A recent opinion from the U.S. District Court for the Northern District of Illinois has stirred up a hornets’ nest of commentary because it appears to recognize the viability of the inevitable disclosure doctrine under the Defend Trade Secrets Act (DTSA). Those familiar with the DTSA will recall that the inevitable disclosure doctrine was supposed to be prohibited under the DTSA because of California Senator Diane Feinstein’s concern that the doctrine might be enforced against California residents. Now, in what appears to be the first federal appellate court opinion construing the DTSA, the U.S. Court of Appeals for the Third Circuit may have further muddied the waters about the inevitable disclosure doctrine in Fres-co Systems USA, Inc. v. Hawkins, Case No. 16-3591, ___ Fed. Appx. __ (3rd Cir. 2017), 2017 WL 2376568 (June 1, 2017) (a link to the opinion can found here).
Factual and Procedural Background: The facts giving rise to the case are straightforward. A former sales representative of Fres-co Systems, Kevin Hawkins, left to join a competitor called Transcontinental. Hawkins was bound by various restrictive covenants in his employment agreement, including a one-year non-compete and a one-year non-solicitation provision forbidding him from doing business with any Fres-co customer (curiously, the opinion does not identify a confidentiality provision but presumably he was bound by one).
When Hawkins refused to confirm that he would abide by his non-solicitation agreement and not solicit Fres-co’s customers, Fres-co sued Hawkins and Transcontinental under the DTSA and Pennsylvania’s version of the Uniform Trade Secrets Act. Fres-co also filed a motion for a TRO to enforce the non-solicitation provision and to prevent the disclosure of any of its trade secrets. Hawkins opposed the motion and provided an affidavit promising he would not use of any of Fres-co’s trade secrets (but again declining to promise not to solicit Fres-co customers).
The U.S. District Court for the Eastern District of Pennsylvania issued a preliminary injunction, directing Hawkins to return any trade secrets and forbidding Hawkins from soliciting any of Fres-co’s top twelve customers. It found evidence of irreparable injury to be “particularly compelling” because Hawkins had access to Fres-co’s confidential customer lists, price lists and marketing and sales strategies. Even though Fres-co had presented no evidence that Hawkins had taken or used that information, and despite Hawkins’ commitment not to use that information, the District Court concluded that Hawkins would “likely use his specialized and confidential knowledge to the detriment of Fres-co . . . and Hawkins’ interference with Fres-co’s client relationships would cause immediate irreparable harm to Fres-co.”
In this respect, given the absence of any proof of misappropriation, the District Court appeared to be applying the reasoning of the inevitable disclosure doctrine. As I have written before, the inevitable disclosure doctrine allows courts to enjoin an employee from working for his/her former employer’s competitors because of the threat of that he or she may inevitably use or share his/her former employer’s trade secrets; however, the doctrine is not recognized in several states, including California and Louisiana, and it has been criticized as being tantamount to a non-compete that was not or could not otherwise have been negotiated.
The Third Circuit’s Opinion: Hawkins and Transcontinental appealed, challenging the District Court’s finding of irreparable injury and arguing there was no imminent threat because Hawkins had sworn in an affidavit that he would not disclose or use any of those trade secrets. The Third Circuit disagreed, emphasizing the ample discretion that trial courts have in making these findings.
The Third Circuit recognized that both the DTSA and Pennsylvania’s version of the UTSA do not require proof of actual misappropriation and that both permit injunctive relief if misappropriation is “threatened.” (Citing to 12 Pa. Cons. Sta. Ann. §5303(a) and 18 U.S.C. §1836(b)(3)(A)(i) of the DTSA). The Third Circuit went on to rely upon one of the seminal inevitable disclosure cases under Pennsylvania law (Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102 (3d Cir. 2010)), and without citing the doctrine by name, it justified the injunction because of the “substantial overlap (if not identity) between Hawkin’s work for Fres-co and his intended work for Transcontinental–same role, same industry, and same geographic region.”
