August 13, 2018

Inevitable Disclosure: Recognition (or Lack Thereof) Under the Defend Trade Secrets Act

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

Prior to the federally enacted Defend Trade Secrets Act (DTSA), companies seeking civil remedies for misappropriation were generally limited to state law causes of action (including, where applicable, a state version of the uniform trade secrets act), and federal litigation was only possible with diversity jurisdiction or the inclusion of another federal claim. While DTSA changed the substantive and jurisdictional landscape of trade secret litigation in many ways, Congress expressly stated the DTSA should not be construed to pre-empt state law. See 18 U.S.C. § 1838. This post discusses a provision under the DTSA that has received considerable attention over the past two years – the restrictions on injunctive relief under 18 U.S.C. § 1836(b)(3)(A)(i)(I).

The DTSA permits injunctive relief “with respect to the misappropriation of a trade secret.” However, the injunction cannot “prevent a person from entering into an employment relationship” and conditions placed on employment must be “based on evidence of threatened misappropriation and not merely on the information the person knows.” 18 U.S.C. § 1836(b)(3)(A)(i). Early commentators suggested this provision prohibited application of the inevitable disclosure doctrine under the DTSA. However, two years after the DTSA became law, the inevitable disclosure landscape remains undefined. This lack of precedent is partially explained by the statute itself, which limits the DTSA’s application to an “act” of misappropriation that “occurs on or after the date of enactment.”1 While hundreds of DTSA cases have entered federal district courts since its enactment on May 11, 2016, only a limited number sought injunctive relief under 18 U.S.C. § 1836(b)(3)(A)(i). Moreover, within that reduced sample size, only a handful of cases involved allegations of threatened misappropriation.

Litigants have defended allegations of threatened misappropriation under the DTSA, albeit outside the injunction context, by arguing that “[the] theory known as ‘inevitable disclosure,’ was rejected by Congress.” Xoran Holdings LLC v. Luick, No. 16cv13703, 2017 WL 4039178, at *6 (E.D. Mich. Sept. 13, 2017) (citing 18 U.S.C. § 1836(b)(3)(A)(i)(I)). However, in Xoran Holdings, the district court rejected that assertion, finding “Defendant’s argument lacks merit,” without further explanation. Id.  Other federal courts have applied inevitable disclosure when assessing threatened misappropriation within the injunction context without explicitly invoking the doctrine itself.2 Importantly, these decisions did not prevent a former employee from accepting new employment, but the courts addressed threatened misappropriation by imposing conditions on the substance and scope of the employee’s future work.

Last year, the U.S. District Court for the Northern District of Illinois applied the inevitable disclosure doctrine within the context of a motion to dismiss. See Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 1:16cv3545, 2017 WL 1954531 (N.D. Ill. May 11, 2017). While Molon Motor involved alleged violations of both the DTSA and Illinois Trade Secrets Act, the court’s discussion of the inevitable disclosure doctrine did not parse between state and federal law. Instead, the district court simply found that “[f]or now, Molon has pled enough for the trade secrets claims to avoid the Rule 12(b)(6) chopping block.” Id. at *7. The district court also cited the Seventh Circuit’s well known decision in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), which found that “defendants are incorrect that Illinois law does not allow a court to enjoin the ‘inevitable’ disclosure of trade secrets.” Id. at 1269 (emphasis added). As noted in a previous post: “the court in [Molon Motor] was not being asked to [enjoin the defendant], but only to decide whether Molon’s claim of trade-secret misappropriation against its competitor could be sustained based on the misconduct of Molon’s former employee. Nonetheless, the doctrine of inevitable disclosure is potentially available in cases, like this, where a highly placed employee quits to work for a direct competitor in an intensely competitive market to do for that new employer substantially the same work he had been doing for the one he left and, shortly before resigning, surreptitiously copies trade secrets of the company he is leaving behind.”

Thus, it appears that at least some district courts are willing to entertain inevitable disclosure arguments to establish threatened misappropriation under the DTSA.  The success of such arguments, of course, depends on the facts of each case and your forum.

1 See, e.g., Roeslein & Assocs. v. Elgin, No. 4:17cv1351, 2018 WL 1138465, at *3 (E.D. Mo. Mar. 2, 2018) (internal quotations omitted) (“Because the DTSA became effective on May 11, 2016, a plaintiff states a plausible claim for relief only if plaintiff sufficiently alleges a prohibited act occurring after May 11, 2016.”).

2 See, e.g., N. Am. Deer Registry, Inc. v. DNA Solutions, Inc., No. 4:17cv0062, 2017 WL 2402579 (E.D. Tex. June 2, 2017); Engility Corp. v. Daniels, No. 1:16cv2473, 2016 WL 7034976 (D. Colo. Dec. 2, 2016); SMS Audio, LLC v. Belson, No. 9:16cv81308, 2016 WL 8739764 (S.D. Fla. Aug. 16, 2016); Allstate Ins. Co. v. Rote, No. 3:16cv1432, 2016 WL 4191015 (D. Or. Aug. 7, 2016).

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