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Nicholas
P. DiNatale, CPA - News and Featured Articles A Non-Compete Clause
of a Different Color The job-hopping employee is a California fixture, especially in Silicon Valley. And we all know that California -- ever interested in preserving job mobility -- doesn't allow non-compete agreements to bind ex-employees, right? Guess again. Judges are showing an increasing willingness to issue injunctions stopping a new hire in her tracks, even where there is no non-compete contract at all. Welcome to the age of "inevitable disclosure." This judicially crafted doctrine stands for the idea that an employee may be prevented from taking a new job, even when he is innocent of any trade secret misappropriation and promises to respect the former employer's rights. A real threat of harm On its face the doctrine seems to conflict with some fundamental concepts involved in trade secret injunctions, which traditionally have not been granted in cases where the plaintiff simply fears an unlawful act, especially an inadvertent one. And even where there already has been an act of misappropriation, the courts ordinarily will not assume that there will be more without some showing of a real threat of continuing harm. But the threat of continuing harm is what forms the basis of inevitable-disclosure theory. In its abstract expression, the theory applies to an employee who is so intensely involved in a narrow field of endeavor (the "pinhead") that it is impossible to imagine that she can work in the same position for another company without making use of confidential information, even with the best of intentions. In cases where it has been applied, judges -- while more or less sympathetic to the employee's predicament -- have stressed that some decisions can be taken by the new employer in which the employee's restricted information would have a subtle but real influence. For example, knowing that the former employer intended an imminent product introduction might cause the employee in the new job to point the company in another direction where it will face less competition. Nevertheless, the net result of applying this doctrine is to say to a person: Your skills may be useful in another place, but you can't take them there; you must find employment that is non-competitive. How can this
happen here, where public policy favors an employee's right to move to
a new job, and where Business & Professions Code §16600 prohibits
contracts which restrain competition? This doctrine of inevitable disclosure
(more precisely, inevitable misappropriation) appears to be slowly creeping
into California employment litigation. The inevitable-disclosure doctrine is not really new. Case law in other states has recognized that at times an employee knows so much about a particularly narrow area of technology or business that to allow unrestrained movement to a competitor would be to sanction misappropriation of trade secrets. And there has been mounting evidence of a willingness on the part of companies to pursue their former executives to make them behave: Witness the high-visibility actions filed within the past year by General Motors, Campbell Soup, and Dow Chemical. Redmond creates new interest Those cases -- alongside 1995 Seventh Circuit U.S. Court of Appeals decision in PepsiCo v. Redmond -- have sparked new interest in the theory. William Redmond had worked for 10 years at PepsiCo, marketing the company's sports drinks and rising to become general manager of the business unit covering California. Along the way, he had become privy to the company's strategic plan, as well as PepsiCo's "attack plans" for specific markets. An ex-PepsiCo employee recruited Redmond to join PepsiCo's major competitor, Quaker Oats Co., which markets Gatorade, the sports-drink market leader. Redmond kept his job negotiations secret, accepted a written offer and then lied to PepsiCo about the status of his job offer with Quaker Oats. When PepsiCo sued to prevent Redmond from taking the job under the Illinois Trade Secrets Act, Redmond and Quaker Oats argued that the information he had obtained at PepsiCo would be irrelevant in his new job and that, in any event, he had promised not to use any confidential information. But the trial judge -- taking into consideration Redmond's less-than-candid conduct in leaving PepsiCo -- did not believe him. Redmond was hit with an injunction barring him from taking the job with Quaker Oats for 5 1/2 months. The judge also permanently enjoined Redmond from disclosing or using PepsiCo trade secrets in his new position. Affirming the district court's ruling, the Seventh Circuit noted that "PepsiCo finds itself in the position of a coach one of whose players has left, playbook in hand, to join the opposing team before the big game." While there
has been no ruling on this legal theory from a California appellate court,
at least two Silicon Valley trial judges have embraced the notion in recent
trade secret cases. In separate actions brought by Advanced Micro Devices
and by National Semiconductor, superior court judges have issued injunctions
-- in memorandum decisions that remain sailed from the public -- prohibiting
individual defendants from taking a new job with a competitor, on the
ground that to do so would unacceptably risk the disclosure or misuse
of trade secrets. There are legitimate competing interests involved in such cases. Perhaps most obviously employees (and the public) have a stake in the free mobility of labor and the vigorous competition that it supports. On the other hand, employers can honestly complain about their most valued secrets going out the door in the head of their chief scientist or director of marketing who has just been hired by the dreaded competition to work on precisely the same sort of product. The courts are left to strike a reasonable balance. Inevitable disclosure might be applied -- and a preliminary injunction imposed -- when the departing employee promises to obey legal and contractual limitations, but the court either doesn't believe him, or concludes that he won't be able to help himself when he takes on the new assignment. In reported cases invoking the doctrine we find two prevalent circumstances. Most commonly, the employee (often in cooperation with the new employer) has misled the old employer about his plans, or through other sneaky or dishonest behavior has shown that she can't be trusted. Sometimes the fact that the employee passed up the chance to take a non-competitive job will influence a court's decision. The second major factor is a clear risk of harm based on the similarity between the (extremely valuable) entrusted information and the scope of the new job. Discriminating rulings In contrast, there are a multitude of reasons given by courts for refusing to issue inevitability injunctions. One of the most common is a failure to specify the claimed trade secrets in a way that permits the court to compare the risk and harm thoughtfully. Another is that the employee was not involved in technical issues, but only in marketing or other business management, where information tends to depreciate more quickly. Some judges have pointed out that the new employer has no apparent need for the information. Others have focused on the old employer's failure to ask for a non-compete agreement, or on the devastating consequences of an injunction to the individual. In general, the courts refusing to issue "inevitable-disclosure" injunctions have found a lack of that sort of fraud or other bad behavior which would have suggested that the employee couldn't be trusted. In fact, outright bans on taking a job are rare. It is more likely that a judge may forbid the individual's participation in a particular product line or area of the business. Moreover, perhaps reflecting the fading of memories or depreciation of secrets, most courts provide that their orders will expire after a set period of time, and/or limit their application to very specifically identified trade secrets. Finally, some judges try to cushion the effect of the restraint by imposing a condition that the ex-employee's salary be continued for the period that he is restrained from working. Although the inevitable-disclosure doctrine was developed outside California, in jurisdictions that by and large will enforce reasonable non-competition agreements, there is no guarantee that it will not continue to be employed here in some form. The Business & Professions Code prohibits only private contracts restraining competition, and does not expressly affect court decrees directed at preventing irreparable harm. Those who argue for application of this approach will emphasize that it can be used in a balanced and humane way, and does not threaten a free labor market. In the 1996 North Carolina district court case of Merck v. Lyon, for example, the court was very careful to limit its restraints to working with very particular technical secrets for a relatively brief period of time. The opinion in that case represents a fairly skeptical and narrow implementation of the doctrine. If California follows the thoughtful example of cases like Merck, we can expect that inevitable disclosure will be used only in compelling situations where the risk of injury is very high. There is
also good news in the preventive law department. Avoiding problems with
this doctrine should be relatively easy with some advance planning and
cautious advice to clients who intend to switch jobs. The key is to avoid
behavior that seems misleading; that means that the employee should be
forthcoming about her new job plans and responsibilities. Opening a channel
of communication between the two companies at a high level can also help
to avoid misunderstanding and provide a platform for creative solutions.
Finally, the new employer can proactively work to minimize the risk of
disclosure, by designing the new job to keep the employee out of business
areas and projects that are perilously close to the prior employment.
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