Inevitable Disclosure

How to limit the access to your ex-employees thoughts.

Or the issuance of a court injunction based on the principles of the inevitability of confidential information disclosure.

Specialists in the IT industry are used to signing NDAs (non-disclosure agreements) and NCAs (non-compete agreements) in addition to an employment contract or service agreement.

A non-disclosure agreement (NDA) is an agreement that can be entered into by an employer/customer (Disclosing party) to protect its trade secrets and confidential information from unauthorized use and disclosure to third parties while working with another party (Recipient party). Learn more about the peculiarities of concluding an NDA here.

A non-compete agreement (NCA) is an agreement in which one party undertakes not to begin competing activities with those of the other party to the agreement and/or not to work for a company that engages in competing activities for a specified period.

It is a common misconception that such agreements are only signed when working with large corporations. After all, any startup founder who, in his/her humble opinion, has the potential to change the course of future history considers it an obligation to sign an agreement that will protect his/her ideas and developments from theft or plagiarism.

At times, protecting business secrets may be more important than releasing the company’s product. “Nonsense”, you may say, but how will you feel if the long-awaited development of a startup appears on the Internet before its official release and on other people’s resources? It is possible to protect a startup’s product without an NDA, but a signed agreement is usually a significant lever in this process. Thus, balance is important not only in life but also in business.

Lawyers frequently combine the provisions of these two agreements to save paper and focus on specifics (NDA and NCA).

The US practice // Injunction or court order

If the other party to the agreement breaches the terms of the NDA / NCA, the company may seek injunctive relief.

What does it mean?

In the event of a violation of the terms of the agreement, the practice of applying for an injunction in favor of the company allows the company to prohibit the employee/partner from engaging in activities that compete with the company’s main activity for a set period. That is, the company may apply to the court for an injunction against the employee/partner at the time of detection or before the violation occurs. Then seek reimbursement damages for any misappropriation of trade secrets or disclosure of confidential information that occurred before the injunction was issued by the court.

As previously stated, an injunction is only issued in court and requires strong evidence from the injured party. However, the proof process is quite complicated because how to separate confidential information/trade secrets from the employee’s skills?

Since we do not live in the imagined future and cannot erase memories or experiences from such a carrier as the brain, the doctrine of Inevitable Disclosure was developed to protect the owner of confidential information. The doctrine’s central tenet is the inevitability of the employee disclosing trade secrets or confidential information if he/she replicates his/her experience at a competitor of his/her former employer.

Therefore, at the stage of litigation between the employer and the former employee, this doctrine is usually applied in US practice, which provides the basis of the evidence base for an injunction as protection against the misappropriation or disclosure of trade secrets.

To clarify, imagine that while working for the previous employer, the employee signed an NDA and, under the terms of this agreement, returned all media containing confidential information or trade secrets, handed over all his/her files to the responsible person of the company and left without further questions. And everything appears to be fine, but the company overlooked one of the employee’s most important carriers of confidential information — his/her memory and experience gained during the cooperation.

As a result, it is difficult for the court to distinguish between the violation of the obligation to keep confidential information confidential and the inevitable disclosure.

How does the court operate? The court should not issue an injunction without first weighing the parties’ interests. In practice, the court of the first instance balances the employer’s interests (to protect trade secrets), the employee’s interests (to protect mobility and choice of livelihood), and the public interest (commercial morality and protection against unfair competition). Granting an injunction without considering the balance of the parties’ interests and the public interest is an abuse of discretion under the law.

Due to flaws in the process of proving the “inevitability” of confidential information disclosure, the courts have specified four general approaches for its determination: 1) a general analysis of the facts, 2) a focus on bad faith, 3) the need for technical information or 4) analyzing competition and similarity of positions.

The court uses a case-by-case basis to determine whether disclosure of confidential information is unavoidable under the general factual analysis because there is no set standard or list of factors.

The second approach, which is based on facts, “focuses on evidence of bad faith or intent on the part of the employee or prospective employer”.

The court recognizes the inevitability of disclosure under the third approach only if the employee “possesses highly technical skills or will be required to use technical information in the new job”.

Finally, the fourth and most complicated approach “focuses on the industry’s objective competitiveness and the similarities between new and old positions”.

Although many cases fall into one of these four categories, courts and scholars debate about which factors should be taken into account when applying the doctrine of inevitable disclosure. All jurisdictions that have adopted the doctrine, at the very least, “require the employer to prove the existence of the trade secret and that the employee was in some way in possession of the trade secret”.

There are also other criteria on which the court relies:

• the existence of a restrictive agreement
• the degree of competition between the former and new employer;
• unfair conduct of the former employee or the new employer;
• type, identification, and scope of knowledge of the employee;
• political considerations;
• efforts of the new employer to preserve the trade secrets of the former employer;
• similarities between the employee’s previous and current positions;
• and whether the trade secrets in question are highly valuable to both employers.

The use of injunctive relief is not absolute. The prohibition should not be overly broad or ambiguous. A confidentiality injunction should be narrowly tailored to protect against the threat of misappropriation of a specific trade secret or disclosure of confidential information.

As a result, most injunctions based on the inevitability of the disclosure of confidential information will include specific activity restrictions.

For example, in the case of PepsiCo, Inc. v. Redmond, which popularized the doctrine and established a standard for determining the inevitability of disclosure of confidential information. The court imposed a temporary injunctive relief against a former PepsiCo, Inc., Redmond employee to perform his duties in the competing company Quaker for 5 months and permanently barred him from disclosing trade secrets. The court justified that, like PepsiCo, Inc., Quaker, which Redmond joined, specialized in a narrow segment of the “sports drinks” market, and Redmond’s new position was very similar to the previous one.

The former employee is not barred from working for a competitor; instead, the former employee is barred from engaging in a specific activity for a limited time. Thus, the injunction strikes a careful balance between the employer’s and employee’s interests, as well as the public interest in fair competition and the preservation of commercial morality in the market.

As a result, the inclusion of injunctive relief as a remedy in the NDA / NCA agreement is a balancing of the rights of both parties to the agreement. At the same time, in practice, the injunction clause is applied while taking into account many factors and balanced arguments, as well as the parties’ evidence bases.

Donikova Kateryna
Lawyer at Digilaw