“Inevitable Disclosure Doctrine” Fails to Demonstrate Breach of Non-Disclosure and Non-Compete Agreements
EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299
EarthWeb, Inc. v. Schlack, 2000 U.S. App. LEXIS 11446
Mr. Mark Schlack worked for EarthWeb, Inc. from October 19, 1998 to September 22, 1999 as the company’s Vice President of Worldwide Content where he had overall editorial responsibilities for the company’s website. EarthWeb was started in 2004 and had 230 employees nationwide that provided online products and services to business professionals in the information technology (IT) industry. The company and Mr. Schlack signed an employment agreement on October 13, 1998 that contained non-disclosure and non-compete clauses. The restrictions prohibited Mr. Schlack from being an employee of a business entity that directly competed with EarthWeb for a period of twelve months after his termination. The agreement provided consideration in the form of Mr. Schlack’s salary, performance-based bonus, and stock options. Mr. Schlack tendered his resignation in September 1999 and informed his superiors at EarthWeb that he had accepted a position with ITworld.com, a subsidiary of IDG, another business connected to the IT industry.
EarthWeb sued Mr. Schlack in federal court and asked it to grant a preliminary injunction to prevent him from working for ITworld.com. EarthWeb sued in order to protect its confidential information and trade secrets related to several components of its business operations: 1) strategic content planning, 2) licensing agreements and acquisitions, 3) advertising, and 4) technical knowledge. The company argued that an injunction and the enforcement of the non-compete agreement were necessary to prevent disclosure of its trade secrets and confidential business information. The federal court denied EarthWeb’s request and the company appealed to the Second Circuit Court of Appeals (jurisdiction over Connecticut, New York, and Vermont). At the appellate level, the court affirmed the district court’s decision and held that the denial of the injunction and enforcement was proper given the facts of the case.
The Second Circuit had previously held that a demonstration of irreparable harm is the “single most important prerequisite for the issuance of a preliminary injunction”. Mamiya Co. v. Masel Supply Co., 719 F.2d 42, (1983). Disclosure of trade secrets and confidential information has traditionally been sufficient to show irreparable harm so long as the harm is imminent. The mere possibility of harm is insufficient and motions should be denied when the harm described in the complaint is remote and speculative. This case did not involve actual theft or misappropriation of confidential information, only the possibility of future disclosure. Mr. Schlack defended himself by asserting that the position awaiting him at ITworld.com was very different from his job at EarthWeb and that he would not have an occasion to divulge any of EarthWeb’s confidential information. Additionally, he claimed that EarthWeb’s complaint overstated his responsibilities and he was nowhere close to being a senior executive with access to vast amounts of confidential information.
EarthWeb had the burden to show that Mr. Schlack’s breach of the non-compete agreement would create irreparable harm. The appellate court held that the company had failed to establish that an injunction was reasonably necessary to protect its business interests. The company failed to produce any evidence that there was an imminent risk that Mr. Schlack would disclose EarthWeb’s confidential information while being employed at ITworld.com. The court stated that EarthWeb had relied on the “Inevitable Disclosure Doctrine”; a theory the court rejected and commented should only be applied in the rarest of circumstances. The doctrine heavily relies on speculation and “what ifs” to advance a request for injunctive relief for breach of a non-compete agreement. This doctrine employed insufficient concrete evidence that there would be a disclosure of confidential information and both the district and appellate courts denied EarthWeb’s request for injunctive relief in the form of enforcing the restrictive covenant.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.