- What You Can Learn From the Muffin Man: Fresh Lessons Regarding Trade Secret Injunctions
- October 27, 2010 | Authors: Kerry L. Bundy; Randall E. Kahnke
- Law Firm: Faegre & Benson LLP - Minneapolis Office
The United States Court of Appeals for the Third Circuit recently issued an opinion that is an excellent reminder of the keys to winning inevitable disclosure cases specifically and trade secret cases generally.
The doctrine of inevitable disclosure, which has its source in trade secret law, holds that in rare circumstances an individual possesses such critical knowledge of a company's trade secrets that she can be temporarily or even permanently banned from working in a specific job, because performing the job itself would inevitably lead to disclosure of her former employer's trade secrets. The doctrine has been a source of controversy among courts and legal commentators, in part because of strong policy considerations on both sides of the debate, and in part because of inconsistent treatment by federal and state courts.
State law governs trade secrets, unlike most areas of intellectual property law, which are governed by federal statute. The vast majority of states—at last count, 46—have adopted laws based on the Uniform Trade Secrets Act (UTSA), which defines a trade secret as information that "derives independent economic value, actual or potential, from not being generally known...and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." The UTSA provides for injunctive relief in the event of "actual or threatened misappropriation" of trade secrets. The remaining states have civil statutes similar to the UTSA.
1. The Bimbo Case
In Bimbo Bakeries USA, Inc. v. Botticella, No. 10-cv-00194 (E.D. Penn. Feb. 9, 2010), aff'd. No. 10-1510, --- F.3d ----, 2010 U.S. App. LEXIS 15314 (3d Cir. July 27, 2010), the court granted a preliminary injunction prohibiting a food company executive from moving to a rival firm, finding that there was a "substantial threat" that the move would lead to trade secret disclosure. The court applied Pennsylvania's version of the UTSA and held that a "substantial threat" or "sufficient likelihood" of inevitable disclosure provided sufficient grounds to grant a preliminary injunction barring the employee from working for a rival company in the same position held at the prior employer. Id. at 30-31.
Chris Botticella was the Vice President of California Operations for multinational food company Bimbo Bakeries. His job provided him with broad access to sensitive and confidential corporate information such as product formulas, product-launch plans, and pricing strategies. In fact, Botticella was one of only seven people in the world with access to all information necessary to replicater Thomas' English Muffins, including the muffins' signature "nooks and crannies" texture, the key to a product that generates $500 million in annual sales. Id. at 5. In October 2009, Botticella secretly accepted an offer to work for a rival company, Hostess Brands. Bimbo found out about Botticella's intent to change jobs several months later, in January 2010. Bimbo immediately sued Botticella and asked the court for an injunction to prevent him from starting his job at Hostess.
At the preliminary injunction hearing, Bimbo presented evidence through expert testimony that Botticella had accessed sensitive strategic documents on Bimbo's network right after notifying Bimbo that he was moving to Hostess. It took Botticella thirteen seconds to access this information, which the expert assessed as not "consistent with ordinary usage, such as opening and reading or otherwise using a document." Id. at 10-11. The expert also determined that, during this time, there were at least three external storage devices attached to Botticella's laptop. The district court concluded that Botticella, who did not testify at the hearing, gave "confusing" deposition testimony regarding his use of external storage devices and ultimately found his testimony "simply not credible." Id. at 17.
The district court determined that the information that Botticella downloaded constituted trade secrets, both because of its strategic importance and also because of Bimbo's efforts to keep it confidential. The court then turned to the "inevitable disclosure" doctrine, which Pennsylvania courts had previously applied in analyzing the threatened misappropriation of trade secrets. Bimbo argued that the court should grant the injunction if disclosure were simply "likely," such that Botticella's employment at Hostess would probably result in the disclosure of Bimbo trade secrets. Botticella, meanwhile, argued for a stricter standard, contending that an injunction would be appropriate only if it would be virtually "impossible for [him] to work at Hostess without disclosing Bimbo's trade secrets." Id. at 24-25. The court agreed with Bimbo. "Our analysis of the case law supports the view that the sufficient likelihood or substantial threat of disclosure of a trade secret need not amount to its inevitability." Id. at 25-26. The court reasoned that judges cannot predict the future "to the degree of ‘inevitability' or ‘impossibility,'" so the standard should be a "practicable" one. Id. at 26. The district court thus held that a plaintiff need show only a "substantial threat" of disclosure to obtain a preliminary injunction of this nature. Id. The Third Circuit essentially adopted the district court's factual determinations and affirmed the district court's analysis. No. 10-1510, --- F.3d ----, 2010 U.S. App. LEXIS 15314 (3d Cir. July 27, 2010).
