The Doctrine of Inevitable Disclosure of a Trade Secret in California
“About the author: Scott Lesowitz is a cum laude graduated of Harvard Law School and a former Assistant U.S. Attorney. His practice is located in Beverly Hills, California. His e-mail address is scott@syversonlaw.com.”
An issue that arises frequently in trade secret law is what happens when an employee who knows trade secrets, proprietary information, processes, methods, plans, strategies, or the like leaves to join a competitor or to start a competing business.
It may seem inevitable that the former employee will use the trade secret in the new employment or business. The former employee cannot simply forget the confidential or proprietary information even if he or she no longer possesses information in writing or in electronic form. However, there may be no tangible evidence of trade secret misappropriation (a term that encompasses theft, use, or disclosure of trade secrets) other than the similarity between the employee’s new job duties and the employee’s old job duties.
In most states, even when there is no tangible evidence of trade secret misappropriation, the employer might be able to obtain a court order (an injunction) barring the former employee from working for the competitor or running the new competing business because of a high likelihood that trade secrets will be used or disclosed. This is the inevitable disclosure doctrine. Under that doctrine, when “an employee with detailed and comprehensive knowledge of an employer's trade secrets and confidential information has begun employment with a competitor of the former employer in a position that is substantially similar to the position held during the former employment,” the court may enjoin (bar) the employee from engaging in the new employment or position. McGowan & Co., Inc. v. Bogan, 93 F.Supp.3d 624, 645 (S.D. Tex. 2015).
However, California rejects the inevitable disclosure doctrine. See Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002). The employer must wait either until there is evidence beyond the nature of the new employment to show that there is a threatened misappropriation or until actual misappropriation occurs. (For clarity’s sake, a “threatened misappropriation” means a high probability that a trade secret will be used or disclosed. It does not necessarily mean that there was an overt making of a threat, such as blackmail). If the employer must wait to file suit until a trade secret has been used or disclosed, irreparable damage may have already occurred. Furthermore, actual trade secret misappropriation may be difficult to prove.
It should be noted that in California it is difficult to use an employment contract to circumvent the inevitable disclosure doctrine. Non-competition agreements and agreements barring employment are usually unenforceable. Unlike other states, this is true even if the agreement is limited in time and geographic scope. California Business and Professions Code § 16600.
A notable issue is how rejection of the inevitable disclosure doctrine affects the language in California’s version of the Uniform Trade Secret Act allowing injunctions based on “threatened misappropriation”. California Civil Code § 3426.2(a); ReadyLink Healthcare v. Cotton, 126 Cal.App.4th 1006, 1011 (2005). While the case law is not fully developed and is a bit muddled, it appears that evidence that an inevitable disclosure will occur can help justify a finding of “threatened misappropriation.” Central Valley General Hospital v. Smith, 162 Cal.App.4th 501, 524-25 (2008). However, if the only evidence of a “threatened misappropriation” is the appearance that usage or disclosure of the trade secret is inevitable, the court will not issue an injunction. Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., 236 Cal.App.4th 243, 265 (2015).
The scope of an injunction predicated on “threatened misappropriation” cannot include barring the former employee from working for a competitor or running a competing business. However, if a former employee has a customer list that constitutes a trade secret, a court might be able to order the employee not to solicit customers on the customer list. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514 (1997). (Customer lists must be sufficiently secret, sufficiently difficult to reconstruct, and sufficiently valuable to constitute trade secrets.) Additionally, the injunction may prohibit the former employee from using or disclosing trade secrets and also order the return of documents and media containing the trade secrets. Central Valley General Hospital v. Smith, 162 Cal.App.4th 501 (2008).