Preventing Inevitable Disclosure of Internet Company Trade Secrets
Internet companies which are springing up all over Long Island are increasingly confronted with the threat that their key employees with access to their most proprietary confidential trade secret information, will be lured away by competitors. As internet companies strive to recover their development costs and to achieve profitability, they can ill afford the loss of their trade secrets, key employees and the competitive advantage they have attained.
To protect against predatory practices in the internet industry, some companies have taken to the Courts as soon as they learn that a key employee is about to leave, seeking injunctions prohibiting that employee from working for a competitor. They rely upon a developing body of law known as the “inevitable disclosure” doctrine — that a former employee will inevitably disclose the former employer’s trade secrets to his new company when he/she is doing essentially the same job or working on the same projects for a direct competitor. We obtained precisely that type of injunctive relief for one of our clients just recently.
Employers can seek this injunctive relief under the inevitable disclosure doctrine despite the fact that the employee has not signed a non-competition/confidentiality agreement (some have even called the doctrine an “implied in fact restrictive covenant”). Injunctive relief can be obtained even though there is no evidence yet that the former employee has absconded with valuable trade secrets or that he or she has used them. This doctrine is a great departure from the accepted law of trade secrets which has generally required some proof of misappropriation, use of trade secrets and/or an agreement before injunctive relief against an employee will issue.
Two New York courts, one a State court and the other a Federal court, both in unpublished decisions, have addressed the inevitable disclosure doctrine specifically in the context of the internet industry and both have reached different results.
DoubleClick Inc. v. Henderson, Jr., (Supreme Court, New York County, November 5, 1997) was the first internet New York inevitable disclosure doctrine case and the Court’s order prohibiting an internet company employee from working for a competitor for six months, has become renown.
Defendants, senior executives at DoubleClick, an internet advertising company, planned to form their own competitor company. DoubleClick’s president found out, immediately fired them and confiscated one of their laptops containing defendants’ new company’s strategic information, a business plan which had been cut and pasted from DoubleClick’s own and proprietary DoubleClick information. The Court concluded “that there is a high probability of ‘inevitable disclosure’ of trade secrets in this case” and prohibited the defendants from launching, taking employment with, or rendering consulting services to, any company which competes with DoubleClick where defendants’ jobs or functions mirrored those they previously performed for DoubleClick. The Court limited the injunction to a period of six months because it believed that the proprietary information known by the former employees will likely lose value after that time given the speed with which the internet industry changes.
Last October, the Federal District Court in Manhattan had a chance to weigh in on the use of the inevitable disclosure doctrine in an internet industry case called Earthweb, Inc. v. Schlack, (S.D.N.Y. October 27, 1999). Earthweb sought to enjoin its former vice president from taking a job with a new internet subsidiary launching a website in competition with Earthweb’s which provided information to professionals in the information technology industry. The Court first entered a temporary restraining order which prohibited defendant Schlack from proceeding with his new employment but reversed itself a month later declining to enter a preliminary injunction (one which would last until trial). The Court discussed the inevitable disclosure doctrine at length but found that the requirements of the doctrine were just not met in that case. The Court was not convinced that the Earthweb trade secret information the defendant possessed would necessarily be used by him in his new job. More importantly, the Court was reluctant “to rewrite the parties’ employment agreement under the rubric of the inevitable disclosure” doctrine so as to permit Earthweb to broaden its narrow restrictive covenant which did not squarely cover Schlack’s new job. Earthweb appealed and the Second Circuit remanded the case back to the District Court for more findings. The District Court reaffirmed its ruling finding no inevitable disclosure. Earthweb appealed again and lost.
While several years ago, there were only a few reported inevitable disclosure doctrine cases, the number is growing and their appearance, particularly in the internet industry, is likely to increase even more. There are admitted hurdles in obtaining such an injunction, but internet companies may have no choice but to seek this relief lest their development efforts and competitive advantage in the market be quickly eroded by the predatory nature of their industry