Does Texas law recognize the “inevitable disclosure” doctrine? Should it?

This strikes me as the wrong question. The right question is not “should Texas follow the inevitable disclosure doctrine?” but rather “what evidence is sufficient to establish imminent harm from the threatened use of trade secrets?” I propose the following dichotomy:

  1. In a “soft” trade secrets case, the mere fact that a former employee knows a company’s trade secrets and has gone to work for a competitor should usually be insufficient to establish the “imminent harm” necessary to support a temporary injunction barring the employee from working for the competitor. There must be something more, such as evidence of a plan to use the trade secrets, or evidence that the employee has already used or disclosed the trade secrets.
  2. But in a “hard” trade secrets case, “something more” should not be required if the trade secret is so secret and so valuable the employee’s mere knowledge of the trade secret creates an imminent risk that the employee will disclose it to her new employer.

I admit that no. 2 is a little circular, but there’s really no getting around that. At least my test puts the emphasis on the degree of the threat, where it should be.

But what is a “soft” trade secret? Or a “hard” trade secret? And what is the inevitable disclosure doctrine in the first place? Let’s back up a bit.

The Inevitable Disclosure Doctrine

The inevitable disclosure doctrine is a concept in trade secrets law. It is the idea that a person who knows a company’s trade secrets can be enjoined from working for a competitor on the theory that the person will inevitably use that knowledge.[1] For example, in T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,[2] the court held that evidence that the defendants possessed the plaintiff’s confidential information and were “in a position to use it to compete” showed an “inherent threat” sufficient to support an injunction.

The Texas Uniform Trade Secrets Act (TUTSA) and the federal Defend Trade Secrets Act (DTSA) do not expressly refer to the inevitable disclosure doctrine. The doctrine can be seen as an application of the common-law “imminent harm” requirement for an injunction. The question is whether harm is imminent when a person with knowledge of the company’s trade secrets is working for a competitor.

The DTSA indirectly rejects—or at least constrains—application of the inevitable disclosure doctrine in two ways. First, it authorizes the court to grant an injunction “to prevent any actual or threatened misappropriation,” but with the important limitation that the court cannot “prevent a person from entering into an employment relationship.” The court can place conditions on such employment, provided the conditions are based on “evidence of threatened misappropriation and not merely on the information the person knows.” In other words, the court cannot limit a former employee’s work for a competitor based merely on the idea that the employee will inevitably disclose the employer’s trade secrets. Second, the injunction cannot conflict with an applicable state law “prohibiting restraints on the practice of a lawful profession, trade, or business.”[3]

Similarly, TUTSA codifies the common-law principle that an injunction may not prohibit a person from using “general knowledge, skill, and experience” acquired during employment.[4] This limitation emphasizes that injunctions should be narrowly tailored to prevent disclosure of trade secrets, not to unreasonably restrict employee mobility. Still, TUTSA at least leaves open the possibility that a risk of “inevitable disclosure” of trade secrets could establish the “imminent harm” needed to support a temporary injunction.

Texas law is unsettled on whether and to what extent the inevitable disclosure doctrine applies.[5] But we can draw some preliminary conclusions from the case law.

First, if there is evidence that the employee has already disclosed the alleged trade secrets to the competitor, or used the alleged trade secrets while working for the competitor, then resort to the inevitable disclosure doctrine is unnecessary. The doctrine really only becomes a real issue when the evidence is that the employee possesses or knows the trade secrets but has not done anything wrong with them—yet.

Second, inevitable disclosure really goes to the question of an injunction, not damages.

Global Supply v. Riverwood

Both principles were apparent in Global Supply Chain Solutions, LLC v. Riverwood Solutions, Inc., No. 05-18-00188-CV, 2019 WL 3852661 (Tex. App.—Dallas Aug. 16, 2019, no pet. h.), a recent case showing the limits of the “inevitable disclosure” argument.

In that case, Global Supply and Riverwood were competitors in the supply chain management industry, including product data management (PDM) services. Id. at *1. They had merger discussions in which Global Supply provided a seven-page PowerPoint presentation containing financial information about Global Supply. Id. at *2. After these discussions were abandoned, Riverwood unsuccessfully solicited two customers of Global Supply and recruited Lori Austin, a consultant for Global Supply, to be Riverwood’s director of PDM services. Id. at *2-3.

Global Supply sued Riverwood and Austin in Collin County District Court, claiming misappropriation of trade secrets, but Global Supply never set a hearing on a temporary injunction. Id. at *4. After some discovery and designation of experts, the parties filed motions for summary judgment, including Riverwood’s motion for summary judgment on Global Supply’s trade secrets claim. Id.

The problem for Global Supply was that there was no “direct evidence” that Austin disclosed any trade secret to Riverwood. Id. at *7. So Global Supply argued that it was “inevitable” that Austin would disclose its trade secrets in the course of her employment at Riverwood. Id. In other words, the inevitable disclosure doctrine.

In support of its argument, Global Supply cited the Seventh Circuit’s statement that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id. (citing PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995)).

But Collin County ain’t in the Seventh Circuit, and the trial court granted summary judgment for Riverwood and Austin.

The Dallas Court of Appeals affirmed, rejecting Global Supply’s inevitable disclosure argument. The court cited Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241-42 (Tex. App.—Houston [1st Dist.] April 3, 2003, no pet.), which said “[w]e have found no Texas case expressly adopting the inevitable disclosure doctrine, and it is unclear to what extent Texas courts might adopt it or might view it as relieving an injunction applicant of showing irreparable injury.” Id.

