It’s a fact of business life that employees leave to join a competitor or start a competing business, armed with confidential information that is suddenly put at risk. While you want to protect those assets, pulling the trigger on litigation may be premature. Unless you have evidence that you’ve been ripped off, a concise warning letter is a typical and prudent first step.

In its classical form, the warning letter serves as a reminder of the employee’s obligations and as a notice that you are prepared to act. The goal is compliance, and it often works. When you get the usual response with soothing reassurance that your concerns will be respected, the risk of loss is not eliminated, but it is mitigated. The exchange is polite, with each side reserving its options.

But the Defend Trade Secrets Act creating original jurisdiction for trade secret claims, the assumptions behind this common minuet may no longer be valid. If there is going to be litigation, you may want to avoid federal court, and for the same reason your opponent may want to go there. (For more information, check out the article “Be Careful What You Ask For”) So your warning letter needs to be crafted to prevent triggering a preemptive federal declaratory judgment action.

The key is to inquire, not accuse. This helps you stay in control of the process while you become better informed. You can find a sample warning letter below:

To Departing Employee

Dear Mr. Smith,

Since you have recently terminated your employment, we wish to remind you of your obligations to the company that continue after your employment ends. As you know the company possesses a great deal of highly sensitive and confidential business information. This includes customer lists, marketing plans, engineering data, product plans, and the like. During your employment you have been provided, or had access to, such information.

Both the law and the contract you signed when you came to work for the company prohibit any use or disclosure of such information after you leave. For your convenience, we enclose a copy of the agreement you signed. Because you have taken employment with a competitor of the company, it is especially important that you take care not to violate your obligations to keep this information confidential. While we have no reason at this time to believe that you have violated your obligations, it would be helpful to understand from you the steps that you intend to take in your new position to ensure that the confidentiality of our information is respected.

We look forward to your early response to this request.

Very truly yours,

To New Employer

Dear Mr. Jones:

We understand that Mr. John Smith, who until recently was employed by us, has decided to join your company. We draw your attention to the fact that Mr. Smith worked in our Advanced Widgets Department as a Senior Research Engineer. In that capacity, he became quite familiar with all aspects of our de-flanging process, which we consider and treat as confidential.

While he was with us, Mr. Smith signed an Employee Confidentiality and Invention Assignment Agreement, a copy of which we enclose for your reference. As things now stand, we have no reason to believe that any of our trade secrets in this area have been misused, and we expect that Mr. Smith will continue to comply with his obligations. We also trust that your company will not assign Mr. Smith to a position that might risk disclosure or use of this sensitive information.

If you have any questions regarding any of these matters, we will be happy to discuss them with you. For the moment, we ask that you describe what steps you are taking to protect against inadvertent misuse of our trade secrets.

We look forward to your early reply.

Very truly yours,

The new Defend Trade Secrets Act for the first time lets you file your case in federal court. but just because you can do it doesn't necessarily mean you should. Federal court provides a lot of advantages for certain kinds of disputes. But there can be a downside.

The easy decision is in a case that the DTSA was designed for, where some of the actors are in other states or countries. Federal courts give you nationwide service of process and uniform rules of procedure that can streamline litigation. Federal judges, with their experience handling cross­border cases, are better suited to resolving complex issues of personal jurisdiction. And if you find out about a threatened theft of valuable data before it happens, the new ex parte seizure provision of the DTSA can give you a powerful remedy.

But federal court is not for everyone. Its judges are "single-assignment," meaning that they have a case from beginning to end, and therefore also have a motive to end it early if it lacks substance. As a result, federal judges (who by the way are not getting any additional resources from Congress along with their new trade secret jurisdiction) often demand more specificity in pleadings and in trade secret definitions, which can end up looking like patent claims. State courts, in contrast, usually run on a "departmental" system, where early issues are handled by specialist judges, giving close cases a better chance to squeak through to trial, and giving plaintiffs more leeway in describing the subject matter of their claims.

Federal judges may be more inclined to transfer venue. And when it comes to substantive issues, the trade secret plaintiff's requirement to demonstrate its "reasonable efforts" to protect its data may get a more skeptical eye. Once a federal judge granted a defense summary judgment because the "confidential" legend on plaintiff's documents was not in a big enough font! So even after the DTSA, trade secret owners need to have an open mind about their strategy in deciding whether, and where, to litigate.

