Some courts accept inevitable disclosure of trade secrets doctrine

July 15, 2013 / By Robert Wood

Georgia employers cannot bring an independent claim for violation of the Georgia Trade Secrets Act based on the inevitable disclosure doctrine in the context of non-compete litigation. This was the conclusion of the Georgia Supreme Court in Holton v. Physican Oncology Servs., LP, 2013 WL 1859294 (Ga. 2013). The Court, in explaining its decision, noted the generally unsettled nature of the inevitable disclosure doctrine. Because the Plaintiff had failed to advance any applicable precedent to determine whether inevitable disclosure was an independent claim or merely an element of misappropriation, the Court denied and reversed a lower court’s grant of an injunction.

In Holton, Michael Holton (“Holton”) was employed as Vice President and Chief Operating Officer of Physician Oncology Services, LP (“POS”), a cancer patient treatment provider. POS required Holton, after hiring him, to sign a non-compete clause. The non-compete clause required Holton to agree upon termination to not provide similar services for one year within a twenty-five mile radius from POS’s locations. Additionally, Holton was required to sign a two year confidentiality covenant. The covenant required that Holton not disclose any of POS’s proprietary business information, which was defined as “personal, social, or business activities of its officers, directors, principals, partners, shareholders, agents, and employees.” Holton, 2013 WL 1859294, at *2.

In a subsequent merger process with Vantage Oncology, LLC (“Vantage”), Holton was removed from his responsibilities of Georgia operations, and ultimately terminated without cause. He then went to work for Ambulatory Services of America (“ASA”) a month later, serving as ASA’s Chief Executive Officer of Radiation Oncology Services of America, Inc. (“ROSA”). Vantage, upon learning of Holton’s move, filed suit for an injunction based on ROSA’s operations that were located within the non-compete zones of Holton’s original employment agreement. Additionally, Vantage sought to enjoin Holton from working for ROSA based on the theory that his knowledge of Vantage’s operations, having served as a vice president, would lead to the inevitable disclosure of POS’s trade secrets. After the lower court granted the injunction, and the appellate court affirmed, Holton appealed to the Georgia Supreme Court.

The Court first took up the issue of the non-compete clause issue, which was rather quickly disposed with. The court noted that the agreement, only one year in length, already expired during the litigation and the injunction no longer stood in the way of Holton’s employment. In fact, the Court noted, Holton had already been serving as ROSA’s Chief Executive since the injunction’s expiration, and thus the issue was moot.

The Court then took up the issue of the separate claim for inevitable disclosure of POS’s trade secrets and confidential information. The Court first noted that Vantage had not argued that Holton had actually disclosed any trade secrets or confidential information. Thus, the basis for the inevitable disclosure claim came down to what Holton retained with his own memory. The Court then articulated the inevitable disclosure doctrine as a theory in which an employer may “prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on plaintiff’s trade secrets. Holton, 2013 WL 1589294, at *9. (citations omitted). The Court explained that this doctrine essentially would allow a court to impose a non-compete clause sua sponte where one does not exist or lengthen a preexisting non-compete clause. A Court considering this doctrine takes several factors into account in determining whether to impose the doctrine such as: whether the employers are in direct competition, whether the employee will be unable to compete without using the former employers trade secrets, whether the secrets are valuable to both employers, and whether the employee holds a similar position with his new employer that he held with his old one. Id. at *11. (citations omitted).

The Court, however, pointed out several problems with Vantage’s inevitable disclosure claim. First, the doctrine carried questionable status among the jurisdictions and was not settled under Georgia law. The Court then declined, as invited by Vantage, to adopt the inevitable disclosure doctrine by broadly interpreting prior precedent. The Court instead pointed out that the Court had frequently cautioned that parties, such as Vantage, against seeking to address issues that lurk in the record, such as independent inevitable disclosure claims. Thus, the Court held that the trial court incorrectly enjoined Holton from working for ROSA insofar as it relied on the theory that he would inevitable disclose POS’s trade secrets and confidential information.

Finally, the Court declined to address Holton’s claim that confidentiality covenant was overbroad. Although the Court indicated that there were serious concerns with it, Holton brought up the issue for the first time on appeal, thus making it inappropriate to an appeal of an interlocutory injunction.

Observation:

Although some Texas cases have mentioned “inevitable disclosure” as a possible legal theory, the Texas Supreme Court has never explicitly adopted it. Rather, Texas courts have focused on the “threatened” disclosure of trade secrets. As this case shows, some non-Texas courts have been more willing to accept the inevitable disclosure doctrine.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood