New England Biz Law Update
An employer could not rely on the “inevitable disclosure doctrine” to obtain a preliminary injunction restricting the scope of the work two former employees could perform after joining a competitor, a U.S. District Court judge in Boston has ruled.
The employer argued that the defendant employees — who had signed confidentiality agreements as a condition of their employment with the plaintiff — had confidential information that they would inevitably use to help their new employer outbid the plaintiff for one of its major accounts.
Accordingly, the plaintiff contended, it was entitled to injunctive relief to prevent “irreparable harm.”
But Judge Denise J. Casper disagreed.
The cases offered by the plaintiff in support of its argument “make clear that the inevitable disclosure doctrine may be used to establish irreparable harm once a party seeking an injunction has already established a likelihood of success on the merits,” Casper wrote. “[However,] they do 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, as the plaintiff seeks to do here.”
The 23-page decision is U.S. Electrical Services, Inc. v. Schmidt, et al.
Further clarification
Defense counsel Christina L. Lewis of Hinckley, Allen & Snyder in Boston said the ruling offers further clarification on the inevitable disclosure doctrine.
“The most significant piece was the judge expressing doubt as to whether the inevitable disclosure doctrine standing alone can meet a burden of proving a likelihood of success on the merits, which is the first prong of the preliminary injunction test,” she said.
Lewis added that a decision for the plaintiff would have made it much easier to get injunctive relief in cases like the one at issue while potentially eliminating any practical limits on the duration of confidentiality agreements.
“No matter how long a person has been away from the trade secrets and confidential information [they allegedly possess], it would have kept them from working from any competitor in perpetuity because [the former employer] could argue that it’s still in the employee’s memory somehow,” Lewis said.
Brian P. Bialas, an employment lawyer at Foley Hoag in Boston who handles cases involving trade secrets and non-disclosure agreements, said the ruling is consistent with prior caselaw from the district of Massachusetts.
While courts have recognized the inevitable disclosure doctrine, they have never held that a claim for misappropriation of trade secrets can be based on the doctrine alone, he said.
Instead, in order to get a preliminary injunction based on the doctrine, employers need to show that the employee breached a non-competition agreement first, and then show that the employer would be “irreparably harmed” if the employee continued to work for the competitor because the employee would inevitably disclose trade secrets or confidential information, Bialas said. “This [case] is different.”
Russell Beck of Beck, Reed, Riden in Boston, who also handles trade secret and non-compete cases, found the ruling particularly interesting in that it seemed to assume that Massachusetts has actually accepted the inevitable disclosure doctrine when, in reality, neither the Supreme Judicial Court nor the Appeals Court has done so. Even Superior Court cases, on balance, suggest that the commonwealth would not adopt the doctrine, Beck said.
Accordingly, for attorneys who need to rely on the inevitable disclosure doctrine, “the federal court is likely to be a more sympathetic forum than the state court, but be prepared for the high standard that will need to be satisfied,” he said.
Additionally, Beck observed that the employer in Schmidt did not ask for an evidentiary hearing to resolve factual issues despite conflicting affidavits from each party. Though the judge made clear that the court needs to balance speed and practicality against fairness at the preliminary injunction phase, she still made note of the employer’s lack of such a request, he said.
In light of such language, “if critical facts are likely to be fairly disputed, it may be advisable to request an evidentiary hearing on the preliminary injunction, perhaps preceded by a temporary restraining order to preserve the status quo in anticipation of the hearing,” Beck said.
Plaintiff’s counsel Stephen T. Melnick of Littler Mendelson in Boston declined to comment.
Alleged violations
Defendant James Schmidt began working for Standard Electric Supply Co., an electrical products and services distributor, as its national accounts director in August 2007. He signed a nondisclosure agreement under which he promised not to reveal any trade secrets, research and development information, customer lists or other proprietary information.
Schmidt was involved in SESCO’s successful bid for the business of Dollar Tree, a chain of discount variety stores. In the course of securing the Dollar Tree account, Schmidt developed close relationships with Dollar Tree employees and contractors.
On Dec. 31, 2008, plaintiff U.S. Electrical Services acquired SESCO and assumed all its liabilities, obligations and agreements while maintaining the SESCO brand.
