August 1, 2018

How "Threatened Misappropriation" Squares with Virginia's Nonrecognition of "Inevitable Disclosure"

Holland & Knight Trade Secrets Blog
Brandon H. Elledge | Robert J. Farlow

The Virginia Uniform Trade Secret Act (VUTSA) defines "misappropriation" as:

1. acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

2. disclosure or use of a trade secret of another without express or implied consent by a person who:

  • used improper means to acquire knowledge of the trade secret; or
  • at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was (1) derived from or through a person who had utilized improper means to acquire it; (2) acquired under the circumstances giving rise to a duty to maintain its secrecy or limit its use; (3) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (4) acquired by accident or mistake.

Va. Code Ann. § 59.1-336. with respect to injunctions, VUTSA provides that "[a]ctual or threatened misappropriation may be enjoined." Id., § 59.1-337. Although "threatened misappropriation" can be enjoined in addition to "actual misappropriation," Virginia (like many other states who have adopted a version of the uniform trade secret act) has not recognized the "inevitable disclosure" doctrine. See, e.g., Government Tech. Servs., Inc. v. Intellisys Tech. Corp., 51 Va. Cir. 55, 56 (Fairfax Cir. Ct. 1999) ("Virginia does not recognize the inevitable disclosure doctrine."); see also LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 470 (Md. 2004) ("No court interpreting the provisions of MUTSA has applied the theory of 'inevitable disclosure.'"). This doctrine provides that "an employer may enjoin an employee who has knowledge of a trade secret from accepting employment with a direct competitor if the employee will necessarily have to use or otherwise disclose those trade secrets to perform the duties of his new position." MeadWestvaco Corp. v. Bates, 91 Va. Cir. 509, 520 (Va. Cir. Ct. 2013).

This raises an interesting issue of whether "threatened misappropriation" at the injunction stage is viewed distinctly from "inevitable disclosure," or whether the "inevitable disclosure" doctrine is a way to show "threatened misappropriation" in support of injunctive relief.

In Dionne v. Southeast Foam Converting & Packaging, Inc., 397 S.E.2d 110 (Va. 1990), the Supreme Court of Virginia affirmed an injunction based on threatened misappropriation. Dionne involved a former employer—Southeast Foam Converting & Packaging, Inc. (Southeast)—that held a patent for packaging materials unlike any other on the market.  Following a dispute, the defendant left his employment with Southeast and informed suppliers and customers that he intended to form a new company that would develop a similar product in a more cost effective manner.  Id. at 112. The defendant also left Southeast on his last day with a briefcase that Southeast discovered contained company documents, and the defendant also acknowledged that he destroyed relevant nondisclosure agreements belonging to the company.  Id.

In contrast, the Supreme Court of Virginia in Motion Control Systems, Inc. v. East, 546 S.E.2d 424 (Va. 2001), reversed an injunction based on threatened misappropriation. Motion Control involved a defendant that had access to new product development, customer lists and specifications. Shortly after signing a noncompete and confidentiality agreement, the defendant went to work for a company that "made some of the same products." Id. at 425. The circuit court enjoined the defendant from disclosing trade secrets or other confidential information, but on appeal the Supreme Court of Virginia found that "the only basis cited by the trial court for issuing the injunction was that [defendant] had knowledge of the trade secrets . . . . The trial court made no findings that [defendant] had actually disclosed or threatened to disclose such information." Id. at 426.Accordingly, the Court held that "[m]ere knowledge of trade secrets is insufficient to support an injunction under the terms of Code § 59.1-337 [the VUTSA]." Id.

While Dionne and Motion Control involved claims of threatened misappropriation, neither case from the Supreme Court of Virginia mentioned the inevitable disclosure doctrine.

In MeadWestvaco Corp. v. Bates, 91 Va. Cir. 509 (Chesterfield Cir. Ct. 2013) a Virginia circuit court further analyzed the Dionne and Motion Control decisions and addressed inevitable disclosure as a potential way of showing "threatened misappropriation" in an injunction context.  The circuit court opinion is not binding authority, but noted that while Dionne and Motion Control "affirm that either actual or threatened misappropriation is required, none of the cases define the scope of threatened misappropriation." Id. at 522.  As a threshold matter, the circuit court also took issue with Government Technology Services, Inc. v. IntelliSys Technology Corp.,51 Va. Cir. 55 (Fairfax Cir. Ct. 1999), observing that such opinion "does find that the inevitable disclosure doctrine is not recognized in Virginia, but...this finding is persuasive, not mandatory" and that "[non] recognition is not akin to rejection." Id. at 521-22.

