The Defend Trade Secrets Act (DTSA) states very clearly that an injunction issued pursuant thereto may not “prevent a person from entering into an employment relationship,” and that any conditions placed on a former employee’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” (Emphasis added). This language appears to bar injunctive relief under the DTSA based on the “inevitable disclosure doctrine,” which in some states permits a court to enjoin a former employee from working for a competitor—even in the absence of a signed non-compete agreement—if it can be established that the employee would “inevitably” (even if inadvertently) use his or her former employer’s trade secrets on behalf of a new employer. As a result, when the statute was first enacted, many commentators assumed that claims based on the inevitable disclosure doctrine would quickly be shot down. In practice, however, that does not appear to be the case. At the very least, some recent federal court decisions have sown confusion around this issue.
We recently wrote about a federal court’s ruling in the Northern District of Illinois that applied the inevitable disclosure doctrine to a DTSA claim. Despite its non-precedential value, this ruling was significant because it interpreted a federal law to allow the application of a doctrine that has been expressly rejected in several states, including California, Maryland, and Virginia, and, again, appears to be barred by the plain language of the DTSA. That case can perhaps be explained by the fact that it was decided on a motion to dismiss, not a motion for injunctive relief, and thus the DTSA’s apparent prohibition on basing an injunction on inevitable disclosure was not necessarily implicated. The same cannot be said about a decision that was issued just three weeks later by the United States Court of Appeals for the Third Circuit, in which the Court applied the inevitable disclosure doctrine in the context of a temporary restraining order. The case is Fres-co Systems USA, Inc. v. Hawkins, 2017 WL 2376568 (3rd Cir. June 1, 2017).
In 2016, Kevin Hawkins notified his employer, Fres-co Systems, that he was resigning from his position as a sales representative to work for a direct competitor of Fres-co, Transcontinental Ultra Flex, Inc. He also informed Fres-co that not only will he be working for a direct competitor, but he will be selling a competing product as well. When Fres-co reminded Hawkins of his one-year non-compete and non-solicitation agreement, he refused to confirm that he would not solicit Fres-co customers with whom he had worked while at Fres-co, and would not commit to honoring the terms of his agreement.
Fres-co then filed suit against Hawkins and joined Transcontinental, alleging, among other things, misappropriation of trade secrets under the DTSA and the Pennsylvania Uniform Trade Secrets Act. Fres-co moved for a Temporary Restraining Order to enforce Hawkins’s non-solicitation provision and to prevent the disclosure of any of its trade secrets. Fres-co claimed that Hawkin’s position gave him access to confidential information, including “customer lists, price lists, and marketing and sales strategies.” Hawkins opposed the motion and attached an affidavit in which he denied awareness of any Fres-co trade secrets and represented that he would not disclose or use any confidential information that he learned at Fres-co while working for Transcontinental.
The district court issued a TRO, observing that neither Hawkins nor Transcontinental would confirm that Hawkins would not “solicit, contact, or communicate with Hawkins’s former Fres-co clients[ ]” and accordingly determined Hawkins would “begin work as a sales representative, the position he occupied while at Fres-co, and be assigned to solicit his former clients.” Notably, the court also held that given his position, Hawkins would “likely use his specialized and confidential knowledge to the detriment of Fres-co…. and Hawkins’s interference with Fres-co’s client relationships would cause immediate irreparable harm to Fres-co.”
Hawkins and Transcontinental appealed to the Third Circuit. The appellate court remanded the case back to the district court because it failed to address three of the four requisite elements for injunctive relief. In so doing, however, the court made an interesting observation in its discussion of the irreparable harm element. Without actually referring to the inevitable disclosure doctrine by name, the court recognized that under the Pennsylvania Uniform Trade Secrets Act and the DTSA, “misappropriation of trade secrets need not have already occurred to warrant injunctive relief; threatened misappropriation is sufficient.” This is not in and of itself a controversial statement, as the DTSA does permit injunctions to be issued based on “threatened misappropriation” (so long as it is not based “merely on the information the person knows”). Citing the lead opinion from the Circuit that applied the inevitable disclosure doctrine to Pennsylvania law (Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 114 (3d Cir. 2010)), the Third Circuit agreed with the district court, and appeared to apply the doctrine in the context of Fres-co’s DTSA claim: “Given the substantial overlap (if not identity) between Hawkins’s work for Fres-co and his intended work for Transcontinental—same role, same industry, and same geographic region—the District Court was well within its discretion to conclude Hawkins would likely use his confidential knowledge to Fres-co’s detriment.” (Emphasis added).
The Third Circuit was not clear whether its application of the inevitable disclosure doctrine was based solely on the Pennsylvania Uniform Trade Secrets Act, as opposed to the DTSA, although it appears to have been based on both. This could create confusion in states in which the inevitable disclosure doctrine is not permitted by state law (e.g., California, Maryland, and Virginia).
Nevertheless, the Third Circuit’s application of the inevitable disclosure doctrine in a decision addressing the DTSA is the second opinion in less than a month to do so. If other federal courts follow, we could see the spread of the doctrine across the country and into jurisdictions that have expressly banned its application at the state level. Only time will tell whether this trend will continue, or if the federal courts will clarify what the DTSA seems to provide in its plain language: that injunctions keeping a former employee out of work may not be based on their alleged “inevitable disclosure” of trade secrets.