Patents, Trade Secrets, and Inevitable Disclosure

Throughout time industries have developed techniques and processes that are believed to be essential elements that contributed to the company's success.  For almost as long, companies have sought and devised ways to protect those techniques and processes that constituted the company's intellectual property. Many companies turned to federal patent protection, others chose to treat the information as trade secrets, and others chose to use contractual obligations to protect their intellectual property. These various forms of protection were especially meaningful in what might be termed soft industries like banking, financial advice, sales transactions, supply chain management and the like. This information was not specifically directed at a product, but was directed at the things that made it possible to produce and sell a product. In many ways this intellectual property may be called business intelligence. The Supreme Court decision Alice Corp. Pty. Ltd. v. CLS Bank Int'l, 134 S. Ct. 2347 (2014) has made it more difficult to use patents to protect business intelligence.

In Alice, the Supreme Court found a software patent to be invalid on the basis that the patent embodied an abstract idea and the patent claims did nothing more than take that abstract idea and place in in a computer environment.   The Court stated, “[w]e conclude that the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent-eligible invention.”  Id. at 2357.  To be patentable, a claim must do significantly more than embody an abstract idea.  In other words, the claim must go beyond that which a human could theoretically do through normal human activities.  As an example, the logistics of a distribution system could be set out on paper, so using a computer to do the same operation faster on a spreadsheet does not result in patentable subject matter.

After Alice, many companies reverted to the earlier practices of using trade secret and contractual obligations to protect business intelligence.  Traditionally, trade secret protection was determined state by state and the individual states were free to codify trade secrets or rely on common law. In 1996, limited federal protection became available when Congress enacted the Economic Espionage Act that covered certain foreign activities.  However, that was not the answer to a domestically applicable trade secret protection.  Congress remedied this gap in 2016 when it enacted the Defend Trade Secrets Act (DTSA), which is effective only for causes of action that occurred in some part after May 11, 2016. While the ultimate effectiveness of the DTSA is undecided, it includes a provision that addressed the granting of injunctions when employees move between companies that are, or are deemed to be, marketplace rivals which may limit its effectiveness in limited what is disclosed. The DTSA states that an injunction cannot “prevent a person from entering into an employment relationship.”  18 U.S.C. § 1836(3)(A)(i)(I). Thus, employee mobility between employers was to be protected by crafting an injunction that was finely tailored.

The requirement for an injunction to have specifically delineated prohibitions is not new. However, for many years, cases seeking to protect business intelligence relied on less defined common law doctrine of inevitable disclosure as a basis for limiting employee mobility on the theory that the employee's new position was so aligned with the employee's old position that the employee would, intentionally or not, inevitably disclose some of the prior employer's business intelligence.  Many contemporaneous articles hypothesized that inevitable disclosure would fade from the case law because of the DTSA provision and the Senate Report statement on the DTSA that this provision “reinforces the importance of employment mobility and contains some limitations on injunctive relief that may be ordered.” S. Rep. No. 114-220 (2016). 

Although the inevitable disclosure doctrine was not historically seen as a means to restrict employee mobility, its application necessarily place restraints on an employee that may hinder mobility. In fact, the doctrine has only been applied by roughly 50 percent of the states.  See COMMENT: A State-By-State Analysis of Inevitable Disclosure: A Need For Uniformity and a Workable Standard, 16 Marq. Intell. Prop. L. Rev. 211, 2012. Some state courts, like California and New York, have noted the hindrance to employee mobility caused by the doctrine. 

Although it is too early to draw any firm conclusions, it appears that the DTSA will not eliminate the use of inevitable disclosure, but the doctrine will be repurposed and applied differently as shown by the case survey below.

