Employers Contemplating A Misappropriation of Trade Secrets Claim Without Evidence of Actual or Threatened Use Should Think Twice In California
In California, a departing employee’s mere possession of trade secrets is an insufficient basis upon which to pursue a claim for trade secrets misappropriation. In addition to possession, a former employer must demonstrate actual use or threatened use (i.e., words or conduct indicating imminent misuse) of trade secrets. See FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270, 1277 (2009) (“A trade secrets plaintiff must show an actual use or an actual threat.”) (internal quotation marks omitted); see also Cal. Civ. Code § 3426.2 (“Actual or threatened misappropriation may be enjoined.”).
Many jurisdictions have adopted some form of the “inevitable disclosure” doctrine, which allows an employer to prevent a departing employee from working for a competitor on the premise that the departing employee will inevitably rely on or use the employer’s trade secrets at the next place of employment. See, e.g., Strata Marketing, Inc. v. Murphy, 317 Ill. App. 3d 1054 (2000); National Starch and Chemical Corp. v. Parker Chemical Corp., 219 N.J. Super. 158 (1987); H & R Block Easter Tax Services, Inc. v. Enchura, 122 F. Supp. 2d 1067 (W.D. Mo. 2000).
Since 2002, however, California has explicitly rejected the inevitable disclosure doctrine as a substitute for proving actual or threatened misappropriation of trade secrets. California courts have rejected this doctrine because it creates an after-the-fact covenant not to compete, in contravention of California’s strong public policy favoring employee mobility. See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1462 (2002) (reasoning that the inevitable disclosure doctrine “runs counter to the strong public policy in California favoring employee mobility”); see also Cal. Bus. & Prof. Code § 16600 (“Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”).
The recent litigation surrounding FLIR Systems, Inc. v. Parrish illustrates the potential problems that can arise when an employer aggressively pursues a misappropriation claim without evidence of actual or threatened use. In that case, the employer brought an action for misappropriation of trade secrets against two former employees. In response to unfounded allegations in the complaint, the former employees presented evidence establishing that they did not use or threaten to use any of the employer’s trade secrets. The trial court entered judgment for the former employees and found that the misappropriation claim was brought in bad faith (as a result of which the court awarded attorneys fees and costs in an amount exceeding $1.6 million).
On the heels of the judgment, the former employees filed a lawsuit for malicious prosecution against the law firm that represented the employer. See Parrish v. Latham & Watkins, 176 Cal. Rptr. 3d 596 (2014). The law firm successfully challenged the complaint in an anti-SLAPP motion, and the matter was appealed. On appeal, the appellate court reversed the trial court’s order granting the law firm’s anti-SLAPP motion. The court reasoned, among other things, that “[the law firm] sought an obviously anti-competitive injunction based on the speculative possibility that the Former Employees’ product might violate its client’s trade secret rights further supports the conclusion that no reasonable attorney would have believed this case had merit.” Id. at 612. The appellate court is now reconsidering this decision and a ruling is expected on August 3, 2015.
In light of California’s clear rejection of the inevitable disclosure doctrine, employers should tread carefully when evaluating potential claims against departing employees. As demonstrated by the FLIR Systems litigation, mere suspicion or apprehension that a departing employee may use a trade secret at his or her next place of employment is insufficient to support a viable misappropriation claim and the perilous decision to proceed with such a claim could expose the employer—or its law firm—to potential civil liability.