Inevitable Disclosure Injunctions Under the DTSA: Much Ado About § 1836(b)(3)(A)(i)(1)(I)

When trade secret law was federalized in 2016, some commentators and legislators expressed concern that federalization of trade secret law would make so-called "inevitable disclosure" injunctions against departing employees a federal remedy, and negatively impact employee mobility on a national scale.

In response to such concerns, the Defend Trade Secrets Act (DTSA) included a provision that is ostensibly designed to limit availability of inevitable disclosure injunctions under the DTSA. The limiting provision is codified in 18 U.S.C. 1836(b)(3)(A)(i)(1)(I), discussed further below.

The DTSA has been in effect for just over three years. My preliminary observation is that courts do not appear to view Section 1836(b)(3)(A)(i)(1)(I) as placing novel limitations on employment injunctions in trade secret cases. They also do not seem to be wary of "inevitable disclosure" language.

Inevitable Disclosure, Generally

Trade secret law's so-called inevitable disclosure doctrine permits a controversial type of injunction in trade secret cases. The doctrine permits a trade secret plaintiff to prevent or limit an employee's ability to take on a new job, even if the employee has not yet used or disclosed any of the employer's trade secrets. The employee acquired the trade secrets lawfully, under an obligation of secrecy and confidentiality, in the course of her employment. But the plaintiff is able to successfully argue that the employee will at some point in the near future use or disclose the trade secrets in violation of that obligation.  See 18 U.S.C. § 1839(5) (defining "misappropriation" of trade secrets).  (For more on the relationship between trade secret law and employees, generally, and other doctrines that limit employment injunctions see my new article The General Knowledge, Skill, and Experience Paradox).

The inevitable disclosure doctrine is a fancy name for what is basically a special type of employment injunction. As one California court put it, before purporting to reject the doctrine, “[t]he inevitable disclosure doctrine results in an injunction prohibiting employment, not just use of trade secrets.” See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1458 (2002) (rejecting inevitable disclosure doctrine as creating an “after-the-fact” non-compete agreement).

The idea is that the employee just won't be able to help it, despite her best intentions, because she knows such specific and sensitive information; is about to switch jobs, and loyalties, to work for a direct competitor; is doing precisely the same work as she did before; and she's maybe not all that trustworthy to begin with. Factors that make the remedy possible are direct, intense competition; that the prospective employer is in a position to benefit; that the employee will have similar job duties at the new company; and that the employee has engaged in suspicious acts, leading his trustworthiness to be questioned.

For example, in one case, an employee worked at Bimbo Bakeries and knew the recipe for Thomas' English muffins. The court preliminarily enjoined him from leaving to work for Hostess in the same position, even though he alleged to have no intention to disclose the recipe for the muffins and reveal how Thomas' gets its "nooks and crannies." The employee was about to take on a similar position while in possession of specific information that would be of high value to Hostess, and also he was not forthcoming in depositions about why he did things like download files before departure, suggesting he could not necessarily be trusted to keep mum. See Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 114 (3d Cir. 2010); see also PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995) (limiting ability of Pepsi employee, involved in marketing Pepsi sports drink All-Sport, to work at Quaker Oats on marketing of Gatorade).

Limitation on Employment Injunctions Under DTSA § 1836(b)(3)(A)(i)(1)(I)

I am not going to talk about whether the inevitable disclosure doctrine is good or bad. My personal view is the doctrine is a misnomer and really stems from the notion of "threatened" misappropriation, which was already actionable in the vast majority of states.  Instead, I am going to argue that the DTSA's supposed limitation on inevitable disclosure injunctions does not have any effect.

Section 1836(b)(3)(A)(i)(1)(I) of the DTSA states as follows

(3) Remedies.—In a civil action brought under this subsection with respect to the misappropriation of a trade secret, a court may— 

(A) grant an injunction— (i) to prevent any actual or threatened misappropriation described in paragraph (1) on such terms as the court deems reasonable, provided the order does not— (I) prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows; or (II) otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business[.]

On its face, Section 1836(b)(3)(A)(i)(1)(I) provides three rules with respect to employment injunctions under the DTSA.

