HP v. Hurd: Trade Secret Misappropriation and Inevitable Disclosure in California
By Patrick U.
On September 7, 2010, Hewlett-Packard (HP) filed a complaint against Mark Hurd, former HP President and CEO, in an effort to obtain an injunction to prevent Hurd from joining competitor Oracle as President and member of the board. HP alleged (1) breach of contract and (2) threatened misappropriation of trade secrets. The claim for breach of contract alleged that Hurd was under contractual obligations to maintain the confidentiality of HP’s trade secrets, and that Hurd violated those obligations. The threatened misappropriation claim alleges that, in his position at Oracle, it will be impossible for Hurd to avoid using or disclosing HP’s trade secrets.
On September 20, 2010, HP and Oracle reached a settlement that would allow Hurd to join Oracle. The details of the settlement are confidential, but an SEC filing indicates that Hurd forfeited a large chunk of HP stock options and experts suspect Hurd agreed not to participate in certain business decisions. Hurd will likely not be allowed to make business decisions for a period of time in areas involving Oracle’s growing hardware business.
This note will analyze HP’s claims on their merits and take a quick look at California’s rejection of the inevitable disclosure doctrine.
HP’s Claims
HP’s claims are really one and the same. HP is claiming that Hurd is in breach of his employment contract because he will inevitably disclose information he is under an obligation to keep confidential. The second cause of action, threatened misappropriation of trade secrets, is an extension of this theory. That, regardless of the employment contract, Hurd will inevitably disclose HP’s statutorily protected trade secrets in his new role at Oracle.
The inevitable disclosure doctrine arises from Cal. Civ. Code § 3426.2(a): “Actual or threatened misappropriation may be enjoined.” Threatened misappropriation has been interpreted, in some jurisdictions, to include situations in which a former employee would “inevitably” disclose trade secrets. Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (2002). The seminal case on the inevitable disclosure doctrine is Pepsico v. Redmond, in which a former Pepsi executive takes a job at Quaker Oats and Pepsi seeks an injunction to prevent the move. 54 F.3d 1262 (7th Cir. 1995). The court held that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id.
Plaintiff in Schlage attempted to apply the inevitable disclosure doctrine in California. 101 Cal. App. 4th 1443. In California, non-compete agreements in employment contracts are per se void. Cal. Prof. Bus. Code § 16600. Through this statute, California seeks to promote employee mobility and protect a person’s right to earn a living. In Schlage, the California Court of Appeals declined to extend the doctrine to threatened misappropriation cases in California, reasoning that it creates an “after-the-fact covenant not to compete restricting employee mobility.” 101 Cal. App. 4th at 1447.
In HP v. Hurd, both causes of action were likely to fail because of California’s policy of favoring employee mobility. Despite the suit’s lack of merit, Hurd (Oracle) and HP settled quickly because of the deep relationship between the two companies. The companies have around 140,000 customers in common, and 40% of Oracle software runs on HP machines. The suit would have soured relations between two companies who have long been synergistic. Interestingly, hiring Hurd signifies Oracle’s hardware ambitions, which is most likely why HP brought the suit in the first place. A legal “firing across the bow.” Watch for this relationship to degrade further over the next few years.
