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Developments in the Law of 'Inevitable Disclosure'

When an employee resigns and goes to work for a competitor, that employee may be in a position to exploit the employer's valuable trade secrets. [FN1] Employers often are understandably concerned that the departing employee will use or disclose such trade secrets and thereby harm the employer's business interests. To prevent such harm, employers may seek emergency relief from the courts, usually in the form of a preliminary injunction ordering the former employee to refrain from working for the competitor for some prescribed period of time. To succeed in obtaining such relief, the employer must demonstrate, among other elements of proof, an ongoing or imminent threat of irreparable harm.

In recent years, New York courts have shown a willingness to grant preliminary injunctions even where the employer presents no evidence of actual or intended disclosure of trade secrets, but where there is evidence that the employee will 'inevitably' disclose the trade secrets in his new employment. In this way, the so-called inevitable disclosure doctrine can fill an evidentiary void, allowing an employer to make a critical showing without providing particularized evidence of misconduct.

Essential factors in this analysis include 1) the extent to which the new employer is a direct competitor of the former employer; 2) the degree of similarity between the employee's former and new positions; and 3) the value of the purported trade secrets to the new and former employers. [FN2] Other case-specific factors such as the nature of the industry or the former employer's efforts to prevent the disclosure of trade secrets may be considered as well.

Courts have had little difficulty applying the inevitable disclosure doctrine to prevent use or disclosure of trade secrets by employees with highly technical expertise. [FN3] By contrast, at least some courts have been reluctant to apply the doctrine to employees occupying managerial positions, and whose confidential business information may be less technical or whose knowledge of trade secrets is merely ancillary to the employee's primary job functions. [FN4]

International Business Machines Corp. v. Visentin, a decision from the U.S. District Court for the Southern District of New York, provides a very recent example of a case in which the court refused to find that a former senior executive would not inevitably use or disclose the former employer's trade secrets. Although the court acknowledged that the doctrine could be used as the basis for an injunction in the appropriate case, it refused to apply the doctrine to the facts presented in this case, following a painstaking analysis of the employee's job functions at his former employer, the nature of the asserted trade secrets, and whether there was any basis to conclude that the employee would inevitably use or disclose trade secrets in his new job.

In this article, we highlight some of the salient facts in Visentin that the court deemed influential in its decision to deny the preliminary injunction. Based on these salient facts, and the court's reasoning, we then offer some practical strategies employers may wish to consider as ways to approach either the hiring of an executive from a competitor, or to protect an employer's trade secrets by enforcement of noncompetition agreements.

'IBM v. Visentin'

On Jan. 19, 2011, Giovanni 'John' G. Visentin, a senior executive at International Business Machines Inc. (IBM) announced his intention to leave IBM to work for the Hewlett-Packard Company (HP). Although Mr. Visentin offered to remain at IBM for a reasonable transition period, IBM declined his offer and immediately sent someone to Mr. Visentin's home to retrieve his laptop. On Jan. 20, IBM filed a complaint alleging claims for breach of contract and misappropriation of trade secrets, and simultaneously moved for a preliminary injunction with the U.S. District Court for the Southern District of New York. Following an extensive four-day hearing, the court denied IBM's motion on Feb. 16, 2011. [FN5]

Prior to his resignation, Mr. Visentin served as general manager of IBM's Integrated Technology Services (ITS) business. In consideration of his position and membership on IBM's exclusive integration and values team, Mr. Visentin executed a noncompetition agreement with IBM, agreeing not to work for a competitor for one year following the termination of his employment with IBM. However, immediately after resigning, Mr. Visentin joined HP to become a senior vice-president.

