Overview of California Trade Secrets Law and Trade Secrets Litigation
From my experiences as a bicoastal business attorney practicing in CA, NY, WA, and MA, our nation’s most progressive business startup states, I know that many startup founders are brilliant intellectuals who have created winning positions in their field by way of their professional creativity and personal drive. Yet simultaneously these individuals often lack any real legal knowledge and high-quality legal representation to help them avoid Intellectual Property litigation and understand the power and nuances of Trade Secrets Law.
To that end, I have prepared this brief outline of California Trade Secrets to help startup professionals understand the legal and rational underpinnings of this area of the law, helping them to better communicate with me during legal representation. Please note that this synopsis is only for basic informational and entertainment purposes and should not be relied upon as legal advice. You should consult with me personally to discuss your Trade Secrets concerns.
As an initial point of fact, unlike Patent or Copyright protection which have strict time deadlines on them, Trade Secrets protection can potentially last forever or until the Trade Secret is no longer a secret. Now let’s get deeper into the woods:
FIRST:
The General Policies and Goals of Trade Secrets Law are to:
1. Promote creation of Value and production of ideas
2. Discourage Bad Acts and maintain commercial morality
3. Promote Trade and Competition
4. Encourage Mobility of workers</p>
SECOND:
The 3 elements of the Tort of "Misappropriation of a Trade Secret" are that there must be:
1. a valuable trade secret
2. bad acts
3. reasonable precautions were taken to protect the Trade Secrets
THIRD:
General Sources of Trade Secrets Law:
1. Federal (via TRIPS in1994) and State Laws
2. First Restatement of Torts
3. Uniform Trade Secrets Act (UTSA) of 1979 and 1985
4. Restatement 3rd of Unfair Competition
In the USA, there are 3 main and different working Definitions of Trade Secrets that vary throughout the States:
1. Restatement of Torts, Common Law, Metallurgical Industries: a Trade Secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives owner an opportunity to obtain an “advantage over competitors who don’t know or use it”; it may be a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.
a. Mettalurgical v Fourtek, 5th, 1986: Metallurgical discloses secrets to a manufacturer of the furnace, and to a licensee in Europe; Court holds that such disclosures don’t void secrecy of Metallurgical’s Trade Secrets, but Trade Secrets law must respect reasonable business relations; Trade Secrets law does not require that the Trade Secrets be unique or novel (like Patent Law), so long as it’s not common knowledge; egregious tortious activity qualifies as misappropriation in discovering a not-so-secret Trade Secrets; secrecy is key, and balancing of 3 factors is a proper approach; Trade Secrets 3 factors: secrecy is a required factor; but value and expenditure of time and effort in development are not absolutely required, and depends on facts of case, i.e., if there’s a lot of value, no expenditure is acceptable, and vice versa, or very bad acts can override little value and little expenditure (but this is dicta and persuasive only in this jurisdiction).
b. Rohm and Haas, Restatement 3rd of Unfair Competition, 1982: secret paint formula was not generally known, but it was readily ascertainable from prior publications, but it was acquired here despite reasonable precautions via bad acts from a former employee who memorized and divulged the formula to the new employer; as long as it’s not commonly known to all in the industry and it give a financial advantage to the holder, it’s a Trade Secret.
c. Negative know-how is not a Trade Secret, but this is arguable, especially in case of Departing Employee, because it would otherwise make the most knowledgeable as the least valuable in society.
d. Reasonable Precautions help to prove secrecy, value, investment, and bad acts.
e. Summary of Factors to determine Trade Secrets: extent to which information is known outside or inside the business; precautions taken; value of info.; time and effort to develop the info; ease which information could be acquired or duplicated by others
2. Uniform Trade Secrets Act, including California, which is a modified UTSA jurisdiction: Trade Secrets means information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent “economic value” (actual or potential) from not being “generally known or readily ascertainable by proper means” by other persons who can obtain economic value from its disclosure or use.
a. Must have Reasonable Precautions, or there is no Trade Secrets protection, regardless of very bad acts.
