IL ND Considers Conflicts of Laws and Inevitable Disclosure Doctrine in Employee Non-Solicitation and Trade Secrets Spat

When some  high-level General Electric employees defected to a Chicago rival, GE sued for trade secrets theft and for violations of employee non-solicitation and confidentiality agreements.

Partially granting and partially denying the employee defendants’ motions, the District Court in General Electric Company v. Uptake Technologies, Inc., 2019 WL 2601351 (N.D.Ill. 2019) provides a thorough choice-of-law analysis and discusses the trade secrets case inevitable disclosure doctrine.

Non-Solicitation Agreement: What State’s Law Applies – New York or California?

The first choice-of-law question involved GE’s non-solicitation agreement (the NSA). GE argued that New York law applied since that was what the NSA specified. For their part, the defendants argued that California law controlled the NSA since that is where they were based when they worked for GE and because California law voids employment restrictive covenants.

In Illinois (a federal court exercising supplemental jurisdiction over state-law claims applies the choice-of-law rules of the forum state – here, Illinois), a choice-of-law provision governs unless (1) the chosen forum has no substantial relationship to the parties or the transaction, or (2) application of the chosen law is contrary to a fundamental public policy of a state with a materially greater interest in the issue in dispute.

A party challenging a contractual choice-of-law provision bears the burden of demonstrating a difference in two states’ laws – a conflict – and that the conflict will make a different in the outcome of the lawsuit.

Under New York law, a restrictive covenant in an employment agreement is reasonable if it is no greater than required to protect a legitimate interest of an employer, does not impose an undue hardship on the employee and is not injurious to the public. New York court also consider the temporal and geographic reach of restrictions.

The court found that the NSA’s were enforceable under New York law. It noted that GE was a global company, the one-year term was reasonable and the restriction was narrowly-tailored to high-level employees.

By contrast, California Code Section 16600 voids any contract “by which anyone is restrained from engaging in a lawful profession, trade or business of any kind.” The Court found the NSA was likely void under California law, but it wasn’t a cut-and-dried issue since there is a clear split in California case authorities: some courts enforce non-solicitation agreements; others don’t.

This schism in the California courts signaled an unclear California policy which led the Court to ultimately conclude that applying New York law did not clearly impinge on a fundamental California public policy. [*6]

The Court then found that GE sufficiently alleged the required elements of a breach of contract claim against the defendants and denied the defendants’ motion. (The court did grant the motion filed by the lone employee whose NSA specified California law would govern.)

GE’s Trade Secrets Claim – What Law Governs?

Illinois’s choice-of-law rule for trade secret misappropriation focuses on where the misappropriation occurred or where the defendant benefitted from the misappropriation.

Since Uptake’s (the individual defendants’ corporate employer) principal place of business is in Illinois and the defendants allegedly pilfered GE’s trade secrets there, Illinois law governed GE’s trade secrets claim.

Illinois recognizes the “inevitable disclosure doctrine” which allows a trade secrets plaintiff to show misappropriation by showing a defendant’s new employment “will inevitably lead him to rely on the plaintiff’s trade secrets.”

The plaintiff must allege more than that an erstwhile employee’s general skills and knowledge will be used to benefit a new employer. Instead, the plaintiff must focus on protecting “particularized plans or processes” a defendant was privy to which are unknown to industry competitors and could give the new employer an unfair advantage over the plaintiff. [*9][citing to PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

In evaluating whether disclosure is inevitable, the Court considers (1) the level of competition between former and current employer, (2) whether employee’s new position is similar to former position, and (3) actions new employer has taken to protect against the new employee’s use or disclosure of former employer’s trade secrets.

Since GE alleged that Uptake is a competitor in the data analytics market for industrial machinery and the defendants’ Uptake positions are similar to their former GE ones, the Court found GE sufficiently pled an ITSA claim under the inevitable disclosure doctrine.

Afterwords:

This case illustrates in sharp relief how convoluted and important choice-of-law questions are when different employment agreement sections apply different states’ laws.

The case also provides a useful summary of the key considerations litigators should hone in on when alleging (or defending) trade secrets misappropriation claims based on the inevitable disclosure doctrine.

Published by

PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.