In its motion for preliminary injunction, IBM asserted that in his capacity as general manager, and as a result of his membership on several task forces and teams developing IBM corporate strategy, Mr. Visentin was privy to a large amount of confidential IBM information, including strategic initiatives, deal pricing, troubled clients, potential acquisitions, and client 'pipeline' information. Despite access to such information, the court found that Mr. Visentin's functions at IBM required general managerial expertise as opposed to highly technical, secret or proprietary information. [FN6] The court also credited HP's claim that he would not need to apply any confidential information learned at IBM in his new employment at HP, and, therefore, concluded that the risk of Mr. Visentin's use or disclosure of such confidential information in HP's business was minimal.

Good Behavior

Courts have divided over whether an employee's bad faith ought to be considered in inevitable disclosure cases. Specifically, courts have divided between those which find that the doctrine is meant to intercept intentional misconduct, and those courts that would apply the doctrine where disclosure would be truly inevitable, in the sense that even an employee with the best of intentions could not avoid it. Many decisions suggest that an employee's best intentions may not be enough to prevent the court from finding that the employee's new position poses a significant threat of unintentional disclosure. [FN7] Other cases suggest that in some circumstances, courts may require the former employer to show that the employee is untrustworthy before invoking the doctrine. [FN8]

The court's analysis in Visentin suggests that the employee's demonstrated 'good faith' or continuing loyalty lessened the perception that his work for HP could threaten IBM--for example, Mr. Visentin's decisions not to take any IBM documents with him to HP and to provide HP with a list of customers for whom he could not work because of his responsibility for those customers at IBM. These actions supported his representations that he had no intent to use or disclose IBM's trade secrets in the future. His good behavior as a departing employee, in effect, gave the court a basis from which it reasonably concluded that he would not 'eventually be 'motivated' to break the law.' [FN9]

By contrast to Mr. Visentin's good behavior, a recent case involving a departing Estee Lauder executive illustrates the impact on the court of evidence that a departing employee engaged in conduct that breached ongoing duties of loyalty or fiduciary duties. In that case, the court granted a preliminary injunction prohibiting the employee from working for a competitor. [FN10] The court found that the employee began doing work for the competitor while still employed by the former employer, going so far as to use the former employer's resources to perform work for the competitor. [FN11]

IBM's Reasonableness

In considering whether to grant a motion for preliminary injunction to enforce a noncompetition agreement, courts assess not only the employee's loyalty and good faith, but also the reasonableness of the employer's actions in dealing with the former employee. Visentin suggests that an employer's initial reaction to the news of the executive's resignation may be an important factor which influenced the court's assessment of the equities. The court devoted considerable attention to IBM's decision to refuse Mr. Visentin's offer to remain at the company and IBM's refusal to discuss the new position with Mr. Visentin. [FN12] Based on this fact, the court concluded that IBM's actions changed the status quo, and, therefore, IBM's own actions exacerbated the emergency from which it sought the court's assistance to avoid. [FN13]

IBM's abrupt reaction to Mr. Visentin's departure contrasts sharply with IBM's reaction to the departure of the employee in International Business Machines v. Papermaster, in which case IBM succeeded in obtaining preliminary injunctive relief. [FN14] In Papermaster, IBM not only offered the defendant a substantial pay increase to stay at IBM, but also offered to pay the employee one year's salary in exchange for his agreement not to work for competitor Apple for one year. This attempt, despite being ultimately unsuccessful, helped IBM establish not only its good faith efforts to resolve the situation, but also demonstrated IBM's concern that Papermaster would inevitably disclose important trade secrets.

The former employer, however, is not alone in having to consider carefully the reasonableness of its actions in the aftermath of an employee's decision to leave one position for the other. Employers seeking to attract top talent should likewise consider taking steps to avoid receiving a competitor's business information from a new employee. A hiring employer's efforts to establish that it is not interested in the former employer's trade secrets, can provide powerful evidence that there is no risk of inevitable disclosure of the competitor's trade secrets. As other cases have made clear, mere representations to that effect will not be enough to overcome the appearance of likely disclosure when the two positions are similar enough to make the use of such information seem inevitable. [FN15]

In Visentin, HP clearly thought about Mr. Visentin's responsibilities at IBM and carefully structured Mr. Visentin's new job functions so as to minimize overlap with his job functions at IBM. These efforts appear to have helped HP convince the court that the likelihood of disclosure was insufficient to require an injunction. Further, HP's and Mr. Visentin's agreement not to use or disclose IBM trade secrets buttressed the court's perception that both parties were sincere in their desire to avoid disclosure.

