Monday, December 29, 2008
Ohio Appellate Court Requires Heightened Proof for "Inevitable Disclosure" Case (Hydrofarm v. Orendorff)
The "inevitable disclosure" theory of trade secrets misappropriation continues to yield new rules and concepts. One of the most hotly litigated areas of unfair competition law involves application of the theory absent an actual non-compete agreement. Courts have taken a number of different approaches in balancing the rights of an employer to protect its intellectual property with an employee's right to earn a livelihood.
Three of the earliest and most frequently cited inevitable disclosure cases - PepsiCo v. Redmond, Merck v. Lyon, and DoubleClick v. Henderson - all dealt with direct competition, but no non-compete. What emerged from those cases was that courts required something more than just a theoretical threat of trade secrets disclosure. Some element of bad faith, or a willingness to use actual, identifiable trade secrets had to be present.
A recent Ohio case follows suit.
In late 2005, Hydrofarm - a manufacturer of indoor gardening products - entered into a separation agreement with Phil Orendorff. As is now common, that agreement contained a covenant requiring Orendorff to keep confidential Hydrofarm's proprietary information. It contained no non-compete covenant.
Nearly two years later, Orendorff accepted a job with one of Hydrofarm's direct competitors, Sunlight Supply. Hydrofarm then sued, seeking preliminary injunctive relief under a number of different legal theories, including trade secrets theft. The trial court issued the injunction, barring Orendorff from working for Sunlight Supply for six months.
On appeal, the Court of Appeals of Ohio reversed under the exacting abuse of discretion standard. Notably, the court stated that "[n]either this court nor the Supreme Court of Ohio has applied the 'inevitable disclosure' doctrine in a case that did not involve an enforceable noncompetition agreement." Still, the court did not go so far as to hold that the doctrine couldn't be applied in the absence of a non-compete.
But its holding makes clear that employers must show something more than a direct competitive relationship and an overlap in job duties to enjoin a former employee under the inevitable disclosure doctrine. In particular, the court held:
"Hydrofarm must demonstrate by clear and convincing evidence not only that defendant possesses Hydrofarm's trade secrets, but, also, that defendant will inevitably disclose them to Sunlight Supply, or will utilize those trade secrets in his competitive work on behalf of Sunlight Supply, and that those trade secrets will enable Sunlight Supply to achieve a substantial competitive advantage over Hydrofarm."
Put another way, the employer seeking utilize the doctrine must demonstrate irreparable harm under a heightened standard of proof - something that appears to require bad faith or a concrete demonstrable threat to use the trade secrets at issue. In the Hydrofarm case, the court had little trouble reversing the decision, since Orendorff had not had access to proprietary information of Hydrofarm for almost two years. The court found that pricing and marketing information, along with certain trade show selection criteria and customer feedback concerning products, was stale. As such, it is doubtful this type of cyclical, operational data could be considered trade secret information - and nothing indicated Orendorff threatened to use it.
Court: Court of Appeals of Ohio, Tenth Appellate District
Opinion Date: 12/23/08
Cite: Hydrofarm, Inc. v. Orendorff, 2008 Ohio App. LEXIS 5717 (Ohio App. Ct. Dec. 23, 2008)