b. Fleming: no Contract in this case; a Departing Employee took product needs, Client Lists, projected needs, supply sources and contacts to new job; Court said these are not Trade Secrets because such information known by employee is “readily ascertainable”;
i. But if information is documentation and records that the employee takes, it becomes suspect as a violation of Trade Secrets; but just because the information is written down by the employee does not mean it is a Trade Secret;
ii. Client Names are not Trade Secrets if they are readily ascertainable, but this does not mean you have to duplicate the information exactly as in the original document, because close enough is acceptable in UTSA jurisdiction.
iii. Court says that the information and experience carried by departing employees hired by new company qualify as “readily available info”; but this eviscerates Trade Secrets law, because then a company could just buy out all the employees of another company and then legally take all its Trade Secrets, especially since here Court says that “readily ascertainable” is not information that is just “mentally known,” but also any that were gathered on paper or copies as part of general responsibilities of employee during employment (absent egregious bad acts or torts)
iv. Catch 22: You can Contract around information in public domain if Contracting restrictions are reasonable, but “reasonable” means you cannot impede the pro-competition policies and general goals of Trade Secrets law.
3. Restatement 3d of Unfair Competition: a Trade Secret is any information that can be used in the operation of a business or other enterprise, and that is sufficiently valuable and secret to afford actual or potential “economic advantages” over others.
a. If value and secrecy and very bad acts are clear, evidence of Reasonable Precautions may not be necessary; but good advice would be to take such precautions anyway to avoid expense of lawsuit.
Restatement 3d & UTSA coincide: once the information is generally known or readily ascertainable by proper means, it makes no difference if improper means were used to acquire the information;
a. Negative know-how is a Trade Secret; but this is arguable, especially in case of departing employee, because it would otherwise make the most knowledgeable as the least valuable in society.
b. Church of Scientology, 9th Circuit Court of Appeals, 1986: Departing Employees want to disseminate the Church’s secret questions; Court focuses on the “nature of the activity” and says no Trade Secrets because no commercial value, only spiritual value; Problem with this decision is its focus on commercial value to a business: is not a non-profit a business, and are its Trade Secrets protected; and aren’t many religious activities also economic?
c. Generally, Restatement 3d and UTSA stress economic value and business advantage over Trade Secrets of a “business activity.”
California Trade Secrets Law has adopted the UTSA doctrines, but struck out the "readily ascertainable" language as an element in the cause of action for Misappropriation, but kept the "readily ascertainable" language as a defense; thus, it shifts the burden of proof onto the Defendant to show that it was not readily ascertainable; and thus gives more protection to Plaintiff’s; also, in CA, to prove that the Trade Secret is generally known, the Defendant argues how readily ascertainable it is, and the CA law focuses on finding out if the Trade Secret is generally known.
FOURTH:
General Rules regarding Trade Secrets:
Independent Discovery is acceptable.
Reasonable Precautions:
1. Rockwell: vault and limited access and notice to others of protection of Trade Secrets are “reasonable precautions,” and Trade Secret is not invalidated by practical business needs to carry on its work internally and with other companies by sharing blueprints of its products with its internal and external colleagues.
2. ElectroCraft: precautions were full of loopholes in security, access to secrets, all employees did not have to sign confidentiality agreements, and didn’t have to wear badges;
3. Policies: If court does not see reasonable precautions, you could argue that you’re relying on protection that Trade Secrets law affords; but Court says that the public shouldn’t have such a burden, and that you should protect your own work; Court stresses economic and efficiency arguments over sleeping/negligent owners of Trade Secrets; also, is it Court’s role or Role of Expert Witnesses to determine what is a Reasonable Precaution?
a. Reasonable Precautions assure the legal system that the issue of contention is something of value; and it gives notice to others that this item is protected; and tells law that those who took this Trade Secret did so via a bad act.
4. Trade Secrets protected by law, and should be protected via Contracts as a Reasonable Precaution.
Plain View Doctrine: if the information is in plain view, it casts doubt on the value, secrecy, reasonable precautions, and bad acts regarding a Trade Secret.