Practice Pointers

The Visentin case holds several important lessons both for employers concerned with protecting their trade secrets, and those who wish to hire new employees from the ranks of their competitors.

Employers who wish to maximize the likelihood that they will be able to protect their trade secrets when employees leave to work for competitors, should take steps well in advance of any such departure. For example, employers should invest appropriately in efforts to maintain confidential information, including entering into confidentiality agreements with the critical employees who have access to such information and adopting policies that define with precision the information that the employer considers to be trade secrets. To the extent confidential information exists on computer networks, employers should ensure that such networks are accessible only with appropriate passwords and other security measures designed to prevent the unauthorized use or disclosure of trade secrets.

Employers faced with news of an employee departing to work for a competitor should refrain from acting prematurely, or overreacting to news of the employee's intention to leave, as such a reaction may lead a court to conclude that the former employer has acted punitively toward the departing employee. Although IBM ultimately may have had little choice but to sue Mr. Visentin following his resignation, IBM may have endeavored to avoid the type of conduct that the court found to have been the cause of the emergency. For example, could IBM have extended Mr. Visentin's employment while at the same time seeking to learn more about his future job at HP and the extent to which Mr. Visentin and HP could comply with IBM's noncompetition agreement? At a minimum, IBM might have sought to create a record that it was acting deliberately and cautiously to protect its interests, and not for the purpose of punishing Mr. Visentin or HP.

Conversely, the hiring employer should ensure that the departing employee does not take any documents from the former employer so as to minimize any appearance that the employee intends to use or disclose the former employer's trade secrets during the new employment. While asking for a customer list may help to limit conflict with an employee's previous position, doing so may also inadvertently require the employee to disclose information that the court could later determine to be proprietary. Thus, the hiring employer and the departing employee who seek to use a customer list for this purpose should implement appropriate safeguards to avoid improper use or disclosure of any customer list and to be able to demonstrate those safeguards in any subsequent litigation.

Hiring employers also should invest appropriate time and attention to structuring the departing employee's new job in order to minimize the risk that the new job will be perceived as identical, or in significant conflict with the employee's former position. As Visentin makes clear, the potential to mitigate the risk of inevitable disclosure by appropriate structuring of the new job can be very persuasive to a court considering a motion for a preliminary injunction.

Conclusion

Given the intensely fact-driven, somewhat unpredictable application of the doctrine of inevitable disclosure, employers cannot derive a one-size-fits-all 'rules of thumb' that would achieve the objective of either protecting trade secrets, or avoiding violation of a competitor's noncompetition agreements. Visentin, however, provides helpful guidance as to some of the ways in which the equities, taken as a whole, can influence the court's application of the doctrine.

JEFFREY S. KLEIN and NICHOLAS J. PAPPAS are partners at Weil, Gotshal & Manges. EMILIE ADAMS, an associate in the firm's employment litigation practice group, assisted with the preparation of this article.



FN1. New York common law uses the following factors to determine whether certain information is a trade secret: '(1) the extent to which the information is known outside the business; (2) the extent to which the information is known by employees and others involved in the business; (3) the extent of measures taken by the company to guard the secrecy of the information; (4) the value of the information to the company and its competitors; (5) the amount of effort and money expended by the company in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.' See, e.g., DoubleClick Inc. v. Henderson, 1997 WL 73143, at *4 (N.Y. Co. Ct. Nov. 7, 1997) (citing factors listed in the Restatement of Torts §757, comment b).