Well, not quite. But $940 million is a lot of money, and that's how much a federal court jury awarded on April 15, 2016 to Epic Systems, a Wisconsin healthcare software company, against the U.S. subsidiary of Tata Consultancy, part of the Tata Group headquartered in India. There may be a lot of lessons to come out of this case - and we don't know if the jury's award will be reduced - but what I want to talk about today is inspired by that verdict: how is it that trade secret damages can be so large?

Of course, every case rests on a unique set of facts, and trade secret disputes typically involve allegations of treachery and deceit that can turn a jury's head. But at a time when proving damages in patent cases feels restricted by issues like extraterritoriality and the entire market value rule, it seems that trade secret verdicts keep going up. In a quick search of awards in the past five years, I've found eight (including the Epic case) of more than $25 million, and three of those were in the hundreds of millions.

What is it about trade secret damage law that allows such seemingly generous results? Mainly it's because trade secrets are grounded in tort principles, where the primary objective is to make the plaintiff whole, and where doubts are resolved against the wrongdoer.

Setting aside willfulness for the moment (while we await the Supreme Court's rulings in Halo and Stryker), patent law tries to calculate the rent due for no-fault infringement. Trade secret law, in contrast, tries to return the plaintiff to where it should have been but for the defendant's wrongful behavior. The difference makes trade secret damages harder to predict.

A new Defend Trade Secrets law may give Latin American companies reason to move computer servers to the United States.

This past week the US Congress passed the Defend Trade Secrets Act (DTSA), less than two weeks after the European Parliament voted through the EU Trade Secrets Directive. What might at first seem like an extraordinary coincidence in fact has a lot to do with pressure applied by industry on both sides of the Atlantic to improve the remedies that are available for theft of trade secrets.

Businesses are relying increasingly on secrecy as the preferred way to protect their innovations, as well as the massive amount of analytics, financial and customer data that drive competitive advantage. But this valuable information is also vulnerable, not just to hacking and other kinds of espionage, but also to careless behaviour by employees and business partners. Having access to robust and predictable legal remedies is important.

Those aren’t available in Europe, the Commission found in a 2013 report. That concern led to its proposal for the EU Trade Secrets Directive, an attempt at minimum harmonisation.

Meanwhile, in the US, where thanks to broad discovery rights and a (mostly) uniform set of state laws, trade secret protection has been viewed as relatively powerful, business called for amendment of the federal Economic Espionage Act – which provides only criminal remedies – to include an option for companies to bring their private trade secret disputes to federal court as well. (Up to now, they have been able to do that only in cases where there is “complete diversity” of citizenship among the parties, an unusual occurrence in trade secret cases, or where there is another federal claim – such as patent infringement – pending based on closely related facts.)

Introduced only nine months ago, the DTSA enjoyed unusually bipartisan political support, buoyed by enthusiastic intervention from industry groups. In fact, the only organised opposition came from a group of law professors who were worried that provisions for seizure of infringing property could lead to a new class of “trade secret trolls” terrorising unsuspecting companies. After a Senate hearing last December, at which I was called to rebut the professors’ arguments, work began on a set of amendments that were all accepted by the end of January. On 4 April, the Senate voted unanimously to accept the legislation, and the House followed suit on 27 April. President Obama is expected to sign it soon.

The DTSA adds a private right of action to the existing federal criminal law, using the same standards expressed in the Uniform Trade Secrets Act, which is the basis for almost all US state laws, and was also the pattern for Article 39 of TRIPS. As a result, it can now be said that the US has fully complied with its TRIPS obligations, since it has a single national law covering the subject. However, the new federal law will not displace existing state statutes. Instead, it will be used optionally for trade secret disputes where the federal courts provide a distinct advantage: cases with
interstate or foreign actors, where attorneys can initiate discovery anywhere in the country, and where judicial experience is needed to handle complex jurisdictional issues.

State courts in the US, even though having similar substantive laws on trade secret protection, apply local procedural rules that can vary enormously, impacting multi-state cases where speed matters. This is why industry was so supportive of the legislation: instead of having to go to various county courts with unpredictable local customs, they can take advantage of a single nationwide system and set of rules.

