This article is reprinted with permission from the
March 29, 2000
edition of
New York Law Journal.
© 2000 Incisive Media US Properties, LLC.


Inevitable Disclosure 'DoubleClick' Versus 'EarthWeb'

By Joseph E. Bachelder

Two cases applying New York law to Internet businesses give very different perspectives on the doctrine of "inevitable disclosure." In DoubleClick, Inc. v. Henderson, 1997 N.Y. Misc. LEXIS 577 (Sup. Ct. N.Y. Co. 1997), the New York Supreme Court applied the doctrine in its decision ordering two former employees of an Internet advertising firm not to engage in competition with their former employer for six months after leaving it. In EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299 (S.D.N.Y. 1999), remanded on other points by the Court of Appeals for the Second Circuit, Summary Order No. 99-9302 (2d Cir., Jan. 31, 2000), a Federal District Court refused to apply the doctrine when a company providing on-line services to Information Technology professionals tried to enjoin a former employee from going to work for a competitor. (The court also found that a no-compete agreement did not apply.)

The doctrine of "inevitable disclosure," as used in this column, provides that, at least for a limited period of time, an employer can prevent an employee from becoming employed by a competitor, even in the absence of a no-compete or confidentiality clause, if such employment would result in "inevitable disclosure" to the competitor of trade secrets or other confidential information relating to the business of the employer.1 

The column does not consider (a) the use of "inevitable disclosure" to buttress the enforceability of a no-compete clause, as was done in Eastman Kodak Co. v. Powers Film Products, 189 A.D. 556, 179 N.Y.S. 325 (4th Dep't. 1919), (b) those cases in which the remedy to prevent "inevitable disclosure" was limited to an order not to disclose the protectible information (application of the doctrine of "inevitable disclosure" to support an order not to disclose would seem an oxymoron), see Merck & Co. Inc. v. Lyon, 941 F. Supp. 1443 (M.D.N.C. 1996) or (c) the protection provided by the Uniform Trade Secrets Act against threatened misappropriation of trade secrets.2 

'DoubleClick'

Two key employees of a company engaged in providing advertising services on the Internet were in the process of organizing their own business, in competition with their employer, when the employer discovered what they were doing and fired them. The employer, DoubleClick, Inc., then sued to enjoin them from starting their new business.

Following is a discussion of the facts in DoubleClick, organized around four key issues. A similar discussion follows regarding the EarthWeb case.

1. Had the employer developed trade secrets or other proprietary information entitled to protection?
The court in DoubleClick found that "among the services that DoubleClick has developed are a proprietary advertisement delivery system that distributes advertisements to web sites in its network in a matter of milliseconds, a system that causes certain ads to appear when a user uses certain search terms, and a number of technologies designed to gauge the effectiveness of the advertisements." 1997 N.Y. Misc. LEXIS 577, at *3.

The court further found that "DoubleClick's confidential information about its pricing and customers constitutes trade secrets," id. at *14, and that "DoubleClick operates in a competitive and fast-changing business environment where the use of its proprietary information could cause it real harm." Id. at *20.

2. Was protectible information possessed by the employees?
Each employee had confidential information about DoubleClick's business. According to the court, "Dickey [one of the defendants] had access to [DoubleClick's] 1996 Business Plan, its revenue projections, plans for future projects, pricing and product strategies, and its various databases with information concerning DoubleClick's clients." Id. at *4. (Bracketed material added.) Henderson, the other defendant, had, among other things, "summaries of operations, revenue and expense analyses, analytical summaries of financial indicators, and other highly confidential information." Id. at *5.

3. Would the defendants be competing directly with DoubleClick?
The defendants would have been competing directly with DoubleClick by establishing an Internet advertising business.

4. Was there evidence that disclosure by the defendants was "inevitable"?
Since the defendants were establishing their own business, whatever they carried in their heads inevitably would be available to them in running their own business. Furthermore, the court found substantial evidence of misappropriation of DoubleClick information in anticipation of the defendants establishing the new business.

The court ordered that the defendants be enjoined for a period of six months from commencing their own business or employment with any other company in competition with DoubleClick if their functions at such company included "providing any advice or information concerning any aspect of advertising on the Internet." Id. at *23.

'EarthWeb'

In this case, the defendant, Mark Schlack, had been a vice president of EarthWeb, Inc., a company in the business of supplying information, products and services to Information Technology professionals via websites on the Internet. The parties had entered into an employment agreement that contained a no-compete clause as well as a confidentiality clause. Schlack left EarthWeb to take a job with International Data Group, Inc. (IDG), a company which, at least in part, was in competition with EarthWeb. The court held that the no-compete clause, which applied only to a competitor whose "primary business" involved the same type of information services or involved an "on-line" store, did not apply.

IDG, much larger than EarthWeb, also supplies information and services to Information Technology professionals, but the court found that the overlap of information services was only a very small part of the information supplied by IDG (not its "primary business") and, further, that it produced its own content through a staff of more than 275 journalists (rather than providing a directory or reference library of material as did EarthWeb). The court concluded, as noted above, that the no-compete clause did not apply. (The court then proceeded, in a lengthy discussion, to find, in dictum, that even if the no-compete clause covered the IDG business it would not have been enforceable in this case, a discussion beyond the scope of this column.)

The court examined the doctrine of "inevitable disclosure"; both as a buttress to the no-compete clause (which it rejected) and as a separate theory without reference to the no-compete clause (which it also rejected). The discussion below of the court's rejection of the "inevitable disclosure" doctrine as a separate theory in the case before it follows the same categories of issues as used above in the discussion of DoubleClick.

1. Had the employer developed trade secrets or other proprietary information entitled to protection?
With limited exception, the court in EarthWeb did not find that the information presented to it by EarthWeb constituted trade secrets or other forms of protectible information. "Strategic content planning" according to the court was the only category of information "arguably entitled to trade secret protection in this case." 71 F. Supp. 2d 299, at 314. Even as to that information, the court expressed some doubt as to whether it had not been revealed, upon the launching of the websites, to an extent that removed EarthWeb's right to protection.3 

2. Was protectible information possessed by the employee?
As in DoubleClick, the defendant had access to very confidential information of the employer. The court cited evidence introduced by EarthWeb "that Schlack's primary job responsibilities involved making all significant strategic decisions relating to content," id. at 303, and that Schlack either authored or supervised the creation of the content plans for a number of EarthWeb websites launched within the last year. Thus, Schlack was involved in deciding what content EarthWeb licensed and how that content would be structured on its websites in order to reach specific types of IT professionals.

Schlack was also involved in determining whether the users of a particular EarthWeb website should pay for access to the site, and if so, what the appropriate price should be. As a result, Schlack knows the specific target audience for each website, how EarthWeb aggregated content on those websites to reach the targeted audience, and how EarthWeb may intend to improve the content and delivery of particular websites. Id. at 303-04.

Elsewhere, the court found that "Schlack was primarily responsible for determining what content EarthWeb licensed or acquired for its websites. In that capacity, Schlack was privy to information concerning a wide range of matters." Id. at 305.

Nonetheless, the court concluded that defendant Schlack did not, at least not in a material way, acquire confidential information that could harm EarthWeb. It found as follows:

Schlack had no access to EarthWeb's advertiser list, source codes or configuration files. Nor did Schlack have direct contact with EarthWeb's highest executive officers. He was not involved in developing or planning EarthWeb's overall business strategies and goals, and he had no access to companywide financial reports or information. Thus, while the central nature of Schlack's position necessarily offered him a broad prospective over EarthWeb's day-to-day operations, in many important respects his access to highly confidential information was limited. Id. at 305.

3. Would the defendant be competing directly with EarthWeb?
The court concluded that defendant, in his new position of overseeing website content of four on-line publications and three additional websites owned by IDG, all apparently involving information directed to Information Technology professionals, would not be directly competing with EarthWeb. The court appeared to rely significantly on the fact that the new IDG consolidated website "will rely on original content for over 70 percent of its website's material," id. at 306, rather than relying on acquisitions and licenses from third parties, as did EarthWeb.

4. Was there evidence that disclosure by the defendant was "inevitable"?
The court in EarthWeb touched only tangentially on the question of "inevitability" of disclosure. The employment agreement entered into between the defendant and EarthWeb included a confidentiality clause, as noted above as well as in footnote 3 to this column discussing the remand to the District Court from the Second Circuit. However, that clause did not affect the court's conclusion as to the "inevitability" of disclosure.

The EarthWeb court noted that the holding in DoubleClick "rests heavily on evidence of the defendants' overt theft of trade secrets and breaches of fiduciary duty." Id. at 310. The court went on to say: "Absent evidence of actual misappropriation by an employee, the doctrine [of "inevitable disclosure"] should be applied in only the rarest of cases." Id. at 310. (Bracketed material added.)

The court criticized the dangers inherent in the "inevitable disclosure" doctrine as follows:

While the inevitable disclosure doctrine may serve the salutary purpose of protecting a company's investment in its trade secrets, its application is fraught with hazards. Among these risks is the imperceptible shift in bargaining power that necessarily occurs upon the commencement of an employment relationship marked by the execution of a confidentiality agreement. When that relationship eventually ends, the parties' confidentiality agreement may be wielded as a restrictive covenant, depending on how the employer views the new job its former employee has accepted. This can be a powerful weapon in the hands of an employer; the risk of litigation alone may have a chilling effect on the employee. Such constraints should be the product of open negotiation.

Another drawback to the doctrine is that courts are left without a frame of reference because there is no express noncompete agreement to test for reasonableness. Instead, courts must grapple with a decidedly more nebulous standard of "inevitability." The absence of specific guideposts staked-out in a writing will only spawn such litigation, especially as the Internet becomes a primary medium for ideas and commerce. Clearly, a written agreement that contains a noncompete clause is the best way of promoting predictability during the employment relationship and afterwards. Id. at 310-11.

The court concluded that "EarthWeb's entitlement to a preliminary injunction enjoining Schlack's future employment must be found to rest, if at all, on the restrictive covenant it drafted, and not on a confidentiality provision conflated with the theory of inevitable disclosure." Id. at 311-12.

