Keeping the Cat in the Bag: Inevitable Disclosure Doctrine and its Inevitable Evolution
Choosing to keep intellectual property as trade secrets can place employers in a tough position: employers must expose intellectual property to certain employees so they can do their jobs, but in a global marketplace where employees increasingly work for multiple employers during their business lives, this exposure places trade secrets at risk of misappropriation. Because of the nature of trade secrets, employers cannot always count on contractual obligations or legal remedies to deter misappropriation, and are not always adequately protected by injunctions or compensated by damage awards. The doctrine of inevitable disclosure helps ensure an employer’s intellectual property isn’t exposed if an employee possessing sensitive trade secrets wishes to leave to work for a competitor.
Why Trade Secrets?
The primary legal decision an intellectual property holder must make is whether to maintain that property as a trade secret or disclose the property to the public in return for patent protection. Trade secrets and patents are generally considered mutually exclusive, and choosing one over the other will have lasting consequences regarding how the intellectual property may be used and protected in the future.[1]
Patents are exclusionary rights: they give the owner or assignee the limited ability to prevent others from utilizing the subject matter covered by the patent, but they do not provide any independent “positive” rights.[2] In the United States, patent rights are created by federal statute.[3] Trade secrets predate any specific legal regime, and are simply secrets kept by one entity to give it some advantage over other entities. Over time, laws were developed on a state-by-state basis to provide basic rights to trade secret owners, and currently all fifty states provide some form of protection for trade secrets.[4]
American patent statutes, and the Patent and Trademark Office, generally encourage intellectual property holders to seek patents at the expense of trade secrets.[5] However, there are several reasons why an intellectual property owner would choose trade secrecy over patent protection. For one, the availability of a patent for a given piece of intellectual property is strictly confined by statutory limitations on patentable subject matter and the requirements of utility, novelty, and nonobviousness.[6] There are also economic reasons; for example, the intellectual property owner may believe the value of the property can be protected longer through trade secrecy than by the period granted by a patent, or the property, though valuable, may not have enough value to warrant the time and cost associated with patent prosecution.[7] Furthermore, trade secrecy is often used to protect property for which a patent has been filed but has not yet been issued.
One major difference between patent protection and trade secrecy is the outcome of infringement or misappropriation for the intellectual property holder. Employers possessing patent protected intellectual property have little need to fear exposing that property to their employees, and can limit monitoring of departed employees to the degree required to detect patent infringement. If infringement is detected, the intellectual property owner can sue to prevent future infringement, and can collect damages from the infringer, where appropriate. In contrast, employers possessing trade secrets must take care above and beyond mere diligence to protect those secrets from misappropriation: not only can misappropriation be harder to detect, but the very nature of trade secrets means that in some instances, once the metaphoric genie is out of the bottle, the competitive advantage the trade secret provided is gone.[8] While contractual obligations and the threat of litigation for misappropriation are largely effective, they can still leave certain employers in an untenable position regarding a guarantee of protection for their intellectual property.
Inevitable Disclosure Doctrine and Its Uncertain Application
Enter the doctrine of inevitable disclosure. The inevitable disclosure doctrine holds that, in limited circumstances, an injunction is available to prevent an employee who possesses trade secrets from joining a competitor.[9] Specifically, the doctrine acknowledges that there are certain employees who are privy to secrets of such a nature that it is inevitable that if they were allowed to take certain jobs, they would disclose their previous employers trade secrets. In such cases, unless the competitor can, and does, put sufficient safeguards in place, a court can enjoin the employee from taking the position in the first place.[10]
This doctrine is generally credited to the case of PepsiCo v. Redmond.[11] In November 1994, Redmond, the General Manager of PepsiCo’s Northern California Business Unit, sought to leave PepsiCo and take a job as Vice-President of Field Operations with Gatorade. PepsiCo sued to prevent Redmond from working for Gatorade, arguing that if he took the new position, it would be impossible for him to perform his job without divulging secrets he possessed as a result of his prior position with PepsiCo. The court agreed, holding that Redmond’s intimate knowledge about PepsiCo’s long terms plans would allow Gatorade, “unfairly armed with [this] knowledge… to anticipate [PepsiCo’s] distribution, packaging, pricing, and marketing moves,” and ordered Redmond to delay his start date at Gatorade.[12] Specifically, the court ruled that Redmond could not begin employment until May 1995, at which point the information Redmond possessed would cease having any utility for Gatorade (and thus no longer have the ability to harm PepsiCo).