In the case of Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16 C 03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a Molon employee left and went to a competitor, Nidec Motor.  Molon asserted that the transition resulted in Nidec misappropriating and using trade secret information gained as a result of inevitable disclosure.  This decision was on a motion to dismiss for insufficiency of the complaint.  Nidec asserted that the complaint lacked proper factual basis to support a suit for theft of trade secrets.  The court found that Molon's complaint theory of inevitable disclosure of trade secrets was sufficient at the pleading to make out a plausible case of misappropriation.  However, the court noted that Molon has the burden of proving at trial that Nidec in fact misappropriated trade secrets and cannot rely simply on a fear of disclosure.  This case is special because the inevitable disclosure doctrine is not being used to achieve an injunction against an employee but as a means to prove misappropriation.  

In Panera, LLC v. Nettles, No. 4:16-cv-1181-JAR, 2016 U.S. Dist. LEXIS 101473 (E.D. Mo. Aug. 3, 2016), the court enjoined Panera’s former employee from working at Papa John’s for the remainder of the term of a valid non-compete.  The court  did rely, in part, on the doctrine of inevitable disclosure to reach this decision; however, it noted the parties non-compete agreement specifically listed Papa John’s as a competitor.

In System Spray-Cooled, Inc. v. FCH Tech, LLC, No. 1:16-cv-1085, 2017 U.S. Dist. LEXIS 73909 (W.D. Ark. May 16, 2017), the court refused to enjoin a former employee despite the fact that when the employee left the company there was a valid non-compete.  However, that non-compete contract expired before suit was brought and the court reasoned that issuing an injunction on the basis of inevitable disclosure at this later date would in effect extend the length of a bargained for non-compete agreement.  The court reasoned that the existence of a valid non-compete agreement reflected the parties' realization that there were trade secrets and sensitive information at risk of disclosure and they determined a sufficient length of time for the non-compete to provide them sufficient protection.  The court, in refusing to issue an injunction, was not persuaded that an inevitable disclosure theory should extend the agreed non-compete. 

In Polymet Corp. v. Newman, No. 1:16-cv-734, 2016 U.S. Dist. LEXIS 113000 23 (S.D. Ohio Aug. 24, 2016), a long time former employee, Newman, rose through the ranks and had been exposed to a majority of the company's operating aspects.  Newman ultimately decided to start his own company after determining that much of the process used by Polymet was in the public domain.  Polymet brought suit and claimed that Newman could not possibly refrain from using what he had learned during his time at Polymet, including vendors, pricing, discounts to customers, and production processing trade secrets.  The court denied an injunction to prevent the employee from working for his new company based on a theory of inevitable disclosure, but did issue an injunction to enforce preexisting employment contracts obligation but allowed the ex-employee to continue operating the new company.

The Seventh Circuit decision in PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1272 (7th Cir. 1995) remains a leading case on the standard for applying the inevitable disclosure doctrine.  A PepsiCo employee, Redmond, who had attended multiple PepsiCo strategy meetings left to join the company rival Quaker.  Pepsico and Quaker both viewed the upcoming year as a strategic year in terms of competing for market share and Redmond had knowledge of this fact.  The court set forth a three part test for determining inevitable disclosure:

  1. the level of competition between the companies;
  2. the similarity of the past and current positions held by the employee, and;
  3. the actions taken to prevent potential disclosures of trade secrets by the new employer.

Applying this test, the court issued a one year injunction as it deemed one year sufficient to protect the relevant trade secret information that only pertained to that given one year in the marketplace.

The inevitable disclosure doctrine does not appear to be disappearing; however, it does appear to being recast to enable employer with valid employment covenants to restrict an employee from moving to employment with marketplace competitors. In view of the local hostility to restricting employee mobility and the DTSA provision, the protection of business intelligence, especially in soft industries, will require carefully drafted employment agreements that do not over reach on the term of any prohibition. While it may be inevitable that the doctrine of inevitable disclosure will succumb to increasing demands for employee mobility and more clearly defined and provable trade secrets, that is not the case for the foreseeable future. 

Reprinted with permission from the July 5, 2017 issue of The Legal Intelligencer ©2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.



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