'EarthWeb', 'DoubleClick'

Would the judge deciding DoubleClick have reached the same conclusion as did the judge deciding EarthWeb? Following is a very hypothetical comparison of what might have been the result in the EarthWeb facts and circumstances if they had been subject to the judgment of the court that decided DoubleClick. This hypothetical comparison obviously must be discounted by the lack of any basis for measuring the courts' feelings on such intangibles as the reliability of the evidence in the cases before them.

1. Had the employer developed trade secrets or other proprietary information entitled to protection?
The strategic content planning, licensing agreements and acquisition information and advertising and technical know-how described in EarthWeb would seem to represent trade secrets or other proprietary information that is in the protectible category under the "inevitable disclosure" doctrine as applied by the court in DoubleClick.

2. Did the executive possess any such protectible information?
Certainly the finding of the court that "Schlack was privy to information concerning a wide range of matters on technology issues, marketing and advertising," id. at 305, suggests possession of proprietary information potentially damaging to EarthWeb.

3. Would defendant Schlack be competing directly with EarthWeb?
While EarthWeb and IDG, through its ITworld.com website, played different roles in supplying on-line information to Information Technology professionals, their services appear to be sufficiently overlapping that IDG reasonably could be found in competition with EarthWeb for purposes of applying the "inevitable disclosure" doctrine. (This issue can be distinguished from the issue of whether the language of the no-compete clause defined competition so as to include the business of IDG.) In DoubleClick the New York court found the necessary ingredient for finding competition if both companies were involved in "providing any advice or information concerning any aspect of advertising on the Internet." 1997 N.Y. Misc. LEXIS 577, at *23.

4. Was there evidence that disclosure by Schlack was "inevitable"?
In his role at EarthWeb as well as in his role at IDG, Schlack held responsibilities for determining the content of websites. It is not difficult to imagine a court that decided DoubleClick deciding that Schlack's knowledge of EarthWeb's website design and content strategies, licensing agreements and acquisitions, advertising and technical information "inevitably" would be applied for the benefit of IDG, whether consciously or not. While the EarthWeb court did not find any evidence of actual misappropriation of trade secrets or other confidential information by defendant in his transition from EarthWeb to his new employer, the doctrine of "inevitable disclosure" would seem to have been developed, in part, to eliminate the requirement that a former employer establish actual misappropriation of information in order to enjoin temporarily employment with a competitor.

Summary

The EarthWeb decision represents a significant limitation by a District Court upon the doctrine of "inevitable disclosure." The facts and circumstances in EarthWeb may have been less compelling from the standpoint of the employer than those in DoubleClick. Nonetheless, they would seem reasonably within the rationale of the DoubleClick holding that the employer was entitled to enjoin competitive employment for a six-month period. The District Court in EarthWeb evidently was impatient with an employer whose employment agreement had "rather onerous terms" and the court concluded that "read collectively, the effect of these provisions is to indenture the employee to EarthWeb." 71 F. Supp. 2d 299, at 311. Equally important, the EarthWeb court clearly had concerns regarding the potential for post-termination harassment of former employees under a doctrine where definitions are not very precise.


FOOTNOTES:

1 One of the leading cases applying the "inevitable disclosure" doctrine is PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir., 1995). In that case, a senior executive with knowledge of PepsiCo's marketing, pricing and distribution plans for its sports drinks left to take a high level position in the sports drinks division of Quaker Oats. The executive was not subject to a no-compete agreement. The Seventh Circuit, affirming the District Court for the Northern District of Illinois, held that the risk of disclosure by the former PepsiCo executive in his new role at Quaker Oats warranted injunctive relief preventing him from working for Quaker Oats for a period of six months.

2 The Uniform Trade Secrets Act (UTSA) provides for protection against both "actual or threatened misappropriation" of trade secrets. Uniform Trade Secrets Act. § 2 (amended 1985), 14 U.L.A. 430 (1990).   Neither § 2 nor the Comment accompanying it refers to the doctrine of "inevitable disclosure."

The UTSA was drafted and approved in 1979 and amended in 1985. According to the National Conference of Commissioners on Uniform State Laws, 42 states and the District of Columbia have adopted some form of the UTSA. On March 6, 2000 a bill was introduced in the New York State Assembly to enact the UTSA by amending the General Business Law and the Civil Practice Law of New York.

3 EarthWeb appealed from the District Court's order denying its motion for a preliminary injunction. In an order filed Jan. 31, 2000, the U.S. Court of Appeals for the Second Circuit remanded the case to the District Court for an explanation of its decision to deny EarthWeb's motion to enjoin Schlack from disclosing EarthWeb's trade secrets based on the confidentiality clause contained in the employment agreement. EarthWeb, Inc. v. Schlack, Summ. Order, No. 99-9302 (2d Cir. Jan. 31, 2000), at 4. The Second Circuit also asked the District Court to clarify the grounds on which it denied EarthWeb's motion predicated on EarthWeb's general claim of misappropriation of trade secrets. (The Second Circuit found that EarthWeb had alleged causes of action for breach of contract based on the confidentiality clause and the no-compete clause and a separate claim, outside of the contract, for misappropriation of trade secrets. Id. at 2.)