California Appellate Court "Locks" Out The Inevitable Disclosure
December 13, 2002
In a decision that restricts an employer’s ability to
prevent an employee from joining a competitor, the California Appeals Court for
the Fourth District of California refused to adopt the inevitable disclosure
doctrine to bar a former employee from working for a competitor, Whyte v.
Schlage Lock Co., 101 Cal. Rptr. 2d 277 (Cal. App. Ct. 2002). The inevitable
disclosure doctrine presumes that an employee will inevitably use or disclose
his or her former employer's known trade secrets if the employee performs
similar duties in a new position with a competing employer.
As the Court acknowledged, the factual circumstances
in Schlage Lock closely parallel those of PepsiCo, Inc. v. Redmond, 54 F.3d 1262
(7th Cir. 1995), which is the leading inevitable disclosure case. In Schlage
Lock, a former Schlage vice president (VP) accepted a comparable position with a
fierce competitor of Schlage. The former VP performed essentially the same
duties with the competitor that he had performed with Schlage, had signed a
confidentiality agreement with Schlage upon his initial employment there, and
knew of certain Schlage trade secrets. The former VP's lateral movement to the
competing firm ignited a firestorm of litigation. Schlage's parent corporation,
quite unhappy about the VP's departure and employment with a competitor,
unsuccessfully sought an injunction against the VP in a Colorado court based
upon the doctrine of inevitable disclosure. Thereafter, the VP filed suit
against Schlage and its parent company seeking (among other relief) damages for
interference with contract and a declaration of his freedom to work for the
competitor. Schlage filed a cross-claim alleging several causes of action,
including misappropriation of trade secrets, and sought ex parte an order
restraining the VP temporarily from using or disclosing Schlage's trade
secrets. The lower court issued the temporary restraining order (TRO) against
the VP and ordered expedited discovery and a briefing on whether a preliminary
injunction should issue. After several hearings, the lower court denied the
preliminary injunction and granted the VP's motion to dissolve the TRO. Schlage
and its parent corporation appealed, claiming (among other things) that the
lower court should have applied the inevitable disclosure doctrine to enjoin the
VP.
Affirming the lower court’s order, the appeals court ruled
that the inevitable disclosure doctrine contravened California law and public
policy. The Court surveyed federal and state cases and acknowledged that the
majority of jurisdictions addressing the issue have adopted some form of the
doctrine. Nevertheless, the Court decide to follow the smaller but growing
band of cases that have rejected the inevitable disclosure doctrine, concluding
that those cases correctly balance the competing public policies of employee
mobility and trade secret protection.
In reaching its conclusion, the Court emphasized the
breadth of the inevitable disclosure doctrine, which results in an injunction
prohibiting employment, and not merely the use of trade secrets. The Court
observed that the doctrine allows an employer to restrain a former employee's
pursuit of her livelihood without proof of any actual or threatened use or
disclosure of the former employer's trade secrets. Consequently, the doctrine
tips the balance of employer and employee interests too far in the employer’s
favor in contravention of California's strong public policy favoring employee
mobility, as reflected in §16600 of California’s Business and Professions Code,
which makes noncompetition agreements largely unenforceable.
The Court’s decision also was based on its view that the inevitable
disclosure doctrine created an after-the-fact covenant not to compete. The Court noted that the doctrine
essentially rewrites the employment agreement after the employee has accepted
employment with another, and without any opportunity (on the employee's
part) to negotiate or consent to the covenant. The Court determined that such a consequence was the death-knell for the inevitable disclosure doctrine under California law, and stated: "Lest there
be any doubt about our holding, our rejection of the inevitable disclosure
doctrine is complete."
The Court’s decision certainly restricts an
employer’s ability to prevent an employee from joining a competitor, but
employers can still protect their interests. California case law allows employers to enforce agreements that prevent former employees from soliciting their former employer's customers, and an employer can
enforce confidentiality agreements to protect trade secrets from
misappropriation or disclosure. Following Schlage Lock, however, in
order to enforce such restrictions, an employer will need to show more than that
a former employee has accepted employment with a competitor; the employer will
need some evidence of threatened or actual use of confidential or trade secret
information.
For more information, contact Kara Daniels, toll free, at
888-688-8500.
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