The DTSA also provides an ex parte seizure when the trade secret holder has advance warning that someone is about to destroy a stolen secret or leave the jurisdiction. This provision has been quite controversial; however, applications have to be so well supported, and the penalties for a mistaken application are so severe, that most believe the remedy will not be invoked often and will be allowed only in obviously deserving cases.

Two other aspects of the DTSA deserve special comment. First, although US law has always allowed courts to issue orders against a “threatened” misappropriation, concern was raised whether this standard language might allow a federal court to stop a departing employee from taking a similar job with a competitor. This so-called “inevitable disclosure doctrine” has provoked fear – not always rational – that courts might be able to bar competitive employment merely based on how much sensitive data the employee knows. The DTSA’s solution to this mobility issue was to prohibit any order that is based only on what the person knows, requiring instead that it be based substantially on the employee’s behaviour that indicates untrustworthiness.

A second significant feature of the DTSA is its grant of immunity to employee whistleblowers reporting suspected wrongdoing. Existing law in the US is sparse and unreliable, based on a highly contextual backward look at the facts to determine whether the employee’s action may have been justified. Unsurprisingly, under these circumstances, the risks of coming forward are too great, and studies show that many who might otherwise have reported significant wrongdoing have remained silent. Of course, the employer has legitimate interests at stake as well, since the claim may turn out to be wrong, or the employee’s disclosure may be broader than necessary. The DTSA resolves this tension by providing clear immunity, but only for disclosures made in confidence to law enforcement, or as part of a court filing under seal. In this way, the information can be provided without fear of retributive litigation, while the relevant authorities can maintain the integrity of the secrets while they determine whether there is a basis to proceed.

The DTSA will improve the efficiency of, but will not revolutionise, trade secret disputes in the US. As already noted, there will be a certain class of cases brought in federal court because they involve foreign actors or witnesses spread across the country. Strictly local cases – where the chef leaves a restaurant with the secret recipes and moves down the street – will still be handled in state courts. That’s in part because the DTSA requires that the information in controversy be related to a product or service in “interstate commerce”, the minimal jurisdictional requirement for federal courts to act. And it’s in part because local cases will be brought by local lawyers who are familiar with their local courts.

Although some lawyers will want to use federal courts for trade secret cases just because they handle patent matters and are more comfortable there, that may not be the smartest tactical move. Federal judges take their cases on “single assignment”, meaning that they are in charge of all issues from beginning to end. They are therefore more likely to view the case skeptically than state court judges, who typically have a “departmental” system and are sometimes seen as waving through weak cases so that they can be taken care of by a different judge at trial. In addition, federal judges are usually more demanding of a plaintiff’s identification of its trade secrets. So we may not see a general rush toward filing in federal court.

What of the EU Trade Secrets Directive? Also driven by industry concerns over the need for harmonisation, the EU effort starts from a much lower base of harmony than has existed in US states. Indeed, the Commission’s report found a disturbing level of inconsistency among the 28 national regimes. So by establishing common definitions, some common remedies and an approach for protecting secrets during litigation, the directive represents a major step forward.

But measured by the expectations and needs of customers, there is quite a distance left to travel. For cultural and political reasons, the directive does not deal with criminal remedies and so there remains an uneven regime for enforcement in the most egregious cases of information theft. More importantly perhaps for business, there has been no progress on addressing the fundamental problem of pursuing trade secret cases in civil law systems: the lack of discovery. Say what you will about the excesses of US civil discovery in general; the trade secret plaintiff, facing losses from behaviours that only the defendants can know, is always disadvantaged at the outset of a dispute by asymmetric access to information about what happened. Without discovery to set the balance right, there will always be a significant number of legitimate cases that cannot be pursued.

Worse still may be the exceptions provided in the Directive. Unlike the DTSA, whistleblowers are free to disclose confidential information not just to government but also to media, so long as it is in the public interest. And the catchall exception for “protecting a legitimate interest” under national or EU law seems a yawning loophole that even the CJEU may not be able to constrain adequately.

The EU Trade Secrets Directive is a very good start on harmonising standards in this critical area. But for the time being, if your clients need extremely reliable civil remedies they are probably well advised to find ways to bring their cases in the US.

