Inevitable Disclosure of Trade Secrets Doctrine Still Disfavored In New York

by Wilson Sonsini Goodrich & Rosati

While New York law in theory recognizes the "inevitable disclosure" doctrine, a federal district court there, in Janus et Cie v. Andrew Kahnke, recently reinforced the state's hostility to the doctrine by dismissing an employer's complaint against a former employee based entirely on the alleged inevitable disclosure of trade secrets. The doctrine, where recognized, can allow a court to impose a preliminary injunction prohibiting a departing employee from taking a new, competitive job based on a prediction of future trade secret misappropriation, often (but not always) where the former employer presents evidence of untrustworthy behavior. The inevitable disclosure doctrine, however, is disfavored in many states, and courts in those jurisdictions will be critical of an application for preliminary injunction that is based solely on an inevitable disclosure argument. The Janus case illustrates the hostile approach to the inevitable disclosure doctrine by showing the difficulties in relying on it as the basis for a claim against a former employee.

In Janus, the plaintiff, a high-end residential and commercial furnishings provider, brought suit against a former employee, Andrew Kahnke, who left the company to take "a very similar position" with a competitor. Janus was particularly concerned with an account management system that Kahnke had created that included a wealth of information about the company's customers. It believed that Kahnke would develop a similar system for its competitor. Although Kahnke had not signed a non-compete agreement with Janus, he did sign a non-disclosure agreement that prohibited him from sharing Janus's "confidential information," which the agreement broadly defined as "all information that has actual or potential economic value to [Janus]." Based on the fact that it believed Kahnke would exploit Janus's confidential information through his work for its competitor, Janus sued Kahnke for the inevitable disclosure of trade secrets and sought a permanent injunction. In describing the suit, the court noted that Janus had made "the extraordinary request that the Court be the first to recognize the inevitable disclosure of trade secrets as a stand-alone claim in a complaint bereft of any allegations that Kahnke misappropriated trade secrets or breached a non-compete agreement."

The court found that Janus's failure to allege that Kahnke breached a non-compete agreement or misappropriated any of its trade secrets was fatal to its claim. The court described the inevitable disclosure doctrine as heavily disfavored under New York law, and emphasized that New York had a strong public policy against any type of implied-in-fact restrictive covenant, and that such agreements required strict judicial scrutiny. It observed that Janus's attempt to state the inevitable disclosure doctrine as an "independent basis for relief," was simply an effort to "make an end-run" around its confidentiality agreement (which was governed by California law). The court also reiterated that the doctrine should be applied "only in the rarest of cases" where the employer has not shown that the former employee either misappropriated its trade secrets or breached a non-compete agreement. This was deemed not to be one of those cases. Even though Kahnke's new employer was in direct competition to Janus and provided the same products and services, and Kahnke had taken an almost identical position with his new employer and allegedly could not undertake his job responsibilities without utilizing Janus's trade secrets, the court refused to extend the doctrine outside the scope of a misappropriation claim or breach of non-compete. In doing so, it stressed that the doctrine was "fraught with hazard" and that the facts alleged had failed to persuade the court that Janus had successfully "threaded the 'exceedingly narrow path through judicially disfavored territory.'"

The disfavor with which New York courts have treated the inevitable disclosure doctrine is not unusual, as courts in other states treat such claims similarly. For instance, California, for years, has rejected the inevitable disclosure doctrine in its entirety. In Texas, although some state and federal courts have applied a variation of the doctrine, no court has expressly adopted it, and Texas employers should not rely on it as an exclusive means to seek a preliminary injunction. The same is true for Washington where no state or federal court has expressly applied the doctrine and some courts have expressed doubts as to the viability of the doctrine to support a pure trade secret claim. Finally, the doctrine's continued viability in New Jersey also is uncertain following the state's adoption of the New Jersey Trade Secret Act in 2012, after which no court has expressly adopted the doctrine.

While the inevitable disclosure doctrine technically survives in New York, the former employee's actual misappropriation of trade secrets appears to be a prerequisite to its utilization in injunction cases. Given the hostility to the doctrine shown by New York, a safer approach to ensuring the protection of trade secret and confidential information is to consider the use of a reasonable non-compete in those jurisdictions permitting such use (including New York). In all states that have adopted the Uniform Trade Secrets Act (which is every state other than New York and Massachusetts), another alternative is a claim of threatened misappropriation. In such cases, however, an employer will likely have to establish that the former employee's conduct presents a substantial risk of imminent disclosure (or some other heightened standard) and irreparable harm to the company. Establishing such grounds for relief will typically require that the aggrieved employer reasonably identify the precise trade secrets at issue, and introduce evidence of any suspicious behavior accompanying the employee's departure. Merely going to a competitor seldom will suffice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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