keep-calm-i-told-you-it-was-inevitable-We’ve discussed the inevitable disclosure doctrine in previous posts.  It’s a powerful claim and whether adoption of the uniform trade secrets act makes it viable in Texas remains to be seen.   What is it?  Assume that in your prior job you were exposed to certain trade secrets of your employer that you would “inevitably” use in new employment.  The argument goes from the former employer that you should not be able to work at your new  job because of inevitable use. In practice, the employer would not need an agreement to enforce this type of claim, only the existence and provision of trade secrets.  Wow.  Many courts are reticent to invoke such a doctrine.

Whether such a concept is enforceable in Texas remains an open question.  This is especially true with adoption of the Texas Uniform Trade Secrets Act.  It provides that “Actual or threatend misappropraiation may be enjoined.”  So, could a court use this provision to prevent a former employee from working somewhere else in order to protect a trade secret?  In theory, yes.  There is no reported case of a Texas court doing so.

Last week the Fifth Circuit Court of Appeals waded into the state of the law in Texas on inevitable disclosure.  The results were mixed, but the Court was clear to say that Texas has not adopted inevitable disclosure as a “categorical rule”.  Here is a really long but helpful quote from the case:

It is thus not surprising that more recent Texas case law has rejected the notion of a categorical rule. See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 242–43 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (observing that “no Texas case expressly adopt[s] the inevitable disclosure doctrine” and holding that it need not decide whether to follow Rugen and Conley’s “modified version of the doctrine” because the employee produced evidence that “raise[d] a reasonable inference . . . that disclosure and use [of former employer’s confidential information] was not probable”); see also M-I, L.L.C. v. Stelly, H-09-cv-01552, 2009 WL 2355498, at *7 (S.D. Tex. July 30, 2009) (stating that “inevitable disclosure” is not yet the law in Texas, and refusing to order an injunction due to lack of evidence that former employees “took any confidential informationwith them or that they are using such information” at their new employers); see also Troy A. Martin, Comment, The Evolution of Trade Secret Law in Texas: Is It Time to Recognize the Doctrine of Inevitable Disclosure?, 42 S. TEX. L. REV. 1361, 1376 (2001) (concluding that “the functional premise behind the doctrine itself is clearly at odds with Texas jurisprudence” and noting that “very few courts in Texas have advanced the theory”).

We’ll continue to montior the state of the law on inevitable disclosure in Texas.  The bottom line is our state courts have been quiet on the subject and the Texas Supreme Court has not addressed the issue.  Here is a link to the opinion.

                                  

As you probably know, HP filed a lawsuit against former CEO Mark Hurd in California seeking to prevent him from going to work for competitor Oracle.  The Wall Street Journal has a solid account of the lawsuit and analysis of the claims.

The lawsuit asserts causes of action against Hurd for breach of contract and and threatened misappropriation of trade secrets. California law disfavors non-compete agreements, unlike Texas, so Hurd’s employment agreements are not called non-competes but have the same effect. The “Protective Covenants” section of his employment agreement prevent Hurd from disclosing trade secrets and soliciting HP customers, employees, and suppliers. There is also a provision which has the net effect of a non-compete:

(a) No Conflicting Business Activities. I will not provide services to a Competitor . . . that would involve Conflicting Business Activities in the Restricted Geographic Area (but while I remain a resident of California and subject to the laws of California, the restriction in this cause . . . will apply only to Conflicting Business Activities in the Restricted Geographic Area that will result in unauthorized use or disclosure of HP’s confidential information).

 The crux of HP’s claim is that because Hurd was exposed to trade-secrets and business strategies while CEO for HP he will disclose or use that information while working for Oracle – this sounds like the inevitable disclosure doctrine but is styled as threatened misappropriation of trade secrets. What is the doctrine? Here is Linda Stevens take:
 

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner’s competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Texas Court do not recognize the inevitable disclosure doctrine but have come close – California does not appear to either. HP now seeks an injunction to prevent Hurd from working for Oracle based on his contractual obligations and threatened misappropriation of trade secrets.

Hurd was forced out at HP after a sexual harassment scandal, but he was paid millions of dollars. It will be interesting to see how the Judge balances the equities on this case. Is the protective covenant enforceable under California law? (I’ll leave that to a California lawyer to determine.) Will the Court consider the fact Hurd has been paid a significant amount of money to sign these agreements?  Most importantly, will the Court believe he will disclose HP trade secrets at Oracle?  We will keep you posted.
 

 

 


Commentators have described inevitable disclosure as the following:

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner’s competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Linda K. Stevens, Trade Secrets & Inevitable Disclosure, 36 TORT & INS. L. J. 917, 929 (Summer 2001).

Some form of an inevitable disclosure argument is usually made when a Plaintiff is attempting to obtain a temporary restraining order or injunction to enforce a non-compete. The Texas Supreme Court has never recognized the doctrine.

In 1999, the Dallas Court of Appeals in an unpublished opinion stated: “this Court has recognized that a former employee may be enjoined from using or disclosing the former employer’s confidential or proprietary information if the employee is in a situation where use or disclosure is probable.” Conley v. DSC Communs. Corp., No. 05-98-01051-CV, 1999 Tex. App. LEXIS 1321 (Tex. App. Dallas — 1999, no pet.)(not published).

That opinion stated the Dallas court was not adopting the inevitable disclosure doctrine. Whether “probable disclosure” is actually a viable theory under Texas law remains unresolved by the the Texas Supreme Court.

Read David Knight’s analysis of a recent Ohio inevitable disclosure case here.

