonly arises is the existence of a non-compete agreement or non-compete clause within an employment agreement. The biggest distinction between a case for breach of a non-compete agreement and one that is based upon inevitable disclosure is in the enforcement that is available to you. If you are successful in convincing a court that the defendant will inevitably disclose your trade secrets, you are not required to prove actual harm in order to get your injunction. On the other hand, if you got into court under a breach of contract claim for non-competition, in many states, you don’t get an injunction unless you can prove actual harm, and by that most courts mean real, measurable harm usually measured in real, American dollars in lost sales.

Sum it up? The Doctrine of Inevitable Disclosure might best be explained by the Rolling Stones song, “You Can’t Always Get What You Want.”  Because, “No, you can’t always get what you want.” But, you might be able to temporarily prevent someone from using your trade secrets long enough to establish your market lead, though you would prefer that prohibition to last forever. “But, if you try sometime,” assuming you have done your homework and readied the Bastille for war, “you might just find, you get what you need.” Thanks, Mick!  You still rock!