When it comes to protecting your company’s trade secrets, one of the most important remedies you can secure is a court order preventing a former employee from making use of the trade secret for the benefit of a competitor. From your perspective, it’s impossible for an employee who received your company’s crucial business information to simply erase it from her mind and avoid using that knowledge at her new workplace.
Before the federal Defend Trade Secrets Act (“DTSA”) went into effect, employers theoretically could prevent their former employees from taking a new job with a competitor through: 1) an enforceable non-compete agreement, or 2) a court ordered injunction under state trade secret law for misappropriation, in certain jurisdictions, inevitable disclosure. Trade secret owners may rightly be wondering whether and how the availability of either option is affected by enactment of the DTSA.
As a first point, it’s important to understand that neither non-compete agreements nor the inevitable disclosure doctrine are available in all 50 states. Many states place restrictions on non-compete agreements. Non-competes are unenforceable as a matter of law in California. In other jurisdictions a non-compete lasting as long as 5 years is routinely enforced. Numerous states have rejected the inevitable disclosure doctrine, reasoning it would effectively function as a backdoor non-compete to which the parties had never agreed. Other states recognize and apply the inevitable disclosure doctrine unapologetically.
The lack of uniformity in the way states treat the inevitable disclosure doctrine and non-compete agreements creates starkly different options when it comes to protecting a company’s trade secrets. In Massachusetts, even though its courts do not recognize the inevitable disclosure doctrine, a non-compete can block an employee from taking a new job. In California, on the other hand, trade secret owners can’t stop an employee from working for a competitor with a non-compete or the inevitable disclosure doctrine. They must seek injunctive relief tailored to a defendant’s actual disclosure or misuse of the trade secret.
The DTSA expressly doesn’t preempt state trade secret law, so the varied state law landscape remains intact. The Act expressly rejects adopting a federal inevitable disclosure doctrine, and clearly draws the line at prohibiting individuals from taking new positions at competitors of former employers. To that end, it prohibits injunctions that prevent a person from entering into an employment relationship. Furthermore, it mandates that any conditions placed on employment be based on evidence of threatened misappropriation and not merely on information the person knows. Injunctions under the federal DTSA cannot conflict with applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business.
Because the inevitable disclosure doctrine is available in some states and not others, it adds a dimension to a would-be plaintiff’s decision as to whether to bring federal or state law claims for trade secret misappropriation and where to file. Given the states’ varied legal landscapes, how federal courts interpret the interplay between the DTSA, inevitable disclosure doctrine, and non-compete agreements will be important in resolving trade secret misappropriation disputes.
In one of the first written decisions addressing these issues, the federal District Court for the Northern District of California issued a preliminary injunction under the DTSA and California trade secret law against a former employee who left to work at a competitor. (Henry Schein, Inc. v. Cook, No. 16-CV-03166-JST, 2016 WL 3418537 (N.D. Cal. June 22, 2016)
Ms. Cook, a former employee of Henry Schein, was prohibited from accessing or using Henry Schein’s trade secrets – including customer practice reports, customer profiles and preferences, sales histories, and the like – that she downloaded and e-mailed to herself before she left the company. The court previously issued a TRO against Ms. Cook barring her from using the e-mailed and downloaded information as well as from soliciting Henry Schein’s customers, based on the confidentiality and non-solicitation agreements that she had entered into with Schein.
After an evidentiary hearing, however, the court lifted the part of the injunction that had barred Ms. Cook from soliciting customers. It determined that such relief would effectively enforce a nonsolicitation agreement that went against California’s public policy and statutory provision disfavoring restraints against trade. The court found such relief was unnecessary to prevent misuse of the alleged trade secrets because Schein failed to show that Ms. Cook was using the trade secrets to solicit customers, given the customers were existing customers of her new employer. Ultimately, the court applied the DTSA as Congress intended in a state where the new federal law largely mirrors existing state law on non-compete agreements and the inevitable disclosure doctrine.
Bottom Line
For trade secret owners conducting business in states that enforce non-compete agreements and apply the inevitable disclosure doctrine, prophylactic non-competes and the use of state law to bring trade secret misappropriation claims likely will be more appealing after the Schein case, even given the unique remedies that the DTSA offers (such as civil seizure). We’ll keep our eye on other cases, particularly in California, where the DTSA is enforced.