Although much of the Third Circuit's analysis focused on the proper legal standard to be applied to claims of inevitable disclosure under Pennsylvania law, the case is instructive because of what it teaches about how to win inevitable disclosure cases—as well as trade secret cases generally.
a. Identify the Trade Secrets
One of the critical issues in every trade secret case is the identity of the trade secrets that are at issue. Although this may seem somewhat obvious, it is often overlooked—particularly when litigating in the time sensitive context of injunction actions. If the court doesn't know what trade secrets are at issue it can be difficult to outline the parameters of appropriate discovery or to craft the type of specific injunctive relief that Federal Rules of Civil Procedure, and specifically Rule 65, require.
The Court in Bimbo did a good job of identifying the specific trade secrets at issue. Once that threshold issue was addressed, the court could move on to consider whether the defendants misappropriated that information.
b. Identify the Job Similarities
Inevitable disclosure cases are threatened misappropriation cases. Thus, you need to identify the threats to the relevant trade secrets. The threats can come in a number of forms, but in inevitable disclosure cases, the most prominent threat is the temptation to use the trade secrets that is caused by the similarities between the employee's old and new jobs. The closer the job duties, responsibilities, and goals, and the more competitive the industries, the more likely a court is to find that the use of the former employer's trade secrets is inevitable or "likely."
c. Identify the Inequitable Conduct
Identifying specific wrongdoing or suspicious conduct on the part of a former employee can change a misappropriation allegation from common to compelling. Employees who have had access to trade secrets leave to join competitors all the time; so why should a court prevent this particular employee from joining this particular competitor? Because of this particular wrongdoing, suspicious activity, or inequitable conduct. In short, because the former employee can't be trusted.
The Bimbo Court went out of its way to catalogue the former employee's suspicious actions and misdeeds. The more a plaintiff can demonstrate that the former employee can't be trusted, the more likely a court will enter an injunction. The more a court thinks that the case involves an innocent employee who is just trying to feed his family, the less likely a court will enter any relief—let alone the extraordinary relief of an injunction.
d. Master the Facts
In Bimbo, both the district court and the Third Circuit discussed the underlying facts of the case in detail before addressing the relevant legal principles. Why? Because, as the Third Circuit noted, trade secret cases are highly fact intensive. The Third Circuit quoted a time-honored truism surrounding trade secret cases to demonstrate the fact-bound nature of trade secret disputes:
"the misappropriation of a trade secret often must be proved by construct[ing] a web of perhaps ambiguous circumstantial evidence that outweighs the defendants' direct denial"
This means that in trade secret cases, details matter—and mastering the facts is essential. Why should a court buy your story when the other side denies everything? Because the facts tell the story—and your version of the facts is more persuasive.
e. Have Your Witnesses Ready to Testify
In Bimbo, the Third Circuit addressed whether the district court could properly draw an adverse inference against the former employee based on his failure to testify at the preliminary injunction hearing. That is an interesting legal question. And, in our experience, it is also irrelevant. Why? Because in trade secret preliminary injunction cases the district court is trying to: (1) make an expedited decision, (2) based on limited information, (3) in a highly fact-intensive context. This means that, regardless of the legal niceties surrounding adverse inferences, most judges are doing the best they can to arrive at a fair or equitable result. And most people agree that it is fundamentally unfair to protect those who appear untrustworthy or seem to have something to hide. How do you convince a judge that you might have something to hide? Listen to a whole series of scurrilous allegations against you and then refuse to respond through testimony.
f. Win in the Trial Court
Inevitable disclosure cases are fact intensive and frequently involve injunctions. Appellate courts generally give substantial deference to trial court factual findings and decisions regarding injunctions. The Third Circuit's opinion in Bimbo is a prime example of this sort of deference. This means that, although you might have a right to appeal a trial court decision in a trade secret injunction case, your chances of prevailing on appeal are slim. So, the lesson is simple: in trade secret injunction cases, win early. How do you do that? Identify the trade secrets, identify the job similarities, indentify the inequitable conduct, master the facts, and have your witnesses ready to testify.