Disclaimer

                                       Courtesy of Tuaussi 

 

Sam Adams Beer Company recently filed a lawsuit in Massachusetts against a salesman who it alleges went to work for a competitor in California.  The case illustrates the importance of a venue provision in an employment contract, which we recently discussed here

California is downright hostile when it comes to non-solicit and non-compete agreements for employees.  The defendant employee went to work for a California beer maker and lives in California, but his employment agreement with Sam Adams provides for venue in the state of Massachusetts, as well as a choice of law provision for Massachusetts law.  The Complaint alleges:

 

The Employment Agreement is governed by Massachusetts law. Paragraph 12, the governing law clause, provides that the “validity, interpretation and performance of this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.

 

The Agreement further provides that “Any dispute between Employee and the Company shall be litigated exclusively in the state or federal courts of The Commonwealth of Massachusetts, to whose jurisdiction Employee hereby agrees to submit.

 

Of course, this puts the employer in the position of trying to enforce a non-compete against an out-of-state employee.  That said, Sam Adams also sued the new California employer as well which pragmatically will make enforcement easier. 

 

The complaint is interesting because it focuses upon the inevitable disclosure doctrine.  It alleges that former employees had been exposed to proprietary information , including business strategies, that he will inevitably disclose during his employment with his new employer.

 

This is another example of a post-employment covenant with a salesperson, this time in the adult beverage industry.  We will continue to monitor this case.

In Texas there are other options to prevent departing employers from competing with your business:

A Non-Solicitation: Instead of tying down your employee with a non-compete consider a non-solicitation. The non-solicit will still have to meet non-compete standards, but it can be used for specific customers as opposed to geographic areas. The rub, there will always be a debate about the right of a customer to do business with a departing employee and whether the former employee actually solicited the business or was contacted.

 

A Non-Disclosure: An employer can always attempt to lock down an employee by preventing them from using proprietary information they were exposed to through a non-disclosure. Basically the argument is the former employee cannot work for the company’s customer because they are using the company’s propriety information. This is very close to the inevitable disclosure doctrine, which is not recognized in Texas, but a non-disclosure should certainly be considered.

 

Compensation: Can the employer somehow tie future compensation into not competing? Basically, the company will agree to make payments to the departing employee for a period of time after they depart, but payment is dependent on non-competition. The rub, the company probably cannot enforce this agreement in Court, but if the employee decides to compete they don’t get any money.

 

The Anti-Raid Provision: The anti-raid provision prevents a departing employee from hiring your employees. The rationale is to keep the departing employee from setting up shop down the street.

 

There are other options as well, but these should be considered as part of any employment agreement. The more hurdles that can be put in the way of a departing employee, the better.

                                               

Over the last few weeks I’ve been involved in defending and applying for temporary restraining orders in non-compete/trade secret cases in Houston and Dallas County District Courts.  A few observations on those proceedings:

  • It is much easier to get injunctive relief in Texas since after the Texas Supreme Court’s rulings in  Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006) and Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding.  Courts are well aware that the Texas Supreme Court has eliminated many of the technical arguments that were previously used to defeat non-competes on their face.   That being said, you still have to satisfy the statute.
  • Companies have become much smarter about drafting non-competes and non-disclosure agreements.  The majority of agreements I see satisfy Texas law.  They generally have a one year duration, have a reasonable geographic limitation, and in most instances are ancillary to a promise to provide some type of trade secret.
  • Courts want  to see "blood".  Not literally, but Courts need to see inequitable conduct from the alleged non-compete violator.  Did they take trade secrets out the door with them? Are they calling on former customers within days of leaving?  Are they trying to take employees with them?  A mere suspicion is not enough to support a temporary injunction and the Texas Supreme Court has not recognized inevitable disclosure. 

Depending upon your perspective, the good news is non-competes are easier to enforce from a legal standpoint.  That notwithstanding, a party seeking a temporary injunction to enforce a non-compete needs to have its facts lined up to justify this type of relief.

 

David DonatelliIn late April Hewlett Packard hired EMC storage division president David Donatelli.  Donatelli  worked  22 years for EMC and made $17 million over the last three.  The hire reportedly stunned the industry.  As part of his new employment Donatelli was going to relocate to California.

Donatelli was first to the Courthouse and filed a lawsuit in California challenging the 12 month non-compete in his employment agreement.  It reads:

For the twelve-month period following the effective date of your termination, for any reason, from the Company, you agree not to directly or indirectly compete with the Company … including any services … as an employee … to any entity that is developing, producing, marketing, soliciting or selling products or services competitive with products or services being developed, produced, marketed or sold by the Company as of the effective day of your termination.

California is generally considered an unfavorable venue for the enforcement of non-competes as previously discussed.  In particular, California does not recognize the doctrine of inevitable disclosure.  (Basically, the doctrine assumes that when an employee moves from one company to another she will inevitably disclose trade secrets obtained from the prior company.) 

EMC filed its own lawsuit in Massachusetts and was initially successful in obtaining an injunction restricting Donatelli from taking the HP job.  In it’s opinion, the Court rejected Donatelli’s argument that California law applies and gave no defference to the fact that his lawsuit was filed first in California.  Donatelli’s argument that California law applies is undermined by the fact that there is a Massachusetts forum selection clause and choice of law provision in his employment agreement. Additionally, he is a resident of Massachusetts.  A hearing is set for later in the month in the California case.  How the California court will reconcile the Massachusetts ruling and Massachusetts law remains to be seen. 

(H/T Brad Reese)