Back in 1974, when a lot of people thought that trade secret law couldn't survive alongside a patent system that encouraged public disclosure, the Supreme Court in the Kewanee case patted us on the head and said, "don't worry," assuring us that anyone with a patentable invention would be crazy to elect secrecy instead. Patents were exclusionary and "strong" while secrets were "weak." And for a number of years after the Federal Circuit was formed it seemed that patents kept getting stronger all the time, while the risks of secrecy (what if my competitor gets a patent on this?) were pretty obvious.

How times have changed. The courts have been shrinking the universe of what can be patented (business methods, software, therapies), the bars to patenting (obviousness, indefiniteness), and the enforceability of patents (injunctions, damages, fee-shifting). And Congress, through the America Invents Act, has made it easier and cheaper to challenge patents without going to court, establishing the Patent Trial and Appeal Board, which some have referred to as "patent death squads." While patents seem under attack, trade secrets are basking in a new level of attention from industry, reinforced by provisions of the AIA that virtually eliminate the old risks of protecting innovation by secrecy.

So does this mean that we should abandon patenting as a strategy? Not at all. Good patents remain strong, not only in protecting novel inventions from theft, but also in building recognized value, enabling financing and collaborations. Yes, our calculus needs to change, particularly in some technologies. But it was never an either/or situation anyway. The question of patenting or secrecy is less like arriving at an intersection than it is like eating at a buffet: you get to have something of everything that you like.

Hardly a week goes by without seeing a post or article by some well-meaning lawyer who insists that the first step in protecting your trade secrets is to know what you have, therefore you need to do an "inventory." That's only half right: knowing what you own is critical, but you don't have to create a detailed list, as if you were ticking off the contents of a hardware store. In fact, you shouldn't do that.

First, you don't have to. The legal standard is "reasonable efforts," and judges are generally understanding and flexible about the quality of a trade secret owner's efforts. And from a management point of view, making prudent decisions requires only that you assign a risk profile to categories of data, not to individual records.

Second, it's dangerous. Getting too granular risks counting the leaves on the trees, and passing over what makes the forest vulnerable (or valuable). You will end up wasting time and probably abandoning the project. Or worse, you'll miss some important things altogether.

Instead of counting all the leaves in your forest, start by pulling together an interdepartmental team and talking about what drives your competitive advantage, and identify your key vulnerabilities. You'll probably be surprised - and certainly will be better informed - by the different perspectives brought to the meeting.

With this grounding, you will be in a good position to begin designing an approach that will work for your unique organization. And don't worry, the categorization and labeling will come!

You can be sure that most of your employees are active on social media. For younger ones, in fact, Facebooking, Instagramming, and Tweeting are as natural as breathing. But suppose an employee shared pictures of your product prototype? Posted a draft patent application your company was about to file? Messaged a Dropbox link with confidential information (even if only to a fellow employee) over an insecure connection? Crowdsourced a question about a sensitive issue she was handling for a customer?

Do scenarios like these keep you up at night? They should. Social media and the "sharing" culture it has sparked are very real threats to your organization.The Internet—which spawned social media—has changed the way we work and communicate. That change has profound implications for a trade secret system that relies largely on human trust.

I'm not saying openness is inherently bad. Obviously, a certain amount is needed if we're to collaborate for innovation. Yet there's a dark side to the comfort level that's evolved around all this sharing. Companies need to acknowledge the risks of social media and work to prevent leaks by improving their employees' knowledge and good judgment.

Here are six tips to help you keep your company's sensitive information off social media feeds:

Understand that you're asking employees to go against their "digital instincts." By their very nature, social media platforms encourage users to publicly disclose the minutiae of their lives (usually the more, the better). The so-called Facebook generation is conditioned to casually communicate, swapping files and using the Cloud to store and access photos, music, and more. They are experts at revealing a lot using only 140 characters.

Making sure that social media doesn't become a hole through which your company's secrets leak is an especially challenging task because you're essentially asking employees to check their habits at the door. They'll need to learn to operate based on a different set of standards that often contradict how they deal with information in their private lives.

