Inevitable disclosure doctrine rears its head in New Hampshire

Employers may place severe limits on the mobility of their most senior executives without negotiating employment contracts that contain non-compete covenants, according to a case decided last year by the Rockingham County Superior Court.

Ordinarily, an employee may freely choose where she wishes to work, unless the employee has previously agreed to a reasonable employment contract that prevents the employee from moving to a competitive company. Non-compete covenants have been carefully reviewed by the courts to ensure that they are backed by consideration and are no broader than absolutely necessary to protect the employer’s valid interests because the stated public policy of New Hampshire has been to favor employee mobility.

Last fall, in a case brought by Bauer Nike Hockey Inc. of Greenland, N.H., the Rockingham court issued an injunction that barred a former Bauer Nike senior executive from going to work for an upstart competitor, Mission Hockey Inc.

Bauer Nike is by far the dominant designer and manufacturer of hockey skates and equipment. Mission is more known for its roller hockey equipment and holds only a 6 percent market share of the ice hockey skate market. The former Bauer Nike Hockey executive also had been involved in the design of a new high-tech skate shortly before he joined Mission Hockey. The departing executive did not have an employment contract that included a non-compete covenant.

The court barred the executive from going to work for Mission Hockey based on the inevitable disclosure doctrine. This doctrine has not yet been reviewed by the New Hampshire Supreme Court. The doctrine, however, has been applied by courts in other states to protect against the misappropriation of trade secrets by highly placed employees who have been exposed to their employer’s trade secrets before switching jobs to work for a direct, but inferior competitor.

The inevitable disclosure doctrine is used to bar the employee from working for the competitor on the theory that, regardless of the employee’s promise not to disclose trade secrets, the nature of the new employment will necessarily or inevitably require the disclosure of the trade secrets of the previous employer.

The doctrine is not, however, designed to prevent an employee from exploiting the general skills and knowledge acquired during her employment. The focus of the doctrine is solely on the protection of an employer’s trade secrets.

The leading case imposing the doctrine is from the federal courts in the central part of the country and involved a dispute between Pepsi and Quaker Oats when Quaker was just starting in the sports and new age drink business. Pepsi successfully barred a senior marketing executive from going to work for Quaker based on fears that he would inevitably use and consider Pepsi’s secret marketing strategies in his new job for Quaker.

The court thought it would have taken an “uncanny ability to compartmentalize information” for the departing executive to avoid using Pepsi’s trade secrets.

Many other courts have considered the inevitable discovery doctrine since the Pepsi case was decided in 1995. The leading cases rejecting the doctrine are from California, Florida, Minnesota and Maryland. These cases generally focus on the unfairness of imposing an after the fact non-compete agreement on the departing employee when the employer did not act to protect itself by negotiating an agreement in good faith.

The failure to negotiate non-compete agreements also may negatively reflect on the employer’s efforts to protect its trade secrets.

Courts in North Carolina, Illinois and Iowa have accepted the doctrine. No New England state has adopted the inevitable discovery doctrine as part of its common law or by statute, although trial courts in Connecticut and in Rockingham County have used the doctrine as a basis for ruling on petitions for injunctions.

Senior executives who work with trade secrets and the companies that employ them are well cautioned to be aware of the inevitable discovery doctrine, even though New Hampshire has not formally adopted it.

The petitioners in a newly filed trade secrets case now pending before the New Hampshire trial courts are relying upon the doctrine as the basis for an injunction. Other businesses may soon follow suit. As well, employees and employers who enter employment agreements that include a choice of law clause should become familiar with the status of the inevitable discovery doctrine in the state whose law is chosen to analyze the employment contract.

Andru Volinsky is managing partner of Bernstein, Shur, Sawyer and Nelson PA’s New Hampshire offices and specializes in employment law, commercial litigation and white collar criminal law.