• A Harsh Reminder: Employers May Be Sanctioned For Relying On the Inevitable Disclosure Doctrine
  • July 7, 2009
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • The inevitable disclosure doctrine is based on the assumption that when an employee resigns to work in a similar capacity for his or her former employer’s competitor, the disclosure of trade secrets is inevitable, whether or not intentional. Some states recognize this doctrine to prohibit former employees from working for a competitor (e.g., Connecticut, Delaware, New Jersey, Texas and Utah). However, in the state of California, which prides itself on mobility and free competition, the courts have soundly rejected the doctrine of inevitable disclosure. California courts consistently have refused to enjoin competitive employment unless the former employer can establish evidence of an actual intent to misappropriate trade secrets. When coupled with the illegality of noncompetition agreements, the refusal to recognize inevitable disclosure can leave some employers feeling helpless to protect their proprietary information.

    One California employer recently learned the hard way that no matter what it believes the facts are, it can be expensive to improperly assert the doctrine of inevitable disclosure. That employer was FLIR which manufactures various high tech equipment used in connection with infrared cameras, night vision and thermal imaging. Much of this technology was created by William Parrish during his employment with FLIR. In 2005, William Parrish and another FLIR employee, Timothy Fitzgibbons, decided to leave FLIR and started their own company. Shortly thereafter, Parrish and Fitzgibbons entered into negotiations with Raytheon company (one of FLIR’s competitors) about a possible joint deal.

    FLIR filed a lawsuit seeking a permanent injunction (FLIR Systems, Inc. v. Parrish, 09 C.D.O.S. 7448). Through the course of trial it became clear that there was no evidence of an actual threat of misuse or misuse of trade secrets by Parrish or Fitzgibbons. FLIR’s only basis for the injunction was the suspicion that Parrish and Fitzgibbons’ new company would inevitably use trade secrets as part of their new venture.

    Consistent with previous California decisions, the Appellate Court upheld the trial court’s position that “speculation that a departing employee may misappropriate and use a trade secret in a startup business will not support an injunction.” Moreover, the Court found that FLIR’s refusal to settle or withdraw this case even though it was well aware that it had suffered no damages and had no evidence that Parrish and Fitzgibbons intended to misuse trade secrets was further evidence of FLIR’s bad faith. The Court awarded $1,641,216.78 to the former employees for their attorneys’ fees and costs. The award was made under Section 3426.4 of California Uniform Trade Secrets Act on the basis that the plaintiff (FLIR) had filed and maintained the action in bad faith.

    Advice to Employers

    • Without evidence of actual intent to disclose or actual disclosure of trade secrets, employers cannot stop an employee from working for a competitor, even if he or she had access to precious proprietary information of obvious value to the competitor.
       
    • Employers can protect their proprietary information by requiring all employees to sign confidentiality agreements at the time of hire and enforcing those agreements.
       
    • As part of an exit interview, employers should remind departing employees of their continuing obligations with respect to confidentiality/non-disclosure agreements.
       
    • Employers must be vigilant in treating proprietary information as confidential so as not to waive the proprietary status. This can be accomplished by marking confidential information as such, and limiting access to proprietary information on a ‘need to know’ basis.
       
    • Employers should consult their attorneys to develop solid strategies for maximizing protection of their valuable proprietary information, which is made all the more necessary given California’s reluctance to restrain free competition.