Aug 10, 2003 General Employment Issues

New York Employers Cannot Rely on “Inevitable Disclosure” Doctrine To Protect Confidential Information

A New York appellate court recently ruled that an employer could not rely on the doctrine of “inevitable disclosure” in support of its application for a preliminary injunction barring a former employee from working for a competitor. Marietta Corp. v. Fairhurst, 2003 N.Y. Slip Op. 10048, 2002 WL 31898398 (3d Dep’t Jan. 2, 2003).

Under the “inevitable disclosure” doctrine it is presumed that a person who possesses an employer’s trade secrets or other confidential information cannot help but disclose that information when working for a competitor. The doctrine has been applied by some federal courts in New York in limited situations, namely where a high level employee has accepted employment with a direct competitor, in a position similar to the one he or she previously held, and one in which he or she has the opportunity to make decisions that directly relate to the subject matter of the confidential information obtained in the course of the former job. In these circumstances, an employer may use the “inevitable disclosure” doctrine as a basis for an injunction restraining the former employee from working for the competitor, even in the absence of an agreement not to compete. For example, in Lumex Inc. v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996), the court granted an injunction preventing a high level management representative from working with a competitor of where the court found that the former employee was privy to top secret product, business and financial information and would likely disclose these trade secrets to aid his new employer because he could not “eradicate these secrets from his mind.”

The former employee in Marietta, a senior vice president with intimate knowledge of Marietta’s customers and marketing plans, went to work for a competitor one month after his termination. The employee had signed a confidentiality agreement, requiring that he refrain from disclosing or using confidential information in furtherance of competing interests, but no agreement restricting his right to compete with Marietta following his separation. Marietta could not produce any evidence that the employee had actually disclosed any trade secrets to his new employer, but nevertheless sought to enjoin the employee from working for the competitor by relying on the theory of “inevitable disclosure”; that is, Marietta argued that because of the nature of the employee’s responsibilities and the types of information he possessed, it was inevitable that he would make unauthorized disclosures if he was permitted to continue in his competing employment. The lower court granted the injunction, reasoning that it was extremely likely that the employee would use Marietta’s confidential information, even if only “unconsciously,” in carrying out his duties at the competitor, to the unfair advantage of Marietta.

The Appellate Division reversed, finding that “where there is no actual theft of a trade secret, the court, in applying the doctrine of inevitable disclosure, is asked to bind the employee to an implied-in-fact restrictive covenant not to compete.” The court reasoned that because “well entrenched state public policy considerations disfavor” restrictive covenants, “the doctrine of inevitable disclosure is disfavored as well, absent any evidence of actual misappropriation by an employee.” The Appellate Division concluded that “[a]bsent any wrongdoing which would constitute a breach under the confidentiality agreement, mere knowledge of the intricacies of a business is simply not enough” to justify enjoining a former employee from working for a competitor. The court further held that the type of confidential information the defendant employee was privy to (i.e., recent product bids, expansion plans, pricing data, market strategies and the identity of customers) did not qualify as “trade secrets.”

The Marietta decision does not in any way question or undermine the validity of employer confidentiality agreements. However, in light of the court’s rejection of the “inevitable disclosure” doctrine, employers should not assume that they will be able to rely upon confidentiality agreements alone as a basis for preventing former employees who have access to confidential, proprietary information from working for direct competitors. Rather, it is now more important than ever for employers to ensure that such employees sign valid non-compete agreements. In the absence of such an agreement, the employer will be unable to enjoin the employee from engaging in competing employment unless it presents evidence that the former employee has actually misappropriated trade secrets.