The Two Faces of Inevitable Disclosure
The New York Law Journal, March 2001

By Michael Starr and Adam S. Blank

When it comes to the area of employee non-competition law, there is probably no legal theory more in vogue than the so-called doctrine of inevitable disclosure � and none more misunderstood. Inevitable disclosure is not itself a cognizable cause of action and hardly a "doctrine" either. It is, when properly employed, an evidentiary presumption utilized to support other claims for injunctive relief against unfair competition by former employees. The problem is that zealous advocates who oversell the doctrine sometimes merely provoke a judicial backlash that denigrates the concept even in cases when it genuinely applies.

There are in reality two doctrines of inevitable disclosure and each has met with varying degrees of success. In one variant, the prospect of inevitable disclosure may be used in support of a claim for injunctive relief predicated upon an enforceable non-competition agreement. Alternatively, it can also be used not as a supplement to an enforceable restrictive covenant but as a substitute for one. It is this latter face of inevitable disclosure that has met the most judicial resistance and is generally disfavored absent other evidence of employee misconduct.

Inevitable Disclosure as a Supplement

It may fairly be said that what is now called the doctrine of inevitable disclosure had its genesis in a 1919 decision, Eastman Kodak Co. v. Powers Film Products, Inc.¹ In the days when Kodak film was a revolutionary new invention (and Kodachrome� not yet a gleam in anyone�s eyes), a Kodak employee, in breach of an otherwise enforceable non-competition agreement, left to join a competitor, which was intending to establish its new venture by hiring away Eastman Kodak�s most experienced employees.² Lacking evidence that the employee actually had misappropriated any of Kodak�s intellectual property, the court nonetheless enjoined his employment with a direct competitor.

As the court explained, an injunction limited to not disclosing to the new employer his "special knowledge" of Eastman Kodak�s "secret processes" would be ineffective. Because "[t]he mere rendition of services along the lines of his training would almost necessarily impart such knowledge to some degree," an injunction against working for that competitor was justified.³

Under New York law, then and now, restrictive covenants will be enforced if they are reasonably limited in geography, time and scope and then only to the extent necessary to protect the employer from unfair competition resulting from the use or disclosure of trade secrets or confidential information or if the former employee�s services are unique or extraordinary.⁴ In New York, and elsewhere, courts will not enforce even a "reasonable" non-competition agreement unless there is a threshold determination that the employer�s protectible interests are impinged � or a finding that the employee�s services were unique, which in New York is rarer than Demosthenes� quest for an honest man. ⁵

What made Eastman Kodak distinctive was that there was no finding of actual or even threatened misappropriation of the former employer�s trade secret. Rather, the inevitability of such wrongful use was accepted as either an evidentiary presumption for misappropriation or as a substitute for it.

Years later came Lumex v. Highsmith,⁶ which is the modern classic use of inevitable disclosure as a supplement for an otherwise enforceable non-competition agreement even absent proof of actual misappropriation.

In Lumex, the former employer was engaged in the business of manufacturing and selling equipment in the health fitness industry and sought to enjoin its former employee, Greg Highsmith, from working for its competitor, Life Fitness. The employer manufactured a brand called "Cybex" (which gym enthusiasts will immediately recognize) and Life Fitness had just acquired a license to distribute a line of fitness equipment that was, like Cybex, a "single station variable resistance weight stacked machine" � or, in other words, a rose by another trade name. Highsmith had previously signed a "Technical Information and Non-Competition Agreement," which included a restriction on post-employment competition. A little over a year later, Highsmith resigned and announced his intention to join Life Fitness.

The Lumex decision was based on more than that the two company�s were "competitors." Rather, the court emphasized that "companies in the health fitness industry are very aggressive and dynamic" and that it was a "�copy cat�. . . industry," which gave a selling advantage to whoever was "first to the market" with a new concept.⁷ The court also noted that Highsmith was an engineer by training who, as Worldwide Marketing Manager, was a member of Lumex�s elite strategic planning committees and "privy" to information on prototypes for new and future products.⁸

Given these circumstances, the court readily accepted Lumex� testimony that "it would be impossible for Highsmith not to divulge confidential information" as part of his employment with his new employer. Thus, despite the good-faith intentions of both Highsmith and Life Fitness not to exploit Lumex trade secrets, the court enforced the non-competition agreement and enjoined Highsmith from working at Life Fitness for six months so as to avoid "the inevitable disclosure of Cybex trade secrets" by Highsmith in his efforts to produce a better product for his new employer. The modern doctrine of "inevitable disclosure" came of age.⁹

The Role of Technological Sophistication

As assertions of "inevitable disclosure" are becoming more common, courts have shown a greater willingness to accept it in technologically advanced industries. For example, in Business Intelligence Servs., Inc. v. Hudson,¹⁰ the court enjoined Carol Hudson, a former computer software consultant, from working for her former employer�s head-to-head competitor. The court reasoned that Hudson�s disclosure of her knowledge of her former employer�s software, including her knowledge of source codes, would allow her new employer to develop or improve its competing product "with little or no effort," that given the "ephemeral and essential quality of [Hudson�s] knowledge," disclosure would cause irreparable harm, and that "disclosure is likely, if not inevitable and inadvertent, if Hudson commences employment with [the competitor]."