Rule 1. An injunction under the DTSA cannot “prevent” a person from taking new employment and must be based on evidence of "threatened" misappropriation. If an injunction limits someone’s new employment, this requires “evidence of threatened misappropriation,” not merely evidence that the employee “knows” trade secrets.  This means a court cannot say to a departing employee "you cannot ever work at Company X, under any circumstances." But a court can place restrictions on employment, like ordering the employee to wait a few months until a particular deal is over or prohibit the employee from working on a specific project, but only so long as the plaintiff brings forward evidence of a "threat" that the employee will use or disclose the trade secrets. The naked argument that the employee knows and will "inevitably" use or disclose the information in a new job should not be enough.

Rule 2. An injunction under the DTSA cannot place more restraints on an employee than “an applicable State law" would allow.  Applicable state law presumably includes both state statutes like bans on non-competes, as well the state’s trade secret case law on issues like appropriateness of employment injunctions and whether "general knowledge, skill, and experience" can be a trade secret. So in California, a DTSA claim must bow to California UTSA case law stating that California courts allegedly do not grant such injunctions. The federal claim cannot get you a more employee-restrictive remedy than the California one.

Rule 3. State law remedies against employment may give a plaintiff more than a federal DTSA claim would allow. This is the reverse of what was just said in Rule 2. Both the Senate and House Reports make clear that if a state's law authorizes a sweeping employment injunction, this can still be obtained under state law. There is a state ceiling on federal relief. But there is no federal ceiling on state relief. See S. REP. 114-220, S. Rep. No. 220, 114th Cong., March 7, 2016 ("However... if a State's trade secrets law authorizes additional remedies, those State-law remedies will still be available."). So even if the plaintiff can't get the employment injunction he wants with his DTSA claim, he might get it with a Pennsylvania or Ohio trade secret claim.

Much Ado About § 1836(b)(3)(A)(i)(1)(I)

Here is the thing. The three rules stated above do not materially change the state of the law.  In almost no situations did courts prior to the DTSA grant "pure" inevitable disclosure injunctions pre-DTSA. Rather, as trade secret litigators such as Victoria Cundiff have long known, courts did not do this lightly and limited remedies when they could. As Cundiff put it in a report for the Sedona Conference, under the Uniform Trade Secrets Act (UTSA) and  the common law, some courts would accept "inevitable disclosure" arguments and grant preliminary or even permanent injunctions prohibiting former employees who were not bound by non-compete agreements from accepting new jobs. However, Cundiff wrote,

"many of these 'inevitable disclosure' injunctions were entered only after a showing that the employee has engaged in “bad acts” found to threaten misappropriation of trade secrets[.]" 

Cundiff conceded that "a few rare cases prohibited employees from accepting any employment within a particular division of a specific competing organization for a limited period of time solely based on the sensitivity of the information the individual knew." But these cases involved only limitations on employment, and they were the exception rather than the rule. Indeed, a close reading of the most oft-cited "inevitable disclosure" case, PepsiCo, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995), shows that the court didn't even fully prevent Mr. Redmond from working at Quaker Oats. The court only delayed his start date and prevented him from working on a particular task. Id. at 1267 ("... the district court issued an order enjoining Redmond from assuming his position at Quaker through May, 1995, and permanently from using or disclosing any PCNA trade secrets or confidential information.").

My own research suggests a similar state of the law. Since the early days of trade secret law in America, courts have tried to limit the negative impacts of trade secret law on employees' ability to pursue work.

Post-DTSA, the landscape does not seem to have changed from what Cundiff described pre-DTSA.   Some courts have used the statute's reference to "threatened" misappropriation (drawn directly from preexisting law) in order to get around Section 1836(b)(3)(A)(i)(1)(I)'s language. And courts seem completely willing to entertain and use "inevitability" language, even when assessing DTSA claims.

An early DTSA case that got some press for its treatment of inevitable disclosure is a case in point. In Molon Motor and Coil Corp. v. Nidec Motor Corp., No. 16 C 03545 2017 WL 1954531 (N.D. Ill. May 11, 2017), an Illinois federal district court denied defendant Nidec Motor Corp's motion to dismiss plaintiff Molon Motor and Coil Corp.'s trade secret lawsuit against its former employee, Desai. Just prior to leaving his job at Molon, Desai "allegedly copied dozens of Molon's engineering, design, and quality control files onto a personal Kingston portable data drive."