FN2. See, e.g. Earthweb v. Schlack, 71 F.Supp.2d 299, 310 (SDNY 1999).

FN3. See, e.g., Intern. Bus. Machines Corp. v. Papermaster, 2008 WL 4974508 (SDNY Nov. 21 2008) (microprocessors); Integrated Cash Mgmt. Servs. Inc. v. Digital Transactions Inc., 732 F.Supp. 370, 378 (SDNY 1989) (computer software program). See also Bimbo Bakeries USA Inc. v. Botticella, 613 F.3d 102 (3d Cir. 2010) (employee knew, among other trade secrets, the precise recipe for Thomas' English Muffins).

FN4. See, e.g., American Airlines v. Imhof, 620 F.Supp.2d, 574, 582 (SDNY 2009) ('[I]t is well to bear in mind that we are dealing with an individual responsible for sales of a widely used service as distinct, for example, from a food chemist privy to the secret formula for Coca-Cola or even a salesman for a highly specialized, technical product used only by small numbers of obscure manufacturers').

FN5. Int'l. Bus. Machines. Corp. v. Visentin, 2011 WL 672025 (SDNY Feb. 16, 2011).

FN6. Despite Mr. Visentin's high-level management position, the court makes frequent reference to his 'general' traits and skills. Id. at *53 ('Visentin's general managerial skills are his marketable trait'). Indeed, Mr. Visentin's position as a high-level manager as opposed to a 'front line' employee convinced the court that his job would not require him to use confidential knowledge. Id. at *22 ('Although trade secrets may have lurked somewhere on the periphery, the real thrust of his position was to manage his teams to make them as efficient as possible'). Cf. Estee Lauder Cos. v. Batra, 430 F.Supp.2d 158, 175 (SDNY 2006) ('The fact that [the employee] was not the scientist behind the formulas and the development of new products bears not on whether or not [the former employer] has carried its burden of demonstrating irreparable injury').

FN7. Global Telesystems Inc. v. KPNQwest, N.V., 151 F.Supp.2d 478, 482 (SDNY 2001) (finding that despite the departing employee's 'best intentions,' there was a high likelihood that disclosure of trade secrets would occur) (citing Cheng v. GAF Corp., 631 F.2d 1052, 1058 (2d Cir.1980)). See also Papermaster, 2008 WL 4974508, at *10 (finding a high likelihood of 'inadvertent disclosure'); Monovis Inc. v. Aquino, 905 F.Supp. 1205, 1234 (WDNY1994) ('even assuming the best of good faith, it is doubtful whether the defendant could completely divorce his knowledge of the trade secrets...').

FN8. See, e.g., Oce North American Inc. v. Brazeau, 2010 WL 5033310 (N.D.Ill. March 18, 2010); Barilla America Inc. v. Wright, 2002 WL 31165069, at *9, 11 (S.D. Iowa July 5, 2002).

FN9. Visentin, 2011 WL 672025, at *49.

FN10. Id. at 176.

FN11. Estee Lauder Cos. v. Batra, 430 F.Supp.2d at 164.

FN12. Visentin, 2011 WL 672025, at *57 (noting that the lack of discussion marked a departure from IBM's normal process).

FN13. Id. at *20 ('Thus, it was IBM that changed the status quo, leading to its seeking a mandatory injunction').

FN14. Intern. Bus. Machines Corp. v. Papermaster, 2008 WL 4974508 (SDNY Nov. 21 2008).

FN15. See, e.g., Payment Alliance Int'l. v. Ferreira, 530 F.Supp.2d 477, 482 (SDNY 2007) (finding that new employer's 'professed lack of interest' in former employer's trade secrets not enough to overcome the nearly identical new position). 4/4/2011 NYLJ 3, (col. 1)

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Reprinted with permission from the April 4, 2011 edition of the New York Law Journal © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

This item also appeared in the March-April 2011 Employer Update.

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