This contrasts sharply with International Paper Co., v. Suwyn.¹¹ There the court, concluding that the wood and building products field was a low-technology industry driven by general managerial expertise (not to be confused with highly-technical information), refused to enjoin the defendant based on the application of inevitable disclosure.

This reasoning underscores what was implicit in Eastman Kodak. While courts, especially in New York, are reluctant to prevent a former employee from using her general knowledge or expertise to her own best economic advantage, when that general knowledge is entwined with her "special knowledge of . . . secret processes" of her former employer (as it was in Eastman Kodak), a non-competition injunction may be proper. Obviously, the more recondite the technology, the more likely it is that the line between general expertise and trade secrets may be crossed.

Though the technological nature of the industry might help in obtaining an injunction, it might also cause the court to limit its duration. For example, in DoubleClick Inc. v. Henderson,¹² discussed in more detail later, the court enjoined the defendants for a six month period, not the one-year period requested by the plaintiff, because while disclosure would cause irreparable harm, protectible knowledge possessed by defendants involving the rapidly changing internet advertising business would soon become stale.¹³

Inevitable Disclosure as a Substitute

A fundamentally different situation is presented when the idea of "inevitable disclosure" is advanced not to supplement a non-competition agreement but to substitute for one that does not exist or is, for some reason or other, unenforceable.

The law has long recognized that a cause of action for misappropriation of trade secrets may support a non-competition injunction against employees who, in breach of their fiduciary duties, purloin their former employer�s confidential proprietary information on their way out the door.¹⁴ Evidence that an employee has pilfered documents containing trade secrets � or merely engaged in "studied memorization" of them � is sometimes sufficient to obtain an injunction, even where actual competitive use cannot be shown or has not yet occurred.¹⁵

In recent years, the concept of inevitable disclosure is propounded where such evidence does not exist but where the former employer contends that the departing employee could not help but utilize his knowledge of its trade secrets for his new employer. The application of this form of the inevitable-disclosure doctrine � where there is neither a non-competition agreement nor evidence of theft � has met with only rare success and then only where some kind of dishonesty by the departing employee is shown.

The classic instance of this variant of inevitable disclosure is Pepsico, Inc. v. Redmond.¹⁶ Redmond was the General Manager for Pepsico�s California business. He was recruited by a former Pepsico defector to work for Quaker Oats to help its Gatorade and Snapple products. Pepsico was then in intense competition to overtake Quaker�s lead in the sports and new-age-drink markets.

Redmond had signed a confidentiality, but not a non-competition agreement with Pepsico. And, he had had access to Pepsico�s formal strategic marketing plan, pricing architect and "attack plan" for particular markets.

In upholding the non-competition injunction, the court emphasized that "the mere fact that a person assumed a similar position at a competitor does not, without more, make it �inevitable that he will use or disclose . . . trade secret information.�"¹⁷ The "more" here was mendacity. Redmond�s lack of forthrightness and occasional outright lies to Pepsico after he had accepted Quaker�s offer but before he had actually quit led the court to conclude that Redmond "could not be trusted" to safeguard his former employer's trade secrets.¹⁸ That, when coupled with conflicting testimony as to what Redmond would actually be doing in his new job and "the demonstrated inevitability that Redmond would rely on [Pepsico] trade secrets in his new job at Quaker," was enough to uphold the injunction.¹⁹

Perhaps the first internet non-competition case, DoubleClick v. Henderson,²⁰ is often cited as application of the inevitable-disclosure doctrine, but it is less so than meets the eye. In DoubleClick, the former employer�s claim was based on misappropriation of trade secrets, not breach of a non-competition agreement.²¹ Two senior executives were about to quit to start their own competitive Internet advertising business. When DoubleClick learned of this, it promptly fired both, confiscated their company-owned laptops (there is a lesson to be learned here), and sued.

The court granted DoubleClick�s request for a non-competition injunction based primarily on the "laptop" evidence, which showed among other things that DoubleClick�s trade secrets had been incorporated into the defectors� own business plan and, in one instance, e-mailed to an industry consultant with ties to DoubleClick�s competitors. The court found misappropriation, but apparently troubled by whether the information was secret enough to warrant legal protection,²² it "bolstered" its finding by "the high probability of �inevitable disclosure� of trade secrets."²³

Quoting Lumex, the court stated that it was unlikely that the two former employees could "eradicate [DoubleClick�s] secrets from [their] mind." It was, however, the evidence both of actual misappropriation during their employment and the defectors� "cavalier attitude toward their [fiduciary] duties to their former employer" that warranted the injunction. The outcome might well have been different if DoubleClick�s claim has been based on "inevitable disclosure" alone.

The Emerging Judicial Backlash

The doctrine of inevitable disclosure met a severe setback in EarthWeb, Inc. v. Schlack.²⁴ The departing employee there, Mark Schlack, was one of ten vice presidents of an internet company that operated various websites for information technology (IT) professionals. He had come to EarthWeb after years in the IT print industry, stayed a year and then quit to join the new internet division of the world's leading provider of IT print-based information.

