In a commercial market increasingly connected through the Internet, the importance of trade secret protection for businesses is growing exponentially. A single key employee can wreak havoc if he misappropriates trade secrets and then uses that information or discloses it to compete against his former employer. Traditionally, employers have been able to secure injunctions in Texas courts against former employees’ actual use or disclosure of trade secret information based on evidence of those employees’ intentions. And while a few Texas courts have gone so far as to issue injunctions where it was merely probable a defendant would use or disclosure trade secrets, none have expressly or formally adopted the doctrine is known as ‘inevitable’ disclosure. The Texas Uniform Trade Secrets Act (TUTSA) may have changed that effective September 1, 2013, wherein the state legislature added a new tool to employers’ arsenal by expressly authorizing injunctive relief for “threatened misappropriation.” When combined with the Texas Supreme Court’s trend toward favoring enforcement of non-competes, Texas has, at least temporarily, tilted pro-business in the never-ending tug-of-war between employer proprietary concerns and employee mobility interests. What is less clear is how this augurs for the future.
Although the concept of threatened misappropriation has been a part of the Uniform Trade Secrets Act since its inception in 1979, the flavor known as “inevitable disclosure” did not gain widespread currency until PepsiCo Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). Traditional threatened misappropriation cases issued injunctive relief based on evidence of probability under the circumstances that the former employee would use the trade secret information in his new job. The inevitable disclosure doctrine dispenses with an analysis of the circumstantial evidence surrounding the particular former employee’s subjective likely future intent, and instead entertains the objective question of whether someone in the former employee’s situation would inevitably use the former employer’s proprietary information. Some state courts have adopted “inevitable disclosure” as the standard for measuring “threatened disclosure” under the Uniform Trade Secrets Act. Others have rejected it, opting for an approach that balances the competing interests of employee mobility against the need to protect trade secrets.
The inevitable disclosure doctrine has a checkered past in Texas jurisprudence. Although no Texas court has formally recognized the doctrine under a common law theory, several have fashioned analogous remedies using similar analysis. But with TUTSA, the days of non-recognition have changed. What is unknown is what form “threatened disclosure” may take in Texas jurisprudence. Will it be of the “inevitable disclosure” variety espoused by Redmond, or a more conservative flavor adopted by other jurisdictions? Prior Texas cases provide few clues.
Three common threads run through the Texas cases that approximated the inevitable disclosure doctrine even before TUTSA: (1) possession of trade secret information, (2) the employee is in a position to use the trade secret information, and (3) that the trade secrets “probably would” be disclosed in the absence of injunctive relief. For example, in Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548 (Tex.App.-Dallas 1993, no writ), the court of appeals upheld a temporary injunction prohibiting the defendant from calling on, soliciting, or transacting business with customers and consultants of her former employer, and also from using confidential information and trade secrets she acquired while employed by her former employer. Id. at 550. Despite evidence in the record that the defendant had not actually used or disclosed the trade secrets, the court nonetheless affirmed the injunction, stating, “Rugen is in possession of IBS's confidential information and is in a position to use it. Under these circumstances, it is probable that Rugen will use the information for her benefit and to the detriment of IBS.” Id. at 552. Thus, each of the above threads, (1) possession of the information, (2) position to use the information, and (3) probability of disclosure, are present in the Rugen holding.
Other decisions tend to support the Rugen court’s reasoning. In Williams v. Compressor Eng'g Corp., 704 S.W.2d 469 (Tex. App–Houston [14th Dist.] 1986, writ ref'd n.r.e.), the court of appeals affirmed an injunction based on a jury finding that trade secrets “probably would” be disclosed. Id. at 470-472. That court went on to note that proof that trade secrets “will be used” by a former employee to compete supports injunctive relief. Id. The court of appeals in Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex.Civ.App.—Houston[1st Dist.] 1978, ref’d n.r.e.), upheld an injunction prohibiting a former employee from working for a competitor. The Weed Eater court noted that injunctive relief was the only viable remedy where even in the best of good faith, the former employee could hardly prevent his knowledge of his former employer’s confidential methods from showing up in his work. And finally, in Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 860 (Tex.App.--Fort Worth 2003, no pet.), the court of appeals held that a plaintiff was not required to prove that a defendant is actually using the information, but only needed to prove that the defendant was in possession of the information and was in a position to use it.
