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‘Inevitable disclosure’ ruling offers employers guidelines

A recent decision by the U.S. District Court in Massachusetts in U.S. Electrical Services, Inc. v. Schmidt may have significant implications for employers seeking to use the “inevitable disclosure” doctrine to enjoin former employees from working for competitors. 

Courts in other jurisdictions have issued injunctions in favor of employers under this doctrine upon finding that the departing employees possessed such intimate and detailed knowledge of their former employers’ trade secrets that they would “inevitably” use that information in their competing employment, even if they honestly attempted not to do so.

In Schmidt, Judge Denise J. Casper refused to issue such an injunction, holding that the potential future disclosure of confidential information was not enough to support such extraordinary relief.

Casper concluded that, as a threshold requirement, injunctions of this kind generally must be supported by evidence of actual misconduct, such as the breach of a non-competition agreement or the proven use or disclosure of confidential information.

Only after that threshold requirement is satisfied may the possibility for “inevitable disclosure” come into play, and it does so, at that point, as potential support for the “irreparable harm” finding needed for an injunction to issue.

Casper’s decision, while not binding on other federal judges or the Massachusetts state courts, will likely serve as persuasive authority in future cases of this kind.

Accordingly, in the wake of Schmidt, Massachusetts employers may have difficulty enjoining former employees based on their alleged knowledge of trade secrets or confidential information absent proof of actual misappropriation, use or disclosure.

Factual background

The plaintiff, U.S. Electrical Services, Inc., is a national distributor of electrical products and services.

Two former employees of USESI, James Schmidt and Peter Colon, accepted offers of employment with Munro Distributing Co., Inc., a competitor of USESI. Although both Schmidt and Munro had signed confidentiality agreements with USESI, neither was bound by a covenant not to compete. (Schmidt had entered into a one-year non-competition agreement that had expired, while Munro had never signed such an agreement.)

Schmidt and Colon were hired, in part, to assist Munro in vying for a national account with Dollar Tree Stores, which Dollar Tree had placed up for bid after giving its electrical business to USESI for a number of years.

Although the precise scope of their involvement was disputed, both Schmidt and Colon had been involved in USESI’s work for Dollar Tree while employed by USESI.

One week before the Dollar Tree bid was to take place, USESI filed a lawsuit and accompanying motion for a preliminary injunction against Schmidt, Colon and Munro. Alleging breach of contract, misappropriation of trade secrets, unfair competition and other causes of action, USESI asked that Schmidt and Colon be preliminarily enjoined from working for Munro in any capacity involving the prospective Dollar Tree account.

As the basis for the request, USESI argued that, in the course of preparing Munro’s competing bid on the account, Schmidt and Colon would inevitably use and disclose confidential information of USESI relating to its work for Dollar Tree.

In particular, USESI argued that Schmidt had been so intimately involved in USESI’s relationship with Dollar Tree that he could not possibly erase from his mind the confidential information he had learned in the course of that work, or avoid incorporating it into his competing efforts for Munro, even if he attempted to do so.

Similarly, USESI contended that Colon had taken from its offices confidential files relating to the Dollar Tree business — which Colon denied — and that he would inevitably use those files to support Munro’s bid for the Dollar Tree contract.

The court’s decision

The court denied USESI’s motion for a preliminary injunction, concluding that the motion was not supported by the Massachusetts cases cited by USESI.

Casper explained that the cases did not show “that a party may rely solely on inevitable future conduct, rather than conduct that has actually occurred, to establish a likelihood of success on the merits of a trade secrets appropriation claim or a breach of confidentiality claim.”

In that regard, the judge noted that (i) USESI had not even alleged that Schmidt had actually misused any of its confidential information, and (ii) USESI had not proved its allegation that Colon improperly took confidential files relating to its work for Dollar Tree.

Because USESI had established prospective — but not actual — wrongdoing by Schmidt and Colon, the judge concluded that USESI’s motion had inadequate legal support.

Casper noted that in the Massachusetts precedents cited by USESI, the potential inevitable disclosure of confidential information was considered only after the court found, based on evidence of actual wrongdoing, that the employer had a likelihood of success on the merits of its claims against the former employees.

Thus, in each case, the potential inevitable disclosure was not considered until the next step of the court’s analysis, i.e., whether the employer would suffer irreparable harm if the injunction were denied.

Significantly, Casper appeared to leave open the possibility that, in extraordinary circumstances, an injunction could, in fact, be issued to prevent the inevitable disclosure of trade secrets or confidential information where there is no proof of actual wrongdoing.

As she explained, though, such a case would require compelling facts not present in Schmidt.

In that regard, Casper noted that Schmidt had only limited control over the Dollar Tree account while employed by USESI, and that any information he might recall from that work was now stale, as Schmidt left USESI nearly two years before the commencement of the lawsuit.

The court added that while Colon worked on USESI’s Dollar Tree account more recently, he was less involved than Schmidt had been.

Implications and recommendations for employers

While Schmidt does not have binding precedential effect on other federal judges or the Massachusetts state courts, it is the most recent and comprehensive exposition of the inevitable disclosure doctrine in Massachusetts. As a result, the decision is likely to be persuasive to courts deciding similar cases.

Employers, then, should use Schmidt as a guide in shaping their policies concerning the protection of trade secrets and confidential information — and their corresponding litigation strategy when enforcement becomes necessary. Following are some considerations for employers based on this decision.

First, employers should determine whether all key employees with knowledge of trade secrets or confidential information have signed non-competition agreements. If not, then employers should confer with counsel to determine how best to achieve that.

As actual evidence of misappropriation or disclosure is often not available to the former employer, a non-competition agreement may be the only way to prevent former employees from taking recent trade secrets or confidential information, even if only in one’s memory, to a competitor.

On that subject, employers — particularly those with employees in multiple states — should closely review all of their existing non-competition agreements, in consultation with counsel, to ensure that they are valid and enforceable.

As the legal standards governing such agreements can vary widely from state to state, businesses that attempt to use a single non-competition agreement in all jurisdictions run the risk of having their non-competition agreements invalidated by at least some courts.

Finally, before initiating litigation aimed at preventing a former employee from going to work for a competitor, an employer should carefully consider whether it can establish that the individual has actually breached an agreement with the employer or otherwise violated its rights.

Under Schmidt, employers that go the extra mile to adduce evidence of wrongdoing, such as by using a computer forensics expert to demonstrate the unlawful downloading and removal of confidential information from the former employee’s workstation, will have the best prospects for success.

Todd A. Newman is a partner at Schwartz Hannum in Andover, Mass., which represents management in t labor and employment issues, including litigation, business immigration and education. He gratefully acknowledges Brian D. Carlson and Soyoung Yoon of Schwartz Hannum for their help in preparing the above article.

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