At some point earlier that year, defendant Peter Colon began working for SESCO as a lighting project manager, focused entirely on the Dollar Tree account. His role apparently required constant use of the plaintiff’s cost and pricing information regarding the account while maintaining close relationships with Dollar Tree contractors and project managers.
Colon also allegedly maintained the Dollar Tree “paper file,” which included all cost and pricing information. Like Schmidt, Colon had signed a nondisclosure agreement.
On Sept. 23, 2010, Schmidt resigned and went to work for another U.S. Electrical Services subsidiary.
He subsequently left the new employer on March 19, 2012, to join defendant Munro Distributing Co., a regional competitor of the plaintiff’s that was seeking to expand nationally.
According to the plaintiff, Munro planned to compete for the Dollar Tree account, which was scheduled to go out for bid for the first time in four years.
Meanwhile, on March 18, 2012, Colon — who had been working from home during regular office hours and coming in nights and weekends due to child care issues — resigned from SESCO in order to join Munro.
In the days leading up to Colon’s departure, surveillance cameras showed him near the entry to SESCO’s offices with armfuls of papers on several occasions and a box on another occasion.
Colon said in an affidavit that he was simply bringing papers he had been working on at home back into the office while, in anticipation of his departure, removing personal belongings he had accumulated at the office over the years.
The plaintiff alleged that Colon was taking documents with confidential cost and pricing information that his successor apparently reported missing from the Dollar Tree “paper file.”
Colon denied taking any documents and disputed that such information was ever included in any paper file.
On May 9, the plaintiff sued Munro, Schmidt and Colon in Superior Court, alleging breach of the two employee’s nondisclosure agreements, misappropriation of trade secrets and, with regard to Colon, conversion.
The plaintiff also moved for a preliminary injunction restricting the scope of Schmidt and Colon’s work for Munro while precluding Munro from competing for the Dollar Tree account.
In order to demonstrate likelihood of success on the merits of its complaint, the plaintiff argued that Schmidt would inevitably disclose confidential U.S. Electrical Services information as part of his work with Munro.
The plaintiff also argued that Colon physically took trade secret files that he would inevitably use to help Munro compete for Dollar Tree’s business. However, the plaintiff never requested an evidentiary hearing to resolve conflicting facts in affidavits of the plaintiff and Colon.
Distinguishing features
Casper rejected the inevitable disclosure doctrine as it applied to Schmidt.
“None of the authorities cited by [the plaintiff] stand for the proposition that alleged inevitable future misuse of trade secrets is by itself sufficient to establish a violation of either common law or statutory obligations regarding trade secrets,” the judge said.
In the SJC’s 1972 decision in Jet Spray Cooler, Inc. v. Crampton, for example, the dispute dealt not with the inevitability of future disclosures, but with the issue of whether already disclosed information derived solely from former employees’ memories could qualify as trade secrets protected by the law, Casper said.
Meanwhile, in its 2004 Boulanger v. Dunkin’ Donuts Inc. decision, the SJC acknowledged in a footnote that working for a competitor “makes it likely” that an ex-employee will use information he or she possesses, “but did not suggest that an allegedly inevitable future breach of confidentiality obligations is by itself sufficient to establish liability before the breach actually occurs,” the judge said.
In Schmidt, Casper said, the plaintiff had made no attempt to show that Schmidt had actually disclosed any confidential information or used such information on Munro’s behalf.
Additionally, the judge noted, even if the plaintiff could rely solely on the inevitable disclosure doctrine to demonstrate the likelihood of success on the merits, it still might not be entitled to injunctive relief.
“Here [unlike other cases cited by the plaintiff,] because Schmidt had only limited control and intimacy with the Dollar Tree account, and because the information Schmidt may remember about the … account is stale by at least two years, it is not at all clear that [the plaintiff] would suffer irreparable harm even if Schmidt were to disclose the information he remembers about the … account to his new employer,” Casper said.
Such reasoning applied “with extra force” to Colon, she added.
“Although Colon had worked with the Dollar Tree account more recently than Schmidt had, Colon had less authority… and he had less intimate knowledge of the relevant aspects of the Dollar Tree account,” she wrote.
Casper also found that the plaintiff could not demonstrate likelihood of success on its conversion claim despite the “damning” nature of the surveillance images, given the plausibility of Colon’s explanation in his affidavit and the inability to weigh credibility of the parties’ respective affidavits based on nothing more than a paper record.