It is unclear, however, whether the three factors enumerated above are more or less restrictive than the inevitable disclosure doctrine enunciated in Redmond. In its purest formulation in Redmond, “inevitable disclosure” means that a plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets. Behind the Seventh Circuit’s holding stands a well-reasoned opinion: Teradyne Inc. v. Clear Communication Corp., 707 F. Supp. 353 (N.D. Ill. 1989). As in Redmond, the court in Teradyne analyzed inevitable disclosure in light of the Illinois Uniform Trade Secret Act, holding that “threatened misappropriation can be enjoined under Illinois law” where there is a “high degree of probability of inevitable and immediate ... use of ... trade secrets.” Id. None of the Texas cases cited above, however, discuss the degree of probability that information will be disclosed necessary to support injunctive relief for threatened misappropriation. This appears to be an unanswered question in Texas.
Not all courts have lauded the inevitable disclosure doctrine. The California appellate court for the Fourth Appellate District rejected the doctrine in Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277 (Cal. App. 2002). Although the court acknowledged that the majority of jurisdictions which had considered the inevitable disclosure doctrine had accepted it in some form, the California court joined a small but growing number of jurisdictions rejecting the doctrine. In doing so, the court explained, “Decisions rejecting the inevitable disclosure doctrine correctly balance competing public policies of employee mobility and protection of trade secrets.” The California court observed that the inevitable disclosure doctrine created a de facto covenant not to compete that ran counter to California’s established public policy favoring employee mobility. The court also criticized the doctrine because it rewrote employment agreements after-the-fact, without the employee’s consent, based on inferences drawn from circumstantial evidence.
As previously stated, Texas courts have been reluctant to adopt a common-law variant of the inevitable disclosure doctrine. Two factors now militate against that trend, however. First, of course, is TUTSA. Texas’ Uniform Trade Secrets Act closely resembles Illinois Act. For example, both states that include a “list of actual or potential customers or suppliers” in the definition of a trade secret; that particular addition is absent from the Uniform Act and most other states’ adoption of the Uniform Act. The Redmond case has its origins in the Illinois Act. The second factor is the Texas Supreme Court’s recently announced public policy shift in Exxon Corp. v. Drennen, --- S.W.3d ---, 57 Tex. Sup. J. 1346 (Tex. Aug. 29, 2014), a non-compete case. There the Texas Supreme Court noted that with Texas hosting many of the world’s largest corporations, “public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York.” Thus, the Texas Supreme Court effectively jettisoned its role as the protector of employee mobility in favor of a policy that avoids “’disruptions of orderly employer-employee relations’ within large multistate companies and avoids disruption to ‘competition in the marketplace.’” This public policy shift is quietly abetted by TUTSA, which provides that the Act overrides conflicting law, which could include the Texas Covenant Not to Compete Act’s stringent requirements to establish an enforceable non-compete agreement. Under TUTSA’s provisions, Texas courts may find the justification needed to impose de facto non-competes in the form of injunctive relief for threatened misappropriation. Thus, while Texas courts have previously shied away from adopting the inevitable disclosure doctrine, those days are likely numbered in the pro-business environment prevalent at Texas’ highest legislative and jurisprudential levels.
How Texas courts interpret “threatened disclosure” under TUTSA remains to be seen. Texas courts will have to balance the public policy behind the Uniform Trade Secrets Act against that behind the Covenants Not to Compete Act. One way of doing so would be to require a high degree of probability of inevitable disclosure to trigger relief for threatened disclosure. That is the standard for “inevitable disclosure,” however, and courts rejecting the doctrine argue it runs the risk of creating de facto non-competes in employment relationships. Furthermore, Texas courts are reluctant to depart from existing precedent. Existing precedent suggests that proof of a probability of disclosure is all that is necessary to support injunctive relief. Doesn’t that create an even greater risk of turning TUTSA into a tool for forging de facto non-competes in the employment relationship? None of this bodes well for a balanced approach that weighs employee mobility against the protection of trade secrets. Thus, Texas courts may well trend away from such a balanced approach when interpreting TUTSA’s threatened disclosure provision. How far away they will trend, and whether the Covenant Not to Compete Act’s public policy goals militate against that trend, remain to be seen. Until a Texas court delivers a definitive decision, Texas lawyers will be navigating uncertain waters, and employer attempts to enjoin former employees from unfairly competing may be very difficult to predict.
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