Although Schlack had signed a non-competition agreement with EarthWeb, its scope was so narrowly defined that it did not unambiguously extend to Schlack's new employment. Nonetheless, EarthWeb sought to enjoin Schlack from working at any Internet company targeting IT professionals by invoking the spectre inevitable-disclosure, though there was no evidence of actual or incipient misappropriation or of any mendacity or fiduciary breach by Schlack. The court balked, accusing EarthWeb of attempting to "make an end-run around the [non-competition] agreement by asserting the doctrine of inevitable disclosure as an independent basis for relief."²⁵

The court, though acknowledging the doctrine of inevitable disclosure, said it was restricted to the "rarest of cases." But if inappropriate to supplement an existing non-competition clause, the doctrine must be even more so without one, unless the court�s view was that the employer who negotiates a non-competition agreement should have less legal protection than one who has not. It looks as if EarthWeb choose not to praise inevitable disclosure but to bury it.

Though the EarthWeb court was surely correct in rejecting the idea of inevitable disclosure as a "independent basis for relief," its critique went too far. The court said that absent "actual theft of trade secrets, the court is essentially asked to bind the employee to an implied-in-fact restrictive covenant based on inevitable disclosure," which "runs counter to New York�s strong public policy against such agreements and circumvents the strict judicial scrutiny they have traditionally required."²⁶ That particular criticism is unfair.

The Right Balance

In the classic cases like Eastman and Lumex where inevitable disclosure is invoked to supplement a non-competition agreement, the post-employment restriction sought by the former employer is not implied-in-fact: it is express. In today's world, when dishonest employees can send critical trade secrets out the door with a surreptitious key stroke, enforcement of an otherwise valid non-competition agreement should not necessarily depend on proof of "actual theft." Where the circumstances indicate that the departed employee's use of his prior employer's trade secret is so probable as to be - well, inevitable, enforcing the bargain is not out of place. This form of inevitable disclosure does extend traditional non-competition law but not excessively so.

In contrast, where there is no non-competition agreement, the only legal basis for a post-employment restriction on competition would be misappropriation of trade secrets (or related torts like breach of fiduciary duty or unfair competition). If, in such cases, the employer had proof of actual or incipient misappropriation, it would not have to invoke inevitable disclosure to obtain an injunction. Thus, this variant of inevitable disclosure does run the risk of court-imposed limits on a faultless employee.

This legitimate concern is accommodated, however, because in practice, the restricted employee is not without fault. In Pepsico, for example, it is not just the job similarity or direct competition that grounded the restrictive injunction, but the court's sense that the departed employee just could not be trusted and, one suspects, the unstated suspicion that he was recruited not for his general expertise but for his willingness to divulge.

As a careful analysis of DoubleClick and Pepsico reveal, the application of inevitable disclosure in the absence of a non-competition agreement does and should require a showing of duplicity or faithlessness sufficient to place in doubt the departed employee's willingness to honor his continuing fiduciary duty not to divulge his former employer’s trade secrets to a rapacious competitor.

Moreover, courts frequently cabin the inevitable-disclosure doctrine in unstated ways. First, these cases arise among not merely competitors but between two companies that are purveying essentially the same product to the same market. In Lumex, for example, Highsmith’s new employer was not just selling exercise equipment to fitness clubs: it was selling a "copycat" of Cybex. Second, the restricted former employee is someone who not merely had access to trade secrets but was intimately involved in the formulation or application of those trade secrets to the business - in the words of Eastman Kodak, "special knowledge of . . . secret processes."

Third, it is not simply that the defecting employee’s new job is identical to the old one (that is frequently the case when employees change jobs and, thus, does not distinguish much), but it is typically a position singularly suited to inflicting substantial competitive harm on the former employer. The doctrine of inevitable disclosure is not for salesmen but for senior managers directly responsible for the development and operation of the competitor’s business.²⁷ Fourth, frequently, though not always, the grant of an "inevitable disclosure" injunction is predicated on the former employer’s paying the restrained individual’s salary during the restrictive period – otherwise, the individual may be bereft of earning a livelihood, which is something courts are loathe to impose.²⁸

Courts are justifiedly cautious of over-expanding doctrine of inevitable disclosure. It is not an independent basis for relief, and does not supplant the traditional grounds for obtaining post-employment injunctions. And, it may yet turn out that a case like Pepsico marks not so much the paradigm of inevitable disclosure as its outer limit.

It would, on the other hand, be unfortunate if aversion to the excesses of inevitable disclosure drove courts to honor it in theory but deny it in practice – like the "unique services" branch of non-competition law in New York. Where it properly applies, the inevitable disclosure doctrine provides additional legitimate protection to vulnerable employers who are truly at risk but cannot find the "smoking gun," perhaps because the dishonest employee has been cunning enough to conceal it.

Michael Starr is a partner in the Labor and Employment Group of Hogan & Hartson L.L.P.

A version of this article appeared in The New York Law Journal. This article is reprinted with permission from the March, 2001 edition of The New York Law Journal, www.nylj.com. ©2000 NLP IP Company.