Reverse Engineering:
1. Majority of jurisdictions, including UTSA: Reverse Engineering of a Trade Secret is acceptable, and not a bad act
2. Anti-Reverse Engineering clauses in Employment Contracts: Split among courts: some enforce (if equal bargaining power; and say there are other way to compete around such clauses), and some don’t enforce (if Contracts of adhesion; kills competition)
3. Federal Economic Espionage Act: outlaws Reverse Engineering, even when acceptable under UTSA; criminal penalties.
Contractual Restrictions on Employees:
1. are enforceable, even in the absence of a protectable Trade Secret (Warner-Lambert)
2. Restrictions on Departing Employees:
a. confidentiality agreements; invention assignments; Non-Competition agreements.
b. Negative know-how has special interactions with departing employees.
c. Law: cannot ask departing employees via Contract to give up skills, experience, and knowledge accumulated during their time of employment with you.
d. See Fleming in UTSA section: Catch 22: You can Contract around information in public domain if Contracting restrictions are reasonable, but “reasonable” means you cannot impede the pro-competition policies and general goals of Trade Secrets law.
e. Van Zealand: case involves a Contract; Contracts cannot restrict employees use of client list when the information is readily available in the public domain; Court says I won’t uphold the non-disclosure agreement re: client lists because it restrains trade, competition, and creativity; and the client list information is readily ascertainable; it is in society’s best interests to not lock-up readily ascertainable information via Contracts; also Contract involves unequal bargaining power problems (substantive due process), because who would voluntarily want to contract away the very resources that make you valuable on the market?;
f. Majority of Courts:
i. allow employers to Contract with employees re: information that is not a Trade Secret, but the boundary line relates to Contracts that restrain Competition;
ii. uphold reasonable Non-Competition Agreements; “reasonable” = length of time + geographic scope of affect of Non-Competition Agreement;
iii. BUT in CA, Non-Competition Agreements are unenforceable, with exception of the sale of the business in which key employees of the former company stay in the new company, and the old employer cannot compete for a while to allow the new company to become competitive. (CA BUSINESS AND PROFESSIONS Code).
iv. But in TX, covenants not to compete are lawful if contain reasonable limitations on time, scope, and area of restraint.
v. Clauses can be struck as whole, or in part and language can be reformed.
g. Warner-Lambert: “Listerine Clause Case”: Warner-Lambert promised inventor royalties as long as Listerine is sold; but Warner-Lambert wants to break Contract because it says the original Contract was unclear re: length of royalties, and because, via no fault of Warner-Lambert, the formula was published and now no longer a secret; but Court says that the Contract is valid, regardless of there no longer being a Trade Secret; and here no unequal bargaining power, because the inventor set the limits of the K, not the big corporation.
vi. RESTATEMENT 3d of UC: differs from Warner-Lambert decision: non-disclosure agreement of information in public domain may be unenforceable (Iroquois)
FIFTH:
Remedies for Violation of Trade Secrets:
1. Injunctions: can last as long as the Trade Secrets
2. Head Start Injunctions: tries to eliminate the advantage that the violator gained by forcing violator to cease work on misappropriated info/product for length of time it would have taken to develop the stolen info/prod legitimately
3. Damages: if misappropriated product or information is already in the market, then damages are most socially responsible remedy, because “reasonable remedies” and “actual losses” are hard to determine;
a. UTSA: gives treble damages for really bad acts
b. California Trade Secrets Law: criminal penalties for misappropriation of Trade Secrets;
c. Federal Economic Espionage Act: also criminal penalties; and also outlaws Reverse Engineering, even when acceptable under UTSA;
d. Problem is that keeping Trade Secrets in a criminal trial are hard because Defendants have the right to a public trial; and standard of proof is higher in criminal trial; thus are rare; But, injured party can get “restitution” as a remedy in criminal trials, yet injunctions are easier in civil trials; thus it’s a good idea to have concurrent criminal and civil suits in Trade Secrets violations matters.