Further thoughts on the Defend Trade Secrets Act and inevitable disclosure
Guest post by Maxwell Goss. Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation. Dr. Goss blogs at Law and the Creative Economy.
Last week I wrote about the doctrine of “inevitable disclosure” as it relates to the Defend Trade Secrets Act of 2016 (DTSA), the statute that created a general, private cause of action for trade secret misappropriation under federal law. Because inevitable disclosure is of continuing importance and controversy, I wanted to unpack the issues further here. As discussed below, the DTSA leaves room for trade secret plaintiffs to assert inevitable disclosure.
Trade secret plaintiffs frequently face problems of proof. Gathering evidence that a suspected individual or company has actually misappropriated trade secrets, or legitimately threatens to misappropriate trade secrets, can be a substantial hurdle to getting a lawsuit off the ground.
Take a typical scenario where an employee of company A goes to work for company B, and A alleges that the employee is using its trade secrets on behalf of B. In some cases, company A will have evidence that the employee swiped its secrets before leaving, perhaps by emailing himself a customer list or downloading technical specifications onto a flash drive. Company A might even have evidence that company B is now using the secrets, perhaps because it is soliciting A’s customers or has launched a product based on A’s specifications. In many cases, though, the activities of the employee and the new employer are a black box. The employee was exposed to trade secrets at Company A, and is now working for Company B, but Company A has not uncovered evidence of specific disclosures to Company B. Company A may have reason to believe the employee must be disclosing secrets to B, or threatens to do so, but has no way to confirm this directly prior to filing suit and obtaining discovery—a catch-22. Is company A without recourse?
Enter the “inevitable disclosure” doctrine. Under this common-law doctrine, a trade secret plaintiff may base a claim for trade secret misappropriation on a showing that disclosure of trade secrets is “inevitable.” In PepsiCo, Inc. v. Redmond, the landmark Seventh Circuit case on inevitable disclosure, a former employee of PepsiCo went to work for a competing beverage company. Notably, there was no allegation that the employee had stolen specific information and given it to the competitor. Instead, PepsiCo argued that the employee could not help but use the company’s trade secrets to help its competitor “achieve a substantial advantage” and “respond strategically” through his knowledge of PepsiCo’s pricing, distribution, and marketing information. Because his reliance on such information was inevitable, the court affirmed an injunction barring the former employee from assuming his position at the competitor company.
The doctrine of inevitable disclosure is controversial, and is only recognized in some jurisdictions. One objection is that it essentially allows courts to impose a non-compete on those who never signed a non-compete agreement. Another objection is that it facilitates abusive lawsuits against former employees based on flimsy evidence. Yet another objection is that it can enable a company to obtain an injunction that damages a competitor without any evidence of wrongful conduct by the competitor itself. Unsurprisingly, then, inevitable disclosure was frequently discussed in the lead-up to the passage of the Defend Trade Secrets Act. As enacted, the DTSA did ultimately limit the application of the doctrine. Though the language of the DTSA largely tracks that of the Uniform Trade Secrets Act (UTSA), which has been enacted in some form in nearly all states, the DTSA departs from the UTSA in that it expressly disallows injunctions that “prevent a person from entering into an employment relationship” and prohibits any conditions placed on a person’s employment in an injunction based “merely on the information the person knows.”
In light of this language, many observers have concluded that inevitable disclosure is a dead letter under the DTSA. For example, one article states that the DTSA “explicitly rejects the inevitable disclosure doctrine under federal law.” To take another example, I recently attended a (very good) presentation in which it was stated that inevitable disclosure is “foreclosed” by the DTSA. And I would be remiss not to mention that I myself declared in a CLE presentation last year that “[t]he DTSA seemingly rejects inevitable disclosure by dictating that conditions on employment in an injunction may not be based merely on information the person knows.”
But the doctrine of inevitable disclosure lives on under the DTSA, albeit in a diminished form. As explained in my previous post, the court in Molon Motor and Coil Corp. v. Nidec Motor Corp. recently held that a plaintiff had successfully stated a claim for trade secret misappropriation under the DTSA where it had pled allegations supporting an inference that a former employee who went to work for a direct competitor would inevitably have disclosed the plaintiff’s trade secrets to the competitor during the period in which the DTSA has been in effect. The court added: “Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date [of the DTSA] is plausible.” Notably, the court then ordered the parties to discuss a “discovery plan on the trade secret claims.” In short, the plaintiff’s allegations of inevitable disclosure entitled it to move forward on both its federal and state trade secret claims.
It would be easy to dismiss Molon as dealing only with a narrow issue of limited importance. The Court’s principal concern, after all, was how the DTSA applies where the alleged theft at issue preceded its passage—an issue relevant in only a few and declining number of cases. But the ruling should not be dismissed so quickly. In reaching its holding, an essential part of the Court’s analysis was that was that inevitable disclosure can in fact support a DTSA claim. This conclusion has at least two potential implications applicable beyond the specific procedural posture of the case.
First, the DTSA could be used to secure jurisdiction in federal court and then state law could be used to secure an injunction based on inevitable disclosure. Consider companies A and B again. Company A wants to sue an employee of company B in federal court—for instance, because of perceived advantages in bringing the case before a federal judge or because of the streamlined process for obtaining discovery across state lines under the federal rules. But suppose the parties are citizens of the same state. Prior to passage of the DTSA, unless there had been some hook other than diversity jurisdiction for bringing the case in federal court, company A would have been forced to bring the case in state court. Under the DTSA, diversity of citizenship does not matter. Company A can bring the case in federal court regardless of the parties’ citizenship.
If company A goes this route, is it stuck with the DTSA’s strict limitations on injunctive relief, including the prohibition of injunction based “merely on the information the person knows”? Very arguably not. By its own terms, the DTSA does not preempt state trade secret law, and state law claims will nearly always be available in cases where the DTSA applies. Assuming the applicable state law permits injunctive relief based on inevitable disclosure, company A could file a concurrent claim for trade secret misappropriation under state law and obtain an injunction based on an inevitable disclosure theory. In such a case, the DTSA would be used to obtain federal court jurisdiction while state law would be used to obtain the desired relief.
Second, the DTSA stops well short of barring all injunctive relief based on inevitable disclosure. The limitations on injunctions under the statute apparently extend only to employment relationships: An injunction may not “prevent a person from entering into an employment relationship,” and any conditions on employment must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” This suggests that an injunction that does not impact employment may still be based on inevitable disclosure.
For example, if company A can offer evidence that an employee who departed for company B will inevitably disclose A’s trade secrets to B, a court conceivably might grant an injunction prohibiting B from using or disclosing A’s trade secrets. For companies that believe their trade secrets are being misused but cannot get into the “black box” of the competitor’s activities prior to discovery, this could be a major advantage. More controversially, a court could grant an injunction directly against the employee based on inevitable disclosure, provided the injunction does not prevent the employee from working for company B or impose conditions on his or her employment.
If the Molon opinion is any indication, the DTSA giveth but the DTSA does not taketh away. That is, a trade secret owner can use the DTSA to bring its case in federal court, and can avail itself of the distinctive benefits and relief available under the DTSA, without losing its ability to assert inevitable disclosure in jurisdictions recognizing the doctrine under state law. Of course, it is unknown how other courts would address similar issues. (As far as I can determine, while a few opinions have made passing reference to inevitable disclosure in DTSA cases, Molon is the first to directly address the applicability of the doctrine under the DTSA.) At a minimum, though, the opinion indicates that rumors of the demise of inevitable disclosure are greatly exaggerated.