Tuesday, September 6, 2016

Ohio Case Proves It: The Inevitable Disclosure Doctrine Is Inherently Unworkable

Trade secrets theft is a serious thing. We all know that by now.

Equally serious, though, is a charge of trade-secrets theft that proves totally unfounded. Meritless claims deter entrepreneurship, limit outside investors, ruin customer and vendor relationships, and cause significant litigation expenses that detract from a firm's operational success.

The inevitable disclosure doctrine is like a gateway drug to specious claims. I have written so extensively on the subject that I am kind of tired of reciting the basic rule, but it goes something like this: a plaintiff can establish its right to injunctive relief by showing that a defendant's use of trade secrets is inevitable. (Let's fully and finally dispel with the uncontroversial proposition that the inevitable disclosure doctrine can be used for anything other than securing an injunction.)

The problem, though, is that the rule is not workable. It lacks standards. It is overused. And it appears to be enforced by no more than a particular judge's subjective determination as to how far it is intended to reach. That's not a rule. That's a sham.

To illustrate this truism perfectly, just read the relatively short injunction opinion in Polymet Corp. v. Newman, No. 1:16-cv-734, out of the Southern District of Ohio. Polymet is in the business of manufacturing something called "hot extruded wire." It had some patents over its process and apparently is a market leader, selling to companies like General Electric, Rolls Royce, and Pratt & Whitney.

Danny Newman apparently worked in several different roles for Polymet for 15 years, from shipping-and-receiving, to purchasing, to sales. He signs no non-compete and no confidentiality agreement. Newman then decides to leave, which was his right to do. He starts his own business to manufacture and sell hot extruded wire, called Element Blue.

Polymet sues him and has no evidence that Newman took anything with him, and no evidence that Element Blue's products are identical to or even substantially similar to what Polymet sells. Instead, it pointed to "circumstantial evidence" that trade secret disclosure was inevitable. That "circumstantial evidence"? How about this:

  1. Newman made plans to form Element Blue while still an employee.
  2. Newman sold hot extruded wire to the same customers.
  3. Newman used a few Polymet vendors and a former Polymet distributor.
And for the Southern District of Ohio, this was apparently enough to lead it to believe that Newman and Element Blue should be enjoined under the inevitable disclosure doctrine.

As wrong as that judgment appears to be (I didn't hear the evidence, but if there was stronger evidence for Polymet, why not cite or allude to it?), the analysis really goes off the rails when applying the inevitable disclosure doctrine.

The whole f*cking point of the doctrine, it appears to me, is that it should provide a restrictive covenant-like remedy. In other words, if the threat of disclosure is that significant - inevitable, it might be said - then the trade-secret holder ought to get the appropriate form of relief. In the Polymet case, that would mean preventing Newman and Element Blue from manufacturing and selling competitive products.

Is that what the court did? Nope.

Instead, it takes a far more confusing path that only will invite future disputes. It bars the defendants from using "Polymet's confidential, proprietary or trade secret parameters, processes, or procedures, and Polymet's confidential pricing and product development strategies for their own benefit." Talk about vague. On that scope, Polymet is sure to be haranguing Element Blue endlessly about what type of process it's using to manufacture its products. The lack of any ascertainable scope also enables Polymet to just shift its trade-secret theory to whatever it learns Element Blue would be doing.

Even the defendants may have been better off facing a broader production-or-sale injunction, if for no other reason that to eliminate the fees associated with a contempt hearing down the road (which on this order seems, dare I say it again inevitable).

The court undermined the very basis of the inevitable disclosure doctrine at the end of its order, finding as follows:

"[P]rohibiting Element Blue from making hot extruded wire, which would effectively shut down the company, is a bridge too far given the current lack of any direct evidence of misappropriation of trade secrets at this time."

That actually might best describe the inevitable disclosure theory - a "bridge too far." To engage in this sort of too-cute-by-half analysis undermines the theory itself. What's really going on here is obvious: the court saw the superficial appeal to the doctrine given the facts, and then when it came time to apply it, the court pulled back entirely from the main point of the doctrine. Through its disjointed analysis, the court illustrated and proved all the shortcomings of the inevitable disclosure theory.

The Polymet case serves as a reminder of why inevitable disclosure almost never works. It is highly unfortunate to have a case like this hanging out there on such weak facts. I continue to believe that the doctrine is properly applied as a rationale for why a narrowly tailored, reasonably drafted non-compete should be enforced. And in no other circumstances.

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