Citing to pre-DTSA Illinois case law on the inevitable disclosure doctrine, the court concluded that Molon’s allegations, including contentions of pre-departure downloading, "direct competition between the parties, as well as the allegations on the employment breadth and similarity of [former employee] Desai’s quality control work at the two companies, are enough to trigger the circumstantial inference that the trade secrets inevitably would be disclosed by Desai to Nidec.” The court also noted in a footnote, I think astutely, that "[a]t bottom, whether a trade secret would be inevitably disclosed is really a question of circumstantial evidence, and those types of questions defy straitjacket formulas."

Other DTSA cases seem similarly open to limited injunctions against employment and also to "inevitable disclosure" language, when presented with the right facts. See also Fres-co Sys. USA, Inc. v. Hawkins, 690 F. App'x 72, 76 (3d Cir. 2017) (upholding a limited injunction on employment activity under the DTSA and PUTSA, using “inevitable disclosure” analysis and case law); Jazz Pharm., Inc. v. Synchrony Grp., LLC, 343 F. Supp. 3d 434, 445–46 (E.D. Pa. 2018) (denying motion to dismiss under DTSA and PUTSA because record “plausibly suggests the threatened misappropriation of Jazz's trade secrets,” and analogizing to the “inevitable disclosure” scenario for support).

  

The upshot is that, to get an employment injunction under the DTSA before an employee has actually used or disclosed the trade secrets, the plaintiff has to do basically the same thing the plaintiff had to do pre-DTSA: prove that the employee is threatening to use or disclose the trade secrets.

This state of the law has earned "red flags" from scholars such as Orly Lobel and others who think inevitable disclosure doctrine should have been abolished. I don't see this state of the law as surprising given how Section 1836(b)(3)(A)(i)(1)(I) was drafted, and given the scope of what was previously permitted under the UTSA. 

The Stanford NPE Litigation Database

I've been busy with grading and end of year activities, which has limited blogging time. I did want to drop a brief note that the Stanford NPE Litigation Database appears to be live now and fully populated with 11 years of data from 2007-2017. They've been working on this database for a long while. It provides limited but important data: Case name and number, district, filing date, patent numbers, plaintiff, defendants, and plaintiff type. The database also includes a link to Lex Machina's data if you have access.

The plaintiff type, especially, is something not available anywhere else, and is the key value of the database (hence the name). There are surely some quibbles about how some are coded (I know of one where I disagree), but on the whole, the coding is much more useful than the "highly active" plaintiff designations in other databases.

I think this database is also useful as a check on other services, as it is hand coded and may correct errors in patent numbers, etc., that I've periodically found. I see the value as threefold:

1. As a supplement to other data, adding plaintiff type
2. As a quick, free guide to which patents were litigated in each case, or which cases involved a particular patent, etc.
3. As a bulk data source showing trends in location, patent counts, etc., useful in its own right.

The database is here: http://npe.law.stanford.edu/ Kudos to Shawn Miller for all his hard work on this, and to Mark Lemley for having the vision to create it and get it funded and completed.

Fromer: Machines as Keepers of Trade Secrets

I really enjoyed Jeanne Fromer's new article, Machines as the New Oompa-Loompas: Trade Secrecy, the Cloud, Machine Learning, and Automation, forthcoming in the N.Y.U. Law Review and available on SSRN. I think Professor Fromer has an important insight that more use of machines in businesses, including but not limited to increasing automation (i.e. using machines as the source of labor rather than humans), has made it easier for companies to preserve the trade secrecy of their information. Secrecy is not only more technologically possible, Fromer argues, but the chances that information will spill out of the firm are reduced, since human employees are less likely to leave and transfer the information to competitors, either illegally in the form of trade secret misappropriation or legally in the form of unprotectable "general knowledge, skill, and experience."

Professor Fromer's main take-home is that we should be a little worried about this situation, especially when seen in light of Fromer's prior work on the crucial disclosure function of patents. Whereas patents (in theory at least) put useful information into the public domain through the disclosures collected in patent specifications, trade secret law does the opposite, providing potentially indefinite protection for information kept in secret. Fromer's insight about growing use of machines as alternatives to humans provides a new reason to worry about the impact of trade secrecy, which does not require disclosure and potentially lasts forever, for follow-on innovation and competition.