When the PepsiCo court first announced this doctrine, the worlds of intellectual property and employment law were shocked by what was perceived as a drastic change to existing laws. It quickly became clear, however, that the doctrine would not have nearly as much of an impact as initially expected. For starters, the injunctions provided by the doctrine are very circumspect: they do not generally prevent an employee from leaving his or her current job, but simply prevent specific employees from taking specific positions during specific (and short) timeframes. For example, the ruling in the PepsiCo case required only that Redmond refrain from beginning employment at Gatorade for six months, a time period that had already elapsed when the 7th Circuit affirmed the state court decision.
Second, and more important, many courts have declined to follow the doctrine at all. Some courts base this decision on a general desire not to limit employee mobility, while other courts emphasize that they do not wish to provide employers with a legal solution for the employer’s failure to negotiate appropriate contractual limitations (specifically non-compete agreements) in the first place.[13] As a result, the doctrine has only been fully implemented in a handful of states, and is either circumspect or inconsistently applied in many others.[14] In some states the availability of the doctrine is still uncertain; just last year, a court in Georgia declined to adopt the doctrine but hinted in its decision that it might be willing to do so in the future if certain conditions are met.[15]
Despite its limited use and strict circumspection, inevitable disclosure is an existing legal doctrine, and employers and employees alike should be aware of its potential for injecting tension into the termination of an employment relationship. While it is always better for employers to have contractual agreements regarding trade secrecy, especially non-compete agreements if an employer is particularly worried about misappropriation, the inevitable disclosure doctrine presents an opportunity for employers to get a second bite at the apple. For employees, the doctrine is a danger that should be taken seriously when contemplating a move to a competitor. Employees worried about the application of the doctrine should work with their future employer to limit the potential for disclosures that might trigger its application.
[1] See Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets As IP Rights, 61 Stan. L. Rev. 311, 338-39 (2008). See also Michael Risch, Trade Secret Law and Information Development Incentives, in The Law and Theory of Trade Secrets: A Handbook of Contemporary Research, 152, 167-168 (Rochelle C. Dreyfuss & Katherine J. Strandburg eds, 2009) (“Patent law and trade secret law cannot be coextensive because trade secrets must be secret and patents must be publicly disclosed.”).
[2] 35 U.S.C.A. § 271(a).
[3] 35 U.S.C.A. §100.
[4] See Thomas J. Rechen & Peter L. Costas, Trade Secrets Law – Principles, Pitfalls and Pronouncements, 71 Conn. B.J. 360, 362 (1997). 46 states have adopted the broad principles of the the Uniform Trade Secrets Act since it was introduced in 1979, and legislation to formally adopt the UTSA has been introduced in a 47th state. See The National Conference of Commissioners on Uniform State Laws, Legislative Fact Sheet Trade Secrets Act, 2013.
[5] This promotes the American ideal of full disclosure of intellectual property in return for limited protection. See 1 Patent Law, Legal and Economic Principles § 2:13 (2d ed.).
[6] 35 U.S.C.A. §§ 100-103.
[7] See Thomas J. Rechen & Peter L. Costas, Trade Secrets Law – Principles, Pitfalls and Pronouncements, 71 Conn. B.J. 360, 361 (1997).
[8] See Edmond Gabbay, All the King’s Horses-Irreparable Harm in Trade Secret Litigation, 52 Fordham L. Rev. 804 (1984).
[9] See PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).
[10] See Barry L. Cohen, The Current Status of the Inevitable Disclosure Doctrine A Unique Trade Secret Litigation Tool, 3 Landslide 40, 41 (2010).
[11] See PepsiCo, supra note 9.
[12] Id. at 1270 (7th Cir. 1995).
[13] See Jules S. Brenner, The Doctrine of Inevitable Disclosure and Its Inevitable Effect on Companies and People, 7 L. & Bus. Rev. Am. 647, 661 (2001).
[14] For a thorough examination of how the doctrine applies on a state-by-state basis, see Ryan M. Wiesner, A State-By-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211 (2012).
[15] See Holton v. Physician Oncology Services, LP, 292 Ga. 864 (2013).
Adam Waks is a J.D. candidate, ’14, at the NYU School of Law.
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