In Bates, the circuit court agreed that Dionne is instructive on granting an injunction based on threatened misappropriation, but disagreed with plaintiff's assertion that Dionne involved a fact pattern giving rise to the inevitable disclosure doctrine: "Rather, the facts in Dionne—the fact that there was a one of a kind product, a disgruntled former employee who helped design the patented product, and communication with customers about his intent to start a new company—demonstrate a case of a direct threat to misappropriate." Id. at 521.  So, perhaps Dionne did not need to mention inevitable disclosure in light of these notable facts – in addition to the company documents found in the defendant's briefcase on the way out the door and his destruction of relevant agreements meant to protect trade secrets.

The circuit court in Bates also distinguished Motion Control, noting that "[w]hile the facts in Motion Control Systems are similar to those in the matter before the court, the injunction is different. The Court in Motion Control Systems evaluated the trial court's decision to enjoin the disclosure of trade secrets and confidential information.  Here, the court has also been tasked with the question of whether to enjoin Bates from working for [a competitor]."  Id. at 522. 

While the fact that a former employee assumed a similar position at a competitor does not, without more, make it "inevitable that he will use or secret information," Bates identified six factors that should be considered before applying the inevitable disclosure doctrine:

(1) whether the former employer possesses a "trade secret"; (2) the employee's position at his former employer; (3) whether the employee possesses an "extensive and intimate knowledge" of his former employer's trade secrets; (4) the degree to which the employee's former employer and new employer are in competition; (5) whether the employee can effectively perform the duties of his new position without disclosing, using, or relying on his former employer's trade secrets; (6) whether there are other circumstances that indicate the employee or his new employer are unable or unwilling to safeguard the former employer's trade secrets.

Id. at 524 (citing Nucor Corp. v. Bell, No. 2:06cv2072, 2008 WL 9894350 at *60-61 (D.S.C. Mar. 14, 2008)).

In applying these factors, the circuit court in Bates granted an injunction.  It found that because of the overlap in the defendant's position at his old and new competing employer, "[the defendant] will necessarily have to use or disclose" his former employer's trade secrets. Id. at 529.  Moreover, while there was no overt action of taking company documents by the defendant, the circuit court gave weight to the defendant's failure to sign an intellectual property agreement despite several requests by his former employer.  Id. at 530.

In defining the scope of threatened misappropriation vis-à-vis inevitable disclosure, Bates further observed that "because [defendant] and [plaintiff] entered into confidentiality agreements, noncompete and nonsolicitation agreements, the central concern announced by courts rejecting the inevitable disclosure doctrine—namely the creation of an ex post facto covenant not to compete is not at issue, making it more favorable to apply the inevitable disclosure doctrine in this case." Id. at 525.  Thus, the fact that Bates also involved a restrictive covenant likely made the application of inevitable disclosure in that case an easier call since the doctrine is more often invoked where the departing employee has not signed a restrictive covenant.  Cf. LeJeune, 849 A.2d at 472 (citations omitted) (vacating injunction where no restrictive covenant was executed and lower court improperly relied "on the assumption that LeJeune's exposure to trade secrets will cause those secrets to be 'inevitably disclosed' by virtue of the new employment with a competitor" and thus the injunction is "'not merely an injunction against the use of trade secrets, but an injunction restricting employment").

While application of the inevitable disclosure doctrine in Bates has not been tested since its 2013 issuance, and even though the Supreme Court of Virginia has never outright rejected this doctrine, it remains apparent that "mere knowledge" of trade secrets – without any other supporting facts – makes for a challenging request for injunctive relief based on threatened misappropriation. Such additional facts may include, for example, (i) what alleged trade secrets a putative defendant holds or possesses, (ii) the extent of a defendant's knowledge about the alleged trade secrets, (iii) the circumstances surrounding the end of a defendant's employment and whether statements or threats were made to others about any intent, (iv) the degree of competition between a previous employer compared to a defendant's new work environment, (v) whether tasks assigned to a defendant will require use or disclosure of the trade secret in order to effectively perform the new job, and (vi) whether the new work environment has mechanisms to protect disclosure of the trade secret.  Each case is different, of course, and some factors (and others not mentioned above) may weigh more heavily depending on the case.  Additionally, if there is proof of "actual misappropriation" instead of only "threatened misappropriation," then the issue of "Is it threatened or inevitable?" may not become as dispositive of an injunction's success under VUTSA.

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