Put social media policies in writing. Don't assume that a few informal warnings and cautionary tales will keep all your employees from tweeting and posting what they shouldn't. If your company already has general policies about the disclosure of information assets, make sure they become part of the official set of rules that govern employees' use of social media. These policies will reinforce the need to keep personal and work issues separated and not to post about what is going on inside the company.

Larger companies need to have these policies reviewed by legal counsel, since typically broad confidentiality restrictions can violate labor laws that guarantee employees the right to discuss their working conditions. Additionally, companies need to decide if social media business contacts belong to them or to their staff. According to recent court decisions, if this isn't clearly specified in the company's policies, those contacts and the social media account itself can be claimed by the employee when he leaves.

Train, train, and then train some more. In many organizations, after initial orientation, data protection policies are left on the shelf and more or less ignored. That's dangerous, because staff can easily forget about the rules or lose respect for the dangers of noncompliance. Meanwhile, they may be working on collaborative projects, examining acquisition possibilities, receiving development proposals, and more. All of these situations can lead to personal social media connections, where you will be relying on the knowledge and good judgment of your employees to control risks.

You can mitigate much of this risk by creating a quality training program that engages your employees as part of the security defense team. They'll make fewer mistakes themselves on social media (and elsewhere), and they'll also be on the lookout for the mistakes of others. Keep in mind that the best training is continuous, careful, upbeat, and professional, and does not rely on threats. And be sure to include everyone—not just key knowledge workers—in social media security training. That includes contractors, temporary employees, and interns.

Know which devices might represent a risk. The growing popularity of "BYOD" policies means that many of your employees may well be storing sensitive information on the same laptops, smartphones, and tablets they use to scroll through status updates in the evenings. That's cause for concern, because cyberthieves can gain access to these devices' contents and your company's systems through relatively easy-to-hack social media accounts and apps.

In addition to establishing clear policies on social media use and providing continuing training, consider technical mitigation measures. Mobile device management (MDM) tools can remotely configure devices, monitor what's on them, and even erase their data if lost. MDM techniques can also include encryption for data stored on or communicated from the device.

Teach employees to spot social media scams. In addition to using MDM tools, training employees on methods that information thieves often use can help them avoid falling prey to traps on social media. For instance, social media profiles give hackers a lot of information that they can use to compose realistic-looking, customized email phishing messages.

But beyond that, websites themselves can be used directly to fool people into joining a fake group, survey, or event, sometimes using a money coupon as a lure. Other traps involve fake 'like' buttons, browser extensions offered for download, or compelling offers designed to make the viewer want to share them with friends. All of these social network scams are grounded on the idea that we are all so used to rapidly connecting, sharing, and exposing that we'll do it more or less automatically with anything that looks attractive. Teaching employees to think twice before clicking can help secrets stay secret.

Be aware of your official social media presence. While you may not be able to fully control what your employees post on their personal social media accounts, you can certainly keep a close eye on official company Twitter, Facebook, and other social media pages.

Have a safety net of trusted employees monitoring and maintaining your company's presence on social media to stop potentially revealing posts from ever reaching the public eye. Also, regularly change passwords to lock out account thieves who may have successfully procured your company's login information.

Civil claims for trade secret misappropriation have always been grounded on state law, with only limited access to federal courts. That would change with the Defend Trade Secrets Act (S.1890) now pending in Congress as an amendment to the Economic Espionage Act. The proposed law enjoys broad industry and bipartisan political support, and was favorably reported out of the Senate Judiciary Committee on January 28. Most of the focus to this point has been on the need for a federal option when misappropriation occurs across state or national borders. But at the recent hearing a new amendment was proposed and accepted that would have an impact well beyond the original legislation. Suggested by Senators Patrick Leahy and Chuck Grassley, this part of the law would provide immunity under federal and state law to whistleblowers who confidentially report suspected illegal activity to the authorities.

The idea for this proposal originated with a draft article, Tailoring a Public Policy Exception to Trade Secret Protection, recently posted by Professor Peter Menell of the UC Berkeley School of Law. Professor Menell was confronting what should be a rather obvious issue: how do we support and encourage the private disclosure to government of needed information about possible wrongdoing, while recognizing the legitimate secrecy interests of business owners? It turns out that current law does not provide a clear answer, and this has negative consequences for whistleblowers and law enforcement.

Although an exception of sorts exists for personal disclosure of trade secrets in the public interest, it is expressed in vague terms that require a balancing of interests in the context of case-specific facts. For example, the Restatement (Third) of Unfair Competition § 40, comment c, states that “a privilege to disclose another’s trade secret depends upon the circumstances of the particular case, including the nature of the information, the purpose of the disclosure, and the means by which the actor acquired the information.” You might imagine that an employee, discovering evidence of corporate wrongdoing, should be comfortably protected by this principle when taking that evidence in confidence to the government. But you would be wrong.

In cases where the whistleblower has reported illegal activity through a qui tam action under the False Claims Act, 31 USC § 3729, some companies have reacted by asserting claims against the former employee for having misappropriated the very secrets that made the action possible. Claims have even been filed against the whistleblower’s attorneys for their part in their client’s alleged violation of a standard nondisclosure agreement. Arguments against applying a public interest exception include that the former employee took too much information, or should have reported their concerns in some other way. In any event, the limited case law and ambiguous formulation of the exception expose potential whistleblowers not only to the expense of litigation but also to its inherent personal stress.

And the risk of litigation is only one of many negative consequences that can result from reporting internal evidence of wrongdoing. As Professor Menell explains, studies show that whistleblowers frequently suffer job loss or demotion, personal shunning or blacklisting. This affects their finances, their families and their health. As one researcher put it, “the surprising part is not that most employees do not talk; it is that some talk at all.”

When employees know of illegal activity but are too scared to come forward, the public suffers. The insider typically is in a unique position to provide the evidence, which then remains walled up within the organization. On the other hand, businesses have a compelling need, particularly in the modern information economy, to protect their legitimate trade secrets from exposure, and sometimes whistleblowers are wrong, driven by self-interest. But at the moment there is no reliable way to balance and protect all these interests by ensuring that the relevant information can get to the officials who can consider it in confidence and make a decision on whether to proceed.

The Leahy-Grassley amendment appears to do this well, adopting what Professor Menell calls a “sealed disclosure/trusted intermediary” approach. Specifically, the amendment would rephrase 18 USC § 1833(2) (defining exceptions to the EEA) to provide that a person may not be held criminally or civilly liable for disclosure of a trade secret, if the disclosure is made (a) in confidence to a government official or to an attorney and (b) for the sole purpose of “reporting or investigating a suspected violation of law.” Immunity would also apply for disclosures made in a complaint or other filing, but only if done under seal. Nondisclosure agreements presented to employees or contractors must contain a notice of the immunity, at least by reference to the company’s relevant policy document. (Failure to provide the notice will forfeit the right to recover attorneys fees or enhanced damages against the employee under the DTSA.)

Significantly – and this point was emphasized by Senator Dianne Feinstein at the January 28 hearing – the amendment would not protect any otherwise wrongful behavior of the employee, such as hacking a computer system in violation of the Computer Fraud and Abuse Act.

If the amendment survives and becomes law, it is not likely to create substantial new burdens or risks for employers. Statutory notice provisions have been required in employee NDAs for decades, as a result of state laws protecting the rights of individual inventors. Recent action by federal agencies like the NLRB and SEC have signaled that employee contracts must expressly confirm the individual’s right to share and report certain kinds of information. And although there is always some incremental risk when secret data is provided to the government, experience has shown it to be manageable.

The benefit to the public of this new approach could be profound. Government plays a central role in the modern economy, and can only enforce rules affecting safety, public health and financial integrity when it has access to information about what might be going wrong. Whistleblowers are usually the best source of this information, but they will almost never come forward if they face the risk of being sued for violating obligations of confidentiality. The DTSA whistleblower amendment provides a sensible answer: a safe harbor for disclosures in confidence to the government.

The Defend Trade Secrets Act (S.1890) would for the first time allow trade secret plaintiffs to file their cases directly in federal court. The proposed law was favorably reported out of the Senate Judiciary Committee on Jan. 28, but with an important amendment protecting the right of employees to change jobs. Specifically, the bill requires that there be evidence of threatened misappropriation to justify an injunction putting limits on what an ex-employee can do. Although some might see this as reinforcing some states’ (particularly California’s) rejection of the “inevitable disclosure doctrine,” its practical effect instead should be to reframe the discussion away from that abstract doctrine and toward the kind of evidence necessary to prove a threat.