Here was what I see as a key passage:

In addition to the myriad of potential societal consequences that a shift toward automation would have on human happiness, subsistence, and inequality, automation that replaces a substantial amount of employment also turns more business knowledge into an impenetrable secret. How so? While a human can leave the employ of one business to take up employment at a competitor, a machine performing this employee’s task would never do so. Such machines would remain indefinitely at a business’s disposal, keeping all their knowledge self-contained within the business’s walls. Increasing automation thereby makes secrecy more robust than ever before. Whereas departing employees can legally take their elevated general knowledge and skill to new jobs, a key path by which knowledge spills across an industry, machines automating employees’ tasks will never take their general knowledge and skill elsewhere to competitors. Thus, by decreasing the number of employees that might carry their general knowledge and skill to new jobs and in any event the amount of knowledge and skill that each employee might have to take, increasing automation undermines a critical limitation on trade secrecy protection.

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For more on trade secret law's "general knowledge, skill, and experience" status quo, see my new article, The General Knowledge, Skill, and Experience Paradox. I recently discussed this work on Brian Frye's legal scholarship podcast, Ipse Dixit  in an episode entitled "Camilla Hrdy on Trade Secrets and Their Discontents".

Measuring Patent Thickets

Measuring the effect of patenting on industry R&D is an age old pursuit in innovation economics. It's hard. The latest interesting attempt comes from Greg Day (Georgia Business) and Michael Schuster (OK State, but soon to be Georgia Business). They look at more than one million patents to determine that large portfolios tend to crowd out startups. I'm totally with them on that. As I wrote extensively during troll hysteria, patent portfolios and assertion by active companies can be harmful to innovation.

The question is how much, and what to do about it. Day and Schuster argue in their paper that the issue is patent thickets, as their abstract shows. The draft article Patent Inequality, is on SSRN:

Using an original dataset of over 1,000,000 patents and empirical methods, we find that the patent system perpetuates inequalities between powerful and upstart firms. When faced with growing numbers of patents in a field, upstart inventors reduce research and development expenditures, while those already holding many patents increase their innovation efforts. This phenomenon affords entrenched firms disproportionate opportunities to innovate as well as utilize the resulting patents to create barriers to entry (e.g., licensing costs or potential litigation).

A hallmark of this type of behavior is securing large patent holdings to create competitive advantages associated with the size of the portfolio, regardless of the value of the underlying patents. Indeed, this strategy relies on quantity, not quality. Using a variety of models, we first find evidence that this strategy is commonplace in innovative markets. Our analysis then determines that innovation suffers when firms amass many low-value patents to exclude upstart inventors. From these results, we not only provide answers to a contentious debate about the effects of strategic patenting, but also suggest remedial policies to foster competition and innovation.

The article uses portfolio sizes and maintenance renewals to find correlations with investment. They find, unsurprisingly, that the more patents there are in portfolios in an industry, the lower the R&D investment. However, the causal takeaways from this seem to me to be ambiguous. It could be the patent thickets that cause that limitation, or it could simply be that industries dominated by large players are less competitive and drive out startups. There are plenty of (non-patent) theorists that would predict such outcomes.

They also find that firms with large portfolios are more likely to renew their patents, holding other indicia of patent quality (and firm assets) equal. Even if we assume that their indicia of patent quality are complete (they use forward cites, number of inventors, and number of claims), the effect they find is really, really small. For the one reported industry - biology, the effect is something like a -0.00000982 percent likelihood of lapse for each additional patent. This is statistically significant, I assume, because of the very large sample size and a relatively small variation. But it seems barely economically significant. If you multiply it out, it means that each patent is 1% more likely to lapse for every 1,000 patents in the portfolio (that is, from 50% chance of lapse, to 49% chance of lapse. For IBM - the largest patentee of the time with about 25,000 patents during the relative time period, it's still only a 25% change. Most patentees, even with portfolios, would be nowhere near that. I'm just not sure what we can read into those numbers - certainly not the broad policy prescriptions suggested in the paper, in my view.

That said, this paper provides a lot of useful information about what drives portfolio patenting, as well as a comprehensive look at what drives maintenance rates. I would have liked to see litigation data mixed in, as that will certainly affect renewals one way or the other, but even as is, this paper is an interesting read.