To sum up, the Third Circuit used the traditional analysis for the inevitable disclosure doctrine, cited arguably the leading case for that doctrine under Pennsylvania law, but did not identify the doctrine in so ruling. While the Third Circuit affirmed this portion of the District Court’s ruling, it remanded the case on other grounds, directing the District Court to provide further analysis for its findings that Fres-co had met the other requirements for an injunction.
Did The Third Circuit Get It Wrong? No, but it missed an opportunity to provide needed clarity on the inevitable disclosure doctrine under the DTSA.
The Third Circuit could have confined its opinion to Pennsylvania trade secret law. The legislative history of the DTSA made clear that the DTSA was not intended to displace any existing state law remedies, and the Senate Judiciary Committee’s Report noted that “if a State’s trade secrets law authorizes additional remedies, those State-law remedies will still be available.” Indeed, as an example, the Report expressly recognized that some states allow injunctions that enjoin an employee “from working in a job that would inevitably result in the improper use of trade secrets” and it noted those remedies would continue to coexist with the remedies of the DTSA. (See Report at pp. 8-9). Consistent with that intent, §1838 of the DTSA expressly affirms that the DTSA does not displace any existing state court remedies. Therefore, the Third Circuit could have simply relied on Pennsylvania law to justify the injunction.
However, by citing to the DTSA but failing to acknowledge that the DTSA does not recognize the inevitable disclosure doctrine, the Third Circuit may have created the potential for future confusion. The legislative history of the DTSA is clear that the DTSA did not recognize the inevitable disclosure doctrine and the plain language of §1836(b)(3)(A) bears that out. But the citation to Bimbo Bakeries, an infamous and well-known inevitable disclosure doctrine case, coupled with its observations about Hawkins’ new duties as justification for the injunction, make it appear that it was upholding the application of the inevitable disclosure doctrine, even if it did not clearly say so.
Ironically, the injunction crafted by the District Court, while rooted in the reasoning behind the inevitable disclosure doctrine, still comported with the DTSA’s restrictions on injunctions that might be brought under the inevitable disclosure doctrine because the injunction allowed Hawkins to continue to work for Transcontinental provided he did not solicit customers. Consequently, the injunction complied with §1836(b)(3)(A) because it did not prevent Hawkins “from entering into an employment relationship” and merely placed conditions on that employment, as that provision of the DTSA allows. The Third Circuit missed the opportunity to make this point as well.
Finally, the Third Circuit could have avoided this whole issue altogether by simply limiting its review to the non-solicitation provision, and ignoring the trade secrets issue as unnecessary.
Takeaways: As the first federal appellate court to consider the DTSA, the Third Circuit should have seized this opportunity to clarify the differences between the DTSA and Pennsylvania law on the inevitable disclosure doctrine. As the Northern District of Illinois’ decision in Molon Motor & Coil v. Nidec illustrates, lawyers are scrutinizing each new case under the DTSA for guidance, particularly for potential conflicts between the DTSA and state law; this opinion could have provided some needed direction on what may be one of the more nettlesome issues of the DTSA — how to treat differences between the DTSA and existing state law remedies regarding the inevitable disclosure doctrine.
One might argue that this is mere semantics since “threatened misappropriation” can always be restrained and given the fact that the injunction is literally consistent with the strictures of the §1836(b)(3)(A). However, by couching the remedy in the language of the inevitable disclosure doctrine, this opinion may be used to create confusion over the scope of the inevitable disclosure doctrine in the future as future litigants may now claim that the Third Circuit, along with the Northern District of Illinois, appeared to endorse the doctrine under the DTSA.
On a more practical note, the decision may embolden claimants with dubious trade secret claims to avoid their obligation to provide some actual or circumstantial evidence of misappropriation and present their claims under the guise of “threatened misappropriation.” Much has been written about the perceived increase in abusive non-compete and trade secret cases; consequently, this ruling runs the risk of providing ammunition to those who might misuse those claims. (A special thanks to Paul Mersino of Butzel Long for bringing this case to my attention).