The Colorado Lawyer
Vol. 28, No. 9 [Page 73]
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Specialty Law Columns
Business Law Newsletter
Non-compete by Non-disclosure: The Doctrine of Inevitable Disclosure
by Michele B. Fagin
Column Ed.: David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs—(719) 475-0097
This newsletter is prepared by the Business Law Section of the CBA to apprise members of the Bar of current information concerning substantive law. This month’s article was written by Michele Fagin, Colorado Springs, an attorney with Sparks Willson Borges Brandt & Johnson, P.C., (719) 475-0097. The article was adapted from a presentation given by the author at the firm’s monthly Technology Breakfast.
Colorado law, at CRS § 8-2-113(2), restricts the use of non-competition agreements ("non-competes"). In addition, common law principles require that non-competes be reasonable as to time, scope, and geography. However, there may be instances when an employee is not subject to a formal non-compete, but is nevertheless forbidden from taking a job in competition with his or her former employer under the doctrine of inevitable disclosure. This article reviews that doctrine and its application.
In discussing these issues, it is important to consider the public policy balance: the need for employers to protect their interests while allowing a free flow of employees in the marketplace. Lawyers tend to think of these issues most when they are helping an employer-client protect his or her interest against current or former employees, but it is also important to consider these issues in the context of deciding whether a new hire is "safe" for a client.
In some cases, an employer-client may wish to limit a former employee’s competition, even though there is no written non-compete agreement, or a non-compete could not be legally enforced. For an incoming employee, it may not be sufficient to check for a written non-compete agreement to decide if the employee is safe for the employer to hire. Because this is an evolving area of law, it is helpful to look at the facts and outcomes of a few of the more influential cases from around the country.
The Pepsico Case
In Pepsico, Inc. v. Redmond,1 the employee, Redmond, left Pepsi, where he was a high-level manager with access to inside information and trade secrets, and went to work for Quaker Oats heading the division that sells Gatorade and Snapple. At the time, Pepsi was planning its strategy for its Gatorade contender. Redmond was candid with Pepsi about his offer from Quaker Oats, but not about his acceptance of that offer.
Pepsi asserted that Redmond could not help relying on Pepsi trade secrets to plot Gatorade and Snapple’s new course, and that those secrets would enable Quaker Oats to achieve a substantial advantage by knowing exactly how Pepsi would price, distribute, and market its sports and new age drinks. The district court had noted in its findings of fact that Redmond’s lack of candor was indicative of his possible "willingness to misuse [Pepsi] trade secrets."2 Applying Illinois law, the Seventh Circuit upheld the district court’s preliminary injunction preventing Redmond from assuming any duties with Quaker Oats related to beverage pricing, marketing, and distribution.
The Merck Case
In another case, Merck & Co. Inc. v. Lyon,3 Lyon was a Merck & Co., Inc. employee whose responsibilities included the Canadian over-the-counter launch of Pepcid AC. Lyon left Merck for a position with Glaxo Wellcome, Inc. that included oversight for the marketing of Zantac, a product which would compete with Pepcid AC. The transition to the new job involved attending a meeting with his new employer while he was still employed by Merck.
The U.S. District Court for the Middle District of North Carolina noted that Lyon told Merck that he was not going to work for a competitor. The court found that Merck’s failure to have a formal non-compete agreement with Lyon "weighs heavily against" the company and that it "may also serve as an indication that the type of confidential information which Lyon possesses has a limited value."4 Nevertheless, the court found that Lyon’s misrepresentation about his future plans may be indicative of his willingness to misuse Merck’s trade secrets to advance his career with Glaxo. Applying North Carolina law, the court enjoined the use of the trade secrets, but allowed the employment.
The Uncle B’s Case
Even the bagel industry is not immune. In Uncle B’s Baker, Inc. v. O’Rourke,5 O’Rourke was a manager at Uncle B’s, a bagel manufacturer with a unique bagel-making process. O’Rourke left and became a plant manager for Brooklyn Bagel Boys ("BBB"). BBB specifically asked that O’Rourke not divulge any trade secrets, and O’Rourke testified that he had not done so and that it was not necessary to do so in order to do his job. It also was revealed it would be impossible to revamp the BBB production line to accommodate the Uncle B’s process.
Although Uncle B’s claimed to have had a written non-compete agreement with O’Rourke, the company was unable to produce one and suggested that O’Rourke had stolen it. Uncle B’s employees also testified that O’Rourke had told them that he was not going to work for a competitor. The court was careful in considering the difference between trade secrets and the employee’s own knowledge, skill, and experience. In a ruling based partially on the threatened disclosure of trade secrets and confidential information, and partially on the threatened violation of the non-competition agreement, and applying Iowa law, the district court issued a preliminary injunction the prevented O’Rourke from working at BBB or otherwise competing with Uncle B’s.
The Jet Courier Service Case
The Colorado courts first looked at the issue of non-competes in Mulei v. Jet Courier Service, Inc.6 Mulei managed the Western Zone operations of Jet Courier. Significantly, he had worked for one of Jet Courier’s competitors before being hired, and brought many of his former employer’s clients and employees with him. Mulei’s employment contract contained a covenant not to compete that the trial court found "void as unsupported by consideration and unreasonable in geographic restriction."7 Mulei left Jet Courier to start his own business in direct competition with Jet Courier, taking clients and employees with him.
