© 2016 The Texas Lawbook.
By Jesse Coleman and Nick Grimmer of Seyfarth Shaw, LLP
(July 12) – Despite numerous invitations, no Texas court has expressly adopted the “inevitable disclosure” doctrine, which generally entitles former employers to enjoin their competitors’ employment of their former employees where the new position entails duties so similar to the former positions that the employees cannot perform them without making use of – or “inevitably disclosing” – trade secrets they learned from former employers.
If Texas courts adopt the inevitable disclosure doctrine, trade secret plaintiffs will add a powerful weapon to their arsenal, and a corresponding increase in trade secret litigation in Texas will surely follow.
What is the “inevitable disclosure” doctrine?
To prevail on a claim for trade secret misappropriation, the plaintiff must prove, amongst other elements, the defendant’s “use of the trade secret.” In essence, for purposes of obtaining injunctive relief, the inevitable disclosure doctrine renders this “use” element an “inevitable use” element (despite the fact that proof of the plaintiff’s “imminent harm” and “irreparable injury” in the absence of an injunction is otherwise required for injunctive relief).
Under the doctrine, “a former employer is entitled to enjoin even anticipated employment or other business activity that would result in inevitable disclosure in order to protect the former employer’s confidential and proprietary information from disclosure, ” according to Orthovita, Inc. v. Erbe, a 2008 decision from the Eastern District of Pennsylvania. The doctrine allows the mere threat of misappropriation to categorically suffice in certain situations, as the Houston (First District) Court of Appeals observed in Cardinal Health Staffing Network, Inc. v. Bowen:
“[T]here are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner’s competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.”
The doctrine is based on the notion “that an employee who wants to succeed at his new position will rely on skills and information learned from his former employer, including trade secrets.” (Ryan M. Wiesner, A State-By-State Analysis of Inevitable Disclosure: A Need for Uniformity and a Workable Standard, 16 Intellectual Property L. Rev. 211, 214 (2012)).
Accordingly, the doctrine presents a fundamental tension between competing interests, i.e., “the need to protect an employer’s confidential, valuable information and the need to support an employee’s freedom of mobility.” Indeed, the doctrine can empower former employers to prohibit their former employees from working for competitors even in the absence of a non-compete agreement and even where the employee has acted in the utmost good faith.
How have Texas courts grappled with the inevitable disclosure doctrine?
The inevitable disclosure doctrine seems at odds with the notion expressed in Abetter Trucking Co., Inc. v. Arizpe that “[i]n Texas, to resign from one’s employment and go into business in competition with one’s former employer is, under ordinary circumstances, a constitutional right,” particularly since the doctrine can apply in the absence of a non-competition agreement. So it is no surprise that several Texas cases (including Bowen) acknowledge that the inevitable disclosure doctrine has not been adopted in Texas.
Nevertheless, many Texas cases have, in effect, applied modified forms of the doctrine, even though none expressly acknowledge adopting the doctrine. These cases include T-N-T Motorsports v. Hennessey Motorsports, Rugen v. Interactive Bus. Systems, Electronic Data Systems Corp. v. Powell, Daily Instruments Corp. v. Heidt, Baker Petrolite Corp. v. Spicer, and FMC Corp. v. Varco Int’l, Inc. While these cases hinge on whether there is proof that the employee’s use of the former employer’s confidential information is probable, the inevitable disclosure doctrine, as such, applies more generally when the employee’s duties with the new employer are sufficiently similar to warrant the conclusion that use is categorically inevitable.
Furthermore, some of these and other Texas cases, such as Reliant Hospital Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., still limit the reach of any form of the doctrine, for instance, by disallowing injunctions which do “not focus on protecting any specific information.”
Did the Texas Supreme Court adopt (or set the stage for adoption of) the doctrine in In re M-I L.L.C.?
Unlike the cases addressed above, the issue in M-I was not an injunction against a former employee. Rather, the issue before the Texas Supreme Court was whether a trial court can exclude a trade secret defendant’s representative from the courtroom while the plaintiff discloses the details of their allegedly misappropriated trade secrets.
The court’s analysis in M-I included application of (1) longstanding constitutional due process law (under which a balancing of competing factors is required when the government functions as an adjudicator of dueling private interests) and (2) provisions of the recently enacted Texas Uniform Trade Secrets Act (“TUTSA”) (directing trial courts to take reasonable measures to protect trade secrets and contemplating “in camera hearings”).
The court ultimately held that the right of a defendant’s representative to be present is (1) not absolute and (2) must be determined case-by-case by balancing the defendant’s due process right to participate against the plaintiff’s potential harm from disclosing trade secrets to its competitor’s representative. (See also Jesse M. Coleman, Texas Supreme Court: Company Representative May Be Excluded from Trade Secret Hearing.”)
Despite this seemingly narrow issue and holding, the ruling could signal Texas’s “inevitable” adoption of the inevitable disclosure doctrine. The Texas Supreme Court expressly instructed lower courts to consider whether the defendant’s representative is a “competitive decision-maker.” According to the court, this consideration is required because “disclosure of [the plaintiff]’s alleged trade secrets to [a competitive decision-maker] would necessarily entail greater competitive harm because, even when acting in good faith, [they] could not resist acting on what [they] may learn” (emphasis added). This, as above, is the same rationale underlying the inevitable disclosure doctrine. Indeed, the court even observed that “it is very difficult for the human mind to compartmentalize and selectively suppress information once learned, no matter how well-intentioned the effort may be to do so.”
It remains to be seen whether Texas courts will treat M-I as an implicit (but nevertheless authoritative) adoption of the inevitable disclosure doctrine. One thing that is nearly certain, however, is that savvy plaintiffs’ counsel will rely on M-I to bolster their positions when seeking to enjoin their client’s competitors and former employees in trade secret litigation.
Counsel on the other side of the aisle will, at least until the Texas Supreme Court squarely addresses the issue, likely respond that M-I’s language – however construed – is mere dicta concerning only due process “balancing” and TUTSA procedural protections which should not be used to create a new broad substantive rule.
Jesse Coleman is a partner in the Litigation Department in the Houston Office of Seyfarth Shaw LLP and can be reached at jmcoleman@seyfarth.com. Nick Grimmer is an associate in the Litigation Department in the Houston office of Seyfarth Shaw LLP and can be reached at ngrimmer@seyfarth.com. Coleman and Grimmer represent and counsel health care, hospitality, and energy-sector clients in numerous trade secret and non-compete disputes, amongst other antitrust and other complex commercial litigation matters.
© 2016 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.