Twenty years ago, the Seventh Circuit Court of Appeals in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995) advanced the “inevitable disclosure” doctrine in trade secret misappropriation cases. The doctrine essentially provides that by virtue of the current employment responsibilities of an employee that possesses trade secrets of the prior employer, it is inevitable, unless enjoined, that such person will use or disclose the trade secrets in his or her current employment. Since that time, courts around the country — state and federal — have had to consider the doctrine, some accepting it, others not. Courts in North Carolina have touched on this issue in the past as well but have generally veered away from outright recognizing and adopting the doctrine. North Carolina courts have either declined to apply the doctrine (see e.g. Analog Devices v. Michalski, 579 S.E.2d 449 (N.C. Ct. App. 2003)) or have found some circumstantial evidence of actual misappropriation or some element of bad faith to justify the imposition of an injunction for threatened misappropriation. See e.g. Armacell LLC v. Bostic, 205 N.C. App. 467, 698 S.E.2d 200 (2010). Recently, though, two appellate decisions raise a question as to whether North Carolina now, at least implicitly, recognizes the “inevitable disclosure” doctrine.
In two of the most recent pronouncements by the North Carolina Court of Appeals on the topic — TSG Finishing, LLC v. Bollinger, 2014 WL 7463824 (Dec. 31, 2014) (”TSG“) and Horner International Co. v. McKoy, 754 S.E.2d 852 (N.C. Ct. App. 2014) (”Horner”), the bar for issuing an injunction for threatened misappropriation of trade secrets may have been lowered. Now, it seems that all that is necessary for a preliminary injunction to issue is the establishment of the trade secret, the defendant’s prior access or knowledge of that trade secret and the mere “opportunity” to use it in a competitive situation against the trade secret’s owner, without further circumstantial evidence of actual misappropriation or act of bad faith. While those opinions may not utter the words ”inevitable disclosure or cite to the PepsiCo decision, the conclusion seems almost inescapable that North Carolina tacitly embraces the doctrine. But if this is the case, serious questions arise regarding the statute and its application in the absence of direct or circumstantial evidence of actual misappropriation or bad faith.
In Horner, the Court of Appeals affirmed the grant of a preliminary injunction against a former plant manager of the Plaintiff that had worked with equipment that produced flavor materials for use in tobacco and food products. Horner International alleged that the Defendant, Bill McKoy, had access to certain of its trade secrets including techniques, methods and processes for production uses of the flavor materials. In affirming the grant of the injunction, the Court dispatched the challenges to the specificity of the trade secrets, as well as to the evidence regarding misappropriation. As to the latter, the Court found that under the North Carolina Trade Secrets Act, N.C. Gen. Stat. § 66-155, an injunction can issue for threatened misappropriation of a trade secret, and all that is needed to establish a prima facie case is that the defendant (1) knows or show have known of the trade secret and (2) “[h]as had a specific opportunity to acquire it for disclosure or use or has acquired, disclosed or used it without the express or implied consent or authority of the owner.” N.C. Gen. Stat. § 66-154(a). The Court then found that the “Defendant’s knowledge of trade secrets and opportunity to use those in his work for his new employer create[d] a threat of misappropriation …” Interestingly enough, the Court affirmed the grant of the injunction merely on the establishment of the prima facie case. Moreover, the Court rebuffed the Defendant’s “strenuous assertions on appeal that Plaintiff produced no direct or circumstantial evidence of his ’acquisition, use, or disclosure of [Plaintiff's] information’.” For the Court of Appeals, no such showing was required as long as the Plaintiff met the prima facie standard, apparently even only through a verified pleading.
