The Use of the Inevitable Disclosure Doctrine to “Backdoor” a Noncompete Agreement in Colorado.
Noncompete agreements in Colorado are generally disfavored. In fact, pursuant to statute, noncompete agreements are only supposed to be enforceable in a few limited circumstances. Specifically, noncompete agreements are supposed to be void ab initio (a fancy way of saying void from the outset) unless the noncompete agreement is contained in one of the following four categories of contracts:
- contracts relating to the purchase and sale of a business;
- contracts for the protection of trade secrets;
- contracts relating to the recovery of expenses paid for educating or training of certain employees;
- employment contracts for executive and management personnel
As it turns out, however, one of the exceptions – contracts for the protection of trade secrets – may be much broader than our state legislature intended. This is because of the judicially created law known as the “inevitable disclosure” doctrine.
To understand how the inevitable disclosure doctrine works (and how it can “backdoor” a noncompete agreement) you first have to understand a little bit about trade secrets and agreements to protect trade secrets.
What are trade secrets?
Almost all companies have some sort of trade secrets. In simple terms, a trade secret is any form of information or data that is actually treated like a secret and provides an enterprise with a valuable and competitive edge over those who do not know the secret. Trade secrets can take the form of something as mundane as a listing of customers and their contact information, to something as unique as the recipe for your favorite soft drink. A trade secret can take the form of a document or a device, a technique or a tactic, a commercial method or mechanism, or special process or procedure. Essentially, a trade secret is any knowledge or information that is kept secret and which provides a competitive advantage.
Are confidentiality, nondisclosure, and nonsolicitation agreements enforceable?
Because of the advantage that a trade secret may provide, it is not uncommon these days for companies to require all of their employees to enter into written employment agreements containing confidentiality, nondisclosure, and/or nonsolicitation agreements. Basically, these agreements say that the employee agrees that during the course of his or her employment, the employee will gain access to information that constitutes a trade secret. In exchange for continued employment, the employee agrees that he or she will not take any trade secrets with them if they leave, they will not disclose any trade secrets to third-parties, and they will avoid soliciting the employer’s existing employees or customers.
Although these agreements typically have a clear anti-competitive effect, Colorado courts long ago decided that they are still enforceable, because they fall into the statutory exception for contracts for the protection of trade secrets. As a result, these agreements are valid and enforceable, even for employees who do not fall into any of the other exceptions described above.
Moreover, under the Colorado Uniform Trade Secrets Act (CUTSA) and the federal Defense of Trade Secrets Act (DTSA), it is against the law for an employee to misappropriate or disclose an employer’s trade secrets. So, even without a written employment agreement, state and federal law can still be applied to prohibit an employee from taking, using, or disclosing (i.e. “misappropriating”) a trade secret.
The Inevitable Disclosure Doctrine.
The question may arise, what happens when a trade secret takes the form of knowledge inside an employee’s head? What protections are there when the employee “jumps ship” by going to work for a competitor?
An employer cannot force that employee to simply forget all of the information he or she may know about, some of which may constitute a trade secret. Nor can the employer expect the employee to avoid the inadvertent use of that knowledge and experience for the benefit of his or her new employer. Even if the employee had the good faith desire to protect the former employer’s trade secrets (which is not always the case), it probably is not realistic to expect the employee to avoid the inadvertent use of his or her knowledge when working for the new employer.
Take for example, the case of a worker who has knowledge and extensive experience using a former employer’s secret process for maximizing the efficiency of widget assembly. Such process may very well constitute a trade secret if others within the widget industry do not know of the secret process. In addition, the employee may have knowledge of a multitude of discreet systems and procedures that contribute to the secret assembly process as a whole.
When the employee leaves and goes to work for a competing widget company, can we really expect the employee to avoid being influenced by his or her knowledge of the former employer’s secret process? Can we expect her to forget each of the discreet bits of information making up the system as a whole? When asked, some courts have said that the answer is “no,” and that the former employee cannot be expected to avoid the inadvertent use of his or her knowledge of the trade secret.
In other words, some courts conclude that it is “inevitable” that “disclosure” of the trade secret will occur; the employee cannot go to work for the competitor without inadvertently using or disclosing that information to the new employer. As a result, courts adopting the “inevitable disclosure” doctrine feel that it is correct to issue an injunction that prevents the former employee from going to work for any competitors of the former employer. Those courts feel that if an injunction does not issue, and if the employee is allowed to compete, the contract for the protection of trade secrets will be breached, and CUTSA or DTSA may be violated. Thus, by adopting this doctrine, some courts have effectively imposed a noncompete agreement even in cases where an employee never specifically agreed to avoid going to work for a competitor and even in cases where the employee may have had no written employment agreement whatsoever.
Importantly, whether the “inevitable disclosure” doctrine is the law in Colorado law is unclear. As of the date of this article, no Colorado state court has specifically adopted the inevitable disclosure doctrine. At the federal level, several Colorado federal courts have considered and even applied the doctrine, but none of those decisions are binding upon other federal courts, let alone our state courts. And of course, neither our 10th Circuit Court of Appeals, nor the U.S. Supreme Court has weighed in to decide the issue. So, for the time being, it will remain up to the courts on a case by case basis to decide whether the inevitable disclosure doctrine should apply. This author’s prediction is that application of the doctrine in those cases will depend upon the particular court’s view of Colorado’s public policy disfavoring noncompete agreements, as well as the particular circumstances of the case, with application of the doctrine being more likely in cases where the former employee has engaged in actual wrongdoing or where the former employee does not appear forthright and honest.
If you have any questions regarding the application of the inevitable disclosure doctrine or the enforceability of a noncompete agreement, please contact me.