"The ability to prevent competition from former employees does not rest solely on the terms and
enforceability of written non-competes."
The Colorado Court of Appeals stated that "[o]nly confidential information acquired during the course of employment may be protected, not the general knowledge of a business operation" and found that Mulei had taken only his general ability and know-how with him.8 Based on this finding, the appellate court upheld the lower court’s dismissal of a counterclaim against Mulei for his breach of the employment contract by disclosing confidential information. It is not clear from the ruling what result would have been reached if it had been found that Mulei was using trade secrets, but an argument can be made that enjoining the competing activities could be a part of such remedy.9
Doctrine of Inevitable
Disclosure in Context
Based on the above discussion of how the courts are applying this doctrine, this article now considers four hypothetical employees who work for or are being considered for employment by Rosie, Inc., a personal robotics company:
1. Antonia came to work for Rosie, Inc. two years ago. She had extensive programming experience. After coming to work, she was assigned a project developing a new robotic speech recognition interface using an unfamiliar computer language. In the process of completing this task, she became an expert developer in the new computer language. She has recently left Rosie, Inc. and found another job doing development for the automotive industry using her newly acquired, and highly marketable, skills.
2. Brutus supervised Antonia. While Antonia wrote code, Brutus worked with Rosie, Inc.’s customers and potential customers to decide the features and capabilities of the new software. Brutus has since left and joined Rosie, Inc.’s competitor to head a team that is developing a speech recognition interface for its robotics division.
3. Claudius used to run Rosie, Inc.’s marketing and sales division. He has since left to form his own company specializing in marketing and sales for robotics companies.
4. Daedalus used to work for Rosie, Inc.’s competitor, heading the team that developed the software that controls a robot’s hand movements. Rosie, Inc.’s client is considering hiring him to develop hand-control software for its own company. The client is hoping that Daedalus can convince most of his team to come along, too.
The following discussion considers the four employees discussed above to see whether the doctrine of inevitable disclosure could be used to prevent the employees from pursuing their new employment.
As noted above in the Jet Courier case, it is important to distinguish between general ability and a trade secret. In the case of Antonia, it is very unlikely that she could be prevented from taking her new job. She will be working in a different industry. It could be argued that the automotive industry is incorporating robotic technology into their cars, and that may be why Antonia got the job, but it would be hard to argue that trade secrets would be integral to Antonia’s success. Even more important, the skills that Antonia is taking with her are almost certainly general ability and would not be considered trade secrets.
Brutus is quite a different story from Antonia. Under the laws of Colorado and most states, California being a notable exception, Brutus could legally have been subject to a written non-compete. Even if he was not, it is possible that the doctrine of inevitable disclosure could prevent him from working in his new job. Brutus has extensive knowledge of the results of marketing analyses. Given the responsibilities of his new job, it would be easy to argue that Brutus would be unable to perform without disclosing the trade secrets of Rosie, Inc. It is likely that he was hired precisely because of that knowledge.
Claudius also may be subject to non-competition based on the doctrine of inevitable disclosure. Claudius has extensive knowledge of the Rosie, Inc.’s customer list and leads. Assuming that this information is a trade secret to Rosie, Inc., it could be very difficult for Claudius to provide marketing and sales services to the robotics industry without relying on his knowledge and contacts from Rosie, Inc.
Daedalus may be a very risky hire for Rosie, Inc. Even if Daedalus is not subject to a written non-compete, it is possible that his former employer could seek to prevent him from working for Rosie, Inc. under the doctrine of inevitable disclosure. From the facts given, it seems likely that Daedalus was hired not for his general skills, but because of his intimate knowledge of his former employer’s trade secrets.
When considering whether a former employee can be prevented from competing with a former employer, it is important to consider all the facts and circumstances and not merely the terms of written agreements. The doctrine of inevitable disclosure can prevent competition from a former employee if the nature of the new employment is such that it would be impossible to do the new job without relying on, or revealing the trade secrets of, the former employer. The case law is still too sparse for generalizations, but a few trends are emerging:
• the industry and job responsibilities need to be very similar if not identical;
• the distinction between general knowledge and trade secrets may be dispositive;
• the efforts of the former employer to maintain trade secrets as secrets are critical to success;
• the candor of the employee in leaving his or her old job can be indicative of whether he or she can be trusted with trade secrets; and
• the activities of the former employee while still on the job, such as attending meetings of the new employer or soliciting business for the new employer, are important factors.
One conclusion is certain. The ability to prevent competition does not rest solely on the terms and enforceability of written non-competes.
1. 54 F.3d 1262 (7th Cir. 1995).
2. Id. at 1270.
3. 941 F.Supp. 1443 (M.D.N.C. 1996).
4. Id. at 1461.
5. 920 F.Supp. 1405 (N.D.Iowa 1996).
6. 739 P.2d 889 (Colo.App. 1987).
7. Id. at 891.
8. Id. at 892.
9. The Colorado Supreme Court reversed the Court of Appeals decision as to other issues of the case, including the duty of loyalty of an employee with respect to soliciting his or her employer’s customers and employees while still employed, and certain issues relating to statutory rights to compensation and punitive damages. Jet Courier v. Mulei, 771 P.2d 486 (Colo. 1989).
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