In-Depth

Careers: How "Inevitable Misappropriation" May Limit Job Mobility

Can your employer prevent you from taking a job with another company—even if it isn’t a direct competitor?

• By Stephen Swoyer
• 03/01/2005

If there’s one right IT professionals regard as inalienable, it’s the ability to work for whomever they want whenever they want.

One potential obstacle is the no-compete clause, which some IT professionals—particularly those involved in the research and development of proprietary technologies, or in C-level and other executive positions—are forced to accept as conditions of their employment. While no-compete clauses are never something to scoff at, many courts—particularly those in technology-rich California—have ruled them unenforceable in practice.

A more troubling example is a legal doctrine known as “inevitable misappropriation.” Even though there’s tenuous legal basis for this theory, that might not stop some employers from using it to discourage employees from taking jobs with other companies—regardless of whether they’re direct competitors or simply one of many players in the highly heterogeneous technology sector.

In 1995, for example, the Seventh Circuit Court of Appeals ruled (in PepsiCo, Inc. v. Redmond) that PepsiCo had a sufficient basis to enjoin former employee William Redmond from taking a position with Quaker Oats, a competing company. PepsiCo argued that Redmond—who was privy to its marketing, pricing, and distribution practices, along with other trade secrets—would “inevitably disclose” this information in his new position.

The Seventh Circuit agreed, ruling that (under Illinois law) a threatened misappropriation of a trade secret was enjoinable if the plaintiff could establish that such an infraction was inevitable. In this respect, the Seventh Circuit found that Redmond would almost certainly have to rely on PepsiCo's trade secrets as he tried to shape Quaker’s business strategy.

According to Adrian Bowles, a principal with consultancy Experture LLC, most companies now require new employees to sign disclaimer forms in which they must aver that they aren’t bringing trade secrets or other proprietary information with them to their new jobs: “Typically, they will say that you are attesting that anything you bring in—in terms of IP—you have the rights to do that.”

Given the “inevitability” test described by the Seventh Circuit’s ruling, however, such disclaimers may not pass legal muster. And while legal scholars stress that, in practice, there’s only a handful of legal precedents that support the doctrine of “inevitable misappropriation,” notable test cases—such as that in PepsiCo v. Redmond—do exist. Especially in the technology sector, where “trade secrets” are, more often than not, a company’s most important assets.

Consider the case of Stephen Grossman, former director of product marketing with semiconductor giant Advanced MicroDevices Inc (AMD). In May of 1995, Grossman quit his job with AMD to take a new position as vice-president of marketing with Hyundai Electronics America, a subsidiary of the South Korean manufacturing giant.

AMD cried foul, claiming that Hyundai recruited Grossman for a lot more than just his product marketing experience. Around the same time, for example, Hyundai had disclosed plans to enter the flash memory business—one of AMD’s core markets. After Grossman came on board, Hyundai was also able to hire away several of the AMD engineers who were integrally involved with the company’s flash memory design and development process. AMD sued, obtaining an injunction on the grounds that Grossman would inevitably misappropriate its proprietary information in his new position with Hyundai.

There have been a few similar rulings since then, legal scholars note, but in the technology-rich state of California, at least, the “inevitable misappropriation” doctrine has since lost ground.

“Many of these cases demonstrate the courts’ willingness to apply the doctrine only when the plaintiff has presented evidence that the departing employee was not forthcoming in disclosing his plans for new employment or otherwise acted in bad faith,” wrote Danielle Pasqualone, currently an attorney with Finnegan, Henderson, Farabow, Garrett, & Dunner, LLP, in a 2002 article for the University of California Berkeley’s Technology Law Journal. “Some commentators interpret these decisions as limiting the doctrine’s applicability to situations where there exists strong evidence of a ‘threatened’ misappropriation.”

The important takeaway here, Pasqualone stresses, is that “courts are reluctant to apply the doctrine in situations where the employer simply fears that the departing employee may inadvertently or unconsciously use or disclose her knowledge of trade secrets.”

In California specifically, Pasqualone notes, subsequent decisions have explicitly rejected the doctrine of inevitable disclosure. In Bayer v. Roche Molecular Systems, Inc., for example, the court explicitly stated that, “California trade secrets law does not recognize the theory of inevitable disclosure; indeed such a rule would run counter to the strong public policy in California favoring employee mobility.” The upshot, she wrote, is that “the court found that the doctrine of inevitable disclosure creates an ex poste facto covenant not to compete.”

This is as it should be, says John Ferrell, an attorney and partner with Silicon Valley IP specialist Carr & Ferrell LLP. ““This doctrine of inevitable misappropriation has not been strongly been supported by the courts. First of all, there’s a strong public policy to let people work. So just because someone has knowledge doesn’t mean that they’re going to inevitably share it.”