More recently, the Court of Appeals in TSG found that an injunction was appropriate under the North Carolina Trade Secrets Protection Act for “threatened” misappropriation of trade secrets involving process refinements for fabric finishes. As in Horner, the Court of Appeals here found the Plaintiff presented prima facie evidence of misappropriation based on the admissions of the Defendant that he had done research and experimentation for TSG on aspects of the fabric finishes for at least one specific customer, that there was some overlap in customers and that the Defendant performed “many of the same duties for [his current employer] for some of the same customers that he formerly served at TSG.” Based on these facts, and relying heavily on the applicability of the trade secrets to both TSG and the new employer’s business, the Court readily found that TSG would likely prevail on the merits of its claim for trade secret misappropriation, principally if not entirely based on threatened misappropriation. In reaching its decision, and reversing the denial of the injunction by the Business Court, the Court of Appeals in TSG apparently was not troubled by Judge Murphy’s recitation of the law in his Order that ”North Carolina courts are reluctant to grant injunctive relief solely on the basis of threatened misappropriation without proof of actual misappropriation.” TSG Finishing, LLC v. Bollinger, 2014 NCBC __ (N.C. Super Ct. Feb. 20, 2014) (quoting Allegis Group, Inc. v. Zachary Piper LLC, 2013 NCBC 13 ¶ 52 (N.C. Super. Ct. Feb. 25, 2013). Nor was the Court of Appeals troubled by the long-standing principle set out by North Carolina courts to ”refuse to enjoin an employee from working for its former employer’s competitor under the doctrine of ‘inevitable discovery’ absent some showing of bad faith, underhanded dealing, or employment by an entity so plainly lacking comparable technology that misappropriation can be inferred.” FMC Corp. v. Cyprus Foote Mineral Co., 899 F. Supp. 1477, 1483 (W.D.N.C. 1995) (citing Travenol Laboratories, Inc. v. Turner, 30 N.C. App. 686, 228 S.E.2d 478 (1976) and Engineering Associates, Inc. v. Pankow, 268 N.C. 137, 150 S.E. 2d 56 (1966)). No mention was made of this precept and the opinion was bereft of any allegation of bad faith or underhanded conduct by the Defendant.
In Horner and TSG, the Courts relied on the ”threatened” misappropriation and prima facie pleading language set forth in the statute to affirm or, in the case of TSG, order the granting of the injunction as to trade secret misappropriation. However, one must ask how such a construct jells with the fact that the defendant in these and other similar situations would have ”acquired” the trade secret while employed by and with the consent of the owner. Indeed, under a strict parsing of the statutory language, the “opportunity” referred to in Section 66-154 — and apparently relied on by these courts due to the absence of any showing of actual misappropriation — relates to the acquisition of the trade secret, not to the use or disclosure. Would not then the statute require circumstantial evidence of acquisition, disclosure or use “without the express or implied consent or authority of the owner”? Otherwise, would not an injunction automatically issue every time a trade secret is identified when the individual had access previously in his employment to that alleged secret and was subsequently employed in a similar position by a competitor?
Trial courts in North Carolina continue to grapple with just what is required to show threatened misappropriation under North Carolina’s Trade Secrets Protection Act. The North Carolina Business Court in late December addressed the issue in a case involving a claim of threatened misappropriation of alleged trade secrets in NASCAR racing. RCR Enterprises, LLC v. McCall, 2014 WL 7591977 (N.C. Super Ct. Dec. 19, 2014). In that case, Judge Bledsoe denied a request for entry of a TRO, in part, finding that the plaintiff had not shown a likelihood of success on the merits when much of the discussion was directed at the degree of overlap in the responsibilities of the Defendant in his current and previous positions. In reaching its decision, the Court noted the lack of official embrace of the “inevitable disclosure” doctrine by the North Carolina courts and then found the degree of overlap insufficient. Interestingly, though, the Court did make reference to the above principles, ignored in TSG and Horner, of demonstrating some actual misappropriation or bad faith to justify the imposition of an injunction for threatened misappropriation. And in doing so, the Court seems to have tried to bring Horner in line with that long-established authority, by interpreting Horner as a case involving evidence of actual misappropriation. Yet, in this regard, the court’s efforts seem a bit far afield. A reading of the Horner decision, however, does not reflect that there was actual misappropriation. Indeed, the Court of Appeals in Horner expressly rejected the protestations of the defendant on appeal that the case lacked direct, indirect or circumstantial evidence of actual misappropriation.
So, what is the final conclusion? Until the North Carolina appellate courts expressly adopt or reject the doctrine, litigants will continue to face this confusing landscape. Whether TSG and Horner will ultimately be viewed as a full or partial embrace of the inevitable disclosure doctrine remains to be seen. But TSG and Horner will support an argument that, in certain factual settings, the courts need not attend to allegations of bad faith or underhanded conduct of the defendant to issue an injunction. Even RCR Enterprises leaves open the possibility that if the trade secrets are established well enough and the risk of future use is high enough, due to overlapping responsibilities, then an injunction might be entered even without evidence of bad faith or any actual misappropriation. If such is the case, a defendant, no matter how sincere his or her conduct and intentions, may be out of a new job if employed in a position with the same duties having once been exposed to the trade secrets of the prior employer.