Forty-seven states have adopted the Uniform Trade Secrets Act. The injunction provisions of the UTSA permit a court to enjoin “actual or threatened misappropriation” of a trade secret. In 1995, the Seventh Circuit decided Pepsico v. Redmond,[1] approving a temporary injunction against a senior marketing executive, who had lied about his future plans, from starting work in the same position for a direct competitor. The court explained that the UTSA allowed an injunction when the “defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” This abstract phrase, detached from the facts of the case, came to be known as the “inevitable disclosure doctrine.” And because it was assumed to mean that employees could be enjoined merely because of how much they knew, it was widely condemned within California and other jurisdictions where policy and law strongly favor of mobility of labor.

“Inevitable disclosure” as an alternative to proving “threatened misappropriation” was rejected with strident language in Whyte v. Schlage Lock.[2] But in Central Valley General Hospital v. Smith,[3] another California court considered the question that Whyte had left unanswered: what evidence would be necessary to infer a “threat” under the UTSA. It concluded that while merely knowing the secret information was not enough, courts could intervene, for example, if the defendant had previously misappropriated trade secrets, or intended to misappropriate, or had refused to return confidential materials. In other words, bad behavior could provide the necessary inference of a threat.

In other states, where courts were presented with facts similar to Pepsico — that is, where the defendant had behaved in a way that made it unlikely he could be trusted — injunctions were sometimes issued, and judges called what they were doing an application of “inevitable disclosure.” See, e.g., Barilla America Inc. v. Wright.[4] As a result, commentators gradually settled into using the phrase without closely inquiring how it was being applied, and dividing jurisdictions according to whether they embraced or rejected “inevitable disclosure,” without questioning its meaning. California and a few other states were said to have rejected the doctrine, while many others had accepted it. But even in the states where it was accepted, judges almost always applied it only in cases where there was some evidence of bad behavior. See, e.g., Bimbo Bakeries USA Inc. v. Botticella.[5]

In other words, a false conflict had been created, and the evil that the Whyte court had railed against was mostly a phantom menace. But because the received wisdom was that inevitable disclosure could restrain someone from taking a new job without any evidence to support the inference of a threat, opponents concluded that employee mobility was protected only in California or in other states that had rejected the “doctrine.” And so when the DTSA was proposed last year, using precisely the same injunction language as the UTSA, they expressed concern that it might allow federal judges sitting in those jurisdictions to ignore state court rulings and apply the inevitable disclosure doctrine to enjoin an employee from taking a new job only because they knew too much. This was true even though the DTSA was expressly non-preemptive and had added language prohibiting an injunction that would “prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation.”

After the Judiciary Committee held its hearing on the DTSA in early December, we continued to hear concern that this language would not be sufficient to protect employees from “inevitable disclosure” injunctions. Stanford Professor Mark Lemley and I then suggested a different approach, one that would direct federal judges to determine the existence of a threat based on the employee’s behavior rather than on what he or she knew. In the recently approved “substitute” bill, new language proposed by Sen. Dianne Feinstein, D-Calif., prohibits any injunction against “entering into an employment relationship” and requires that “conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.”

Other amendments to the DTSA have also improved it, including bringing the limitations and enhanced damages provisions into line with the UTSA, tightening up the already strict requirements for an ex parte seizure order, and creating a new and important exception to protect whistleblowers who need to disclose confidential information in order to report a crime to the authorities. But in terms of widespread impact on the greatest number of trade secret cases, the Feinstein amendment stands out, because it would establish a national standard reflecting the value of employee mobility. Rather than arguing about abstractions or labels, and without affecting any state law or policy on noncompete agreements, courts will apply the statutory language that allows injunctions against threatened misappropriation, focusing on the quality of evidence needed to prove a threat.

In the process, we may have banished the ghost of inevitable disclosure.

[1] 54 F.3d 1262 (7th Cir. 1995). [2]101 Cal. App. 4th (2002). [3]162 Cal. App. 4th 501 (2008). [4]2002 U.S. Dist. LEXIS 12773, *25-26 (S.D. Iowa 2001). [5]613 F.3d 102, 118 (3d Cir. 2010).