Global Supply argued that the adoption of TUTSA brought the inevitable disclosure doctrine to Texas, but the court disagreed. The court reasoned that the “ultimate merits” are not at issue in a temporary injunction hearing in a trade secret misappropriation case. Thus, whatever merit the inevitable disclosure argument may have in support of a temporary injunction, the court said the argument is insufficient to raise a fact issue on damages in response to a motion for summary judgment. Id. at *8.

The court then turned to whether Global Supply had offered sufficient evidence on the elements of its TUTSA claim. Global Supply offered the following:

  • The idea that building supply sourcing could be operated as a standalone business was the trade secret misappropriated by Riverwood.
  • Riverwood contacted a Global Supply customer about using Riverwood for sourcing building supplies, knowing he was a Global Supply customer.
  • Austin was doing the same work at Riverwood that she did for Global Supply.
  • Peck, Global Supply’s president, testified that Austin “must have” disclosed Global Supply’s confidential information in order to do her job at Riverwood.
  • Peck also testified that building supply sourcing “was unlike anything Riverwood was doing at the time.”

Id. at *14-15.

So, the evidence of misappropriation was pretty thin, especially in light of controverting evidence:

  • Global Supply did not share any information about its building supply sourcing business model with Riverwood.
  • The seven-slide PowerPoint presentation did not include this information, and Global Supply conceded that the merger discussions did not involve delivery of trade secrets other than that delivered in writing.
  • Riverwood had sourced building supplies before the merger discussions.
  • Peck conceded Riverwood could have provided building supply sourcing without his being aware of it.
  • Global Supply did not lose any business from the customer Riverwood contacted.
  • Austin testified she returned all company property to Global Supply, did not retain Global Supply documents, complied with her confidentiality agreement, never disclosed Global Supply’s confidential information or trade secrets to Riverwood, and only used generally known information.
  • Peck conceded he had no knowledge of the work Austin was actually doing at Riverwood.
  • Austin testified about how she performed her job responsibilities at Riverwood without using Global Supply’s confidential information.

Id. at *14-15.

Based on the evidence, the Court of Appeals held that the trial court properly granted summary judgment against Global Supply’s trade secrets claim. Id. at *15-16. Thus, the “inevitable disclosure” argument could not fill the gaps in Global Supply’s evidence of misappropriation of trade secrets.

So did Global Supply reject the inevitable disclosure doctrine? Not really. Two significant factors limit the reach of Global Supply. First, it was not a temporary injunction case. Trying to use the inevitable disclosure doctrine as a substitute for direct evidence of damages was a stretch.

Second, the court seemed skeptical of Global Supply’s theory that its business model was a trade secret in the first place. This was apparent in the court’s statement that “Global supply does not point to any summary judgment evidence that it shared with Riverwood any information about its ‘business model’ that ‘took extensive effort to develop.’” Id. at *15.

A Harder Case

Imagine instead a temporary injunction case with evidence that the alleged trade secret is really secret and really valuable. Let’s say an oilfield services company develops a secret drilling technology that a competitor would pay millions for. The engineer who developed the technology for the company gets hired by a direct competitor as Director of Engineering. There’s no evidence that the engineer has disclosed the technology to the competitor, or even evidence that he plans to do so, but the trial court enters a temporary injunction barring the engineer from working for the competitor, citing the imminent risk that the engineer will disclose the technology.

That’s a stronger case for application of the inevitable disclosure doctrine, first because it involves an injunction and second because it involves a “hard” trade secret.

The two quintessential types of hard trade secrets are “secret sauce,” like the Colonel’s herbs and spices or the formula for Coke, and secret cutting-edge technology, like say, laser guidance for self-driving cars. When an employee runs off to a competitor with that kind of secret, it does seem a little unfair to require proof that employee has already given the secret to the competitor.

“Soft” trade secrets are different. Soft trade secrets are things like customer lists, customer information, and pricing information. Virtually every business has this kind of information. That doesn’t mean the information can’t be a trade secret. It can, as I explained in When Is a Customer List a Trade Secret?

But there’s a danger here. If courts grant injunctions too freely in soft trade secret cases, they risk turning trade secret law into a “de facto” non-compete for all employees who have customer information. And Texas courts have recognized we don’t want to do that. See Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 466-67 (Tex. App.—Austin 2004, pet. denied) (“this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition”).

That’s why I say in a soft trade secrets case, there should be some evidence that the employee has used or disclosed the trade secrets—or plans to do so—before the court grants a temporary injunction. If Texas courts are going to embrace the notion of “inevitable disclosure” at all, it should be limited to cases involving hard trade secrets.

Of course, the distinction between hard and soft trade secrets is not in the statutes; it’s just my terminology. And you could always have borderline cases (“semi-soft” trade secrets?) But the underlying concept—that the degree of secrecy and value of the alleged trade secrets is a factor in determining whether a temporary injunction should be granted—is sound. At least it focuses on the right question.

________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] See The Inevitable Disclosure Doctrine: A Necessary and Precise Tool for Trade Secret Law.

[2] 965 S.W.2d 18, 24 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d).

[3] 18 U.S.C. § 1836(b)(3).

[4] Tex. Civ. Prac. & Rem. Code § 134A.003.

[5] Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241-42 (Tex. App.—Houston [1st Dist.] April 3, 2003, no pet.); DGM Services, Inc. v. Figueroa, No. 01-16-00186-CV, 2016 WL 7473947, at *5 (Tex. App.—Houston [1st Dist.] Dec. 29, 2016, no pet.) (mem. op.).

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