One of the Defend Trade Secrets Act’s (DTSA) most noteworthy features is its provision forbidding injunctions that would prevent a former employee from entering into another employment agreement. As explained below, this provision,18 U.S.C. §1836(b)(3)(A)(i)(I), was included to preserve employee mobility and assuage concerns that covenants not to compete, as well as what is known as the “inevitable disclosure” doctrine, might be enforced by federal courts in states that have rejected their enforceability. Today’s post looks at the legislative history of that provision and how courts have interpreted it.
Legislative History and Language: When the DTSA was re-introduced as a bill in 2015, language was added to limit injunctions that might “prevent a person from accepting an offer of employment.” This language was added to quell concerns from California Senator Diane Feinstein over the potential use of non-competes or the inevitable disclosure doctrine, both of which are disfavored under California law. In general, 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. This proposed provision to the DTSA, however, did authorize a court to add other conditions to the former employee’s new position that would prevent actual or threatened misappropriation.
When the DTSA emerged from the Senate Judiciary Committee in January 2016, the language of §1836(b)(3)(A)(i)(I) was broadened to forbid injunctions that would prevent an employee “from entering into an employment relationship.” This language was ultimately approved by Congress and signed into law by President Obama.
In sum, the DTSA allows a district court to impose conditions on an employee’s subsequent employment to protect the employer’s trade secrets provided it is “based on evidence of threatened misappropriation” and “not merely on the information that the person knows.” However, under 18 U.S.C. §1836(b)(3)(A)(i)(II), the conditions that the court intends to impose to protect those trade secrets cannot “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.”
Judicial Interpretations of §1836(b)(3)(A)(i)(I) and (II): To my knowledge, only two cases interpreting this provision have been decided, both in Colorado and both by the same judge, U.S. District Court Judge William J. Martinez; in both cases, Judge Martinez ended up issuing an injunction placing conditions on the former employee’s future conduct.
In First W. Cap. Mgmt. Co. v. Malamed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549, at *3 (D. Colo. Sep. 30, 2016), a financial services company sued its former chief investment officer after the company learned that the defendant had made copies of the company’s “client book.” Judge Martinez held that the client names contained in the “client book” were trade secrets and he concluded there was sufficient evidence that the former officer would use those trade secrets to develop his own business.
However, because the former officer lived in California, he asserted that any injunction restricting his future employment would violate §1836(b)(3)(A)(i)(II) of the DTSA because it would conflict with California’s law prohibiting non-competes. The former employer, which was headquartered in Colorado, argued Colorado law applied because the employment agreement in question had a choice of law provision applying Colorado law. Because Colorado law recognizes that a non-compete can be enforced to protect trade secrets, (see CUTSA, Colo. Rev. Stat. §7-74-103, and Colo. Rev. Stat. §8-2-113(2)), the former employer argued that there was no conflict with the DTSA and an injunction restricting the former officer from soliciting customers could be granted.
Faced with these two different substantive laws, Judge Martinez applied a choice of law analysis, found that Colorado law the most significant relationship to the dispute and enforced the Colorado choice of law provision. Having found that the former officer had misused or would misuse the trade secrets, he applied Colorado law allowing a restrictive covenant to protect trade secrets and it entered an injunction forbidding the former officer from soliciting his former clients for two years.
The second case, Engility Corp. v. Daniels, 2016 U.S. Dist. LEXIS 16637 (D. Colo., Dec. 2, 2016), involved efforts to restrain a former employee who was alleged to be using his former employer’s trade secrets to compete against his former employer. In that case, a military contractor, Engility, sought to enjoin a former employee, Daniels, who had formed a company to compete for a government contract against his former employer. Engility argued that Daniels had taken and was using its trade secrets to unfairly compete against it and asked for an injunction prohibiting Daniels from soliciting business from or bidding on contracts with the government agency, USNORTHCOM. The different versions that Daniels provided to the U.S. District Court for the District of Colorado about what he did with information in connection with his departure provided to be critical in persuading the court that an injunction would be necessary.
Judge Martinez recognized that “[u]nder the DTSA, the Court cannot grant an injunction that ‘prevent[s] a person from entering into an employment relationship,’ and the Court can only place conditions on employment ‘based on evidence of threatened misappropriation and not merely on the information the person knows.’” Id. at p. *10 (quoting §1836(b)(3)(A)(i)(I)). However, he noted that while Colorado law generally disfavored non-competes, it permitted the enforcement of a non-compete to protect trade secrets. (Colo. Rev. Stat. §8-2-113(2)).
Ultimately, Judge Martinez determined that a preliminary injunction was appropriate in the case before him because the former employee had retained trade secrets, had “demonstrated a propensity for making surreptitious copies of the relevant data, and the Court simply cannot trust [defendant’s] representations that no further copies exist.” Engility Corp., at p. *11. To protect the trade secrets that it concluded he had misappropriated or would misappropriate, the judge ultimately entered a one year injunction forbidding Daniels from bidding, soliciting or performing any work for USNORTHCOM.
Takeaways: It’s hard to fully evaluate the impact of this provision so far, as I am only aware of these two cases from the same federal judge. Neither of the cases prevented the former employee from taking a position with a new employer; however, to protect the trade secrets at issue, in both decisions, the judge did impose conditions on the work that the former employees could do. As the Malamed case illustrates, choice of law and forum selection provisions may be determinative if the case has an employee who was employed in a state that disfavors the inevitable disclosure doctrine or non-competes. Finally, like most trade secret cases, questions of credibility and trustworthiness remain important considerations to courts in deciding the scope of an injunction.