Trade Secret Owners Somewhat Limited in Defense Against Ex-employees and Competitors
Friendly reminder: employers can’t prevent employees from working for competitors based solely on their knowledge of trade secrets. Back in 2016, trade secret law in the U.S. underwent a major development with the passage of the Defend Trade Secrets Act of 2016 (DTSA) which for the first time defined a federal cause of action for trade secret misappropriation. Before the DTSA, trade secret misappropriations were controlled by state trade secret laws which are not always uniform. In addition, with no federal cause of action, trade secret misappropriation cases were only heard in federal court if there was some federal cause of action also alleged.
The DTSA changes trade secret landscape in an additional way. The DTSA limits an employer’s ability to prevent an employee from working at a competitor’s company, even when there is a risk of trade secret misappropriation. Under the DTSA, injunctive relief that would ‘prevent a person from entering into an employment relationship’ must be based upon ‘evidence of threatened misappropriation and not merely on the information the person knows.’ By contrast, some states permit injunctive relief under the ‘inevitable disclosure doctrine’ even when there is no evidence of threatened misappropriation. Under some states’ laws, if it is determined that the employee would ‘inevitably’ misappropriate trade secrets, injunctive relief is appropriate under the ‘inevitable disclosure doctrine,’ which effectively operates as a constructive non-compete on employees who did not actually sign a non-compete agreement.
Here’s an example. In Molon Motor & Coil Corp. (‘Molon’) v. Nidec Motor Corp. (‘Nidec’), a federal court in Illinois was the first to address the ‘inevitable disclosure doctrine’ during the DTSA era. The Molon court was faced with a Motion to Dismiss the plaintiff’s trade secret misappropriation claim based upon the lack of evidence showing threatened misappropriation. Despite the absence of evidence, the court denied the defendant’s Motion to Dismiss and allowed the case to proceed to discovery.
The underlying facts of the Molon case are somewhat typical. Molon manufactures electric engines. The head of quality control at Molon left the company to go to a direct competitor, Nidec. Before he left, he allegedly copied trade secrets including many engineering, design, and quality control files onto a thumb drive. Molon sued Nidec under the DTSA and state trade secret claims in federal court, and Nidec filed the Motion to Dismiss discussed above.
The Molon court’s use of the ‘inevitable disclosure doctrine’ in a DTSA case should help trade secret owners defeat Motions to Dismiss, which are usually filed before discovery is conducted based on an absence of evidence of threatened or actual misappropriation. However, it does not appear that the Molon decision will have an impact on the DTSA prohibition against injunctive relief absent any evidence of threatened misappropriation.
Takeaway – Trade secret lawsuits can now be brought in federal court, but injunctive relief may be easier to obtain in some state courts.