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A Refresher on the Trade Secrets Doctrine, Part I

January 23, 2007

By Andrea Anapolksy

In the wake of jury selection for the Coco-Cola Co. theft trade secrets trial and Apple Computer’s two-year quest to discover who leaked trade secret information about an unreleased Apple product to several online blog sites, misappropriation of a company’s trade secrets may have become increasingly more difficult to prevent. This article will be the first of a two-part series which examines the trade secrets doctrine and recent developments related to it. This article in particular will assess the doctrine of trade secrets under California law and will offer available remedies on avoiding misappropriation.

Treatment of Trade secrets under California law.

Under California law, the trade secrets doctrine is found primarily in two statutes: the California Uniform Trade Secrets Act, Civil Code §§ 3426 et. seq., (the “UTSA”) and Penal Code §499c.

The penal code provides that anyone who intends to “deprive or withhold the control of a trade secret from its owner” or has the “intent to appropriate a trade secret to his or her own use” or to the use of someone else, may be guilty of theft. (Penal Code § 499c)

The Civil Code, provides the definitions to “misappropriation” and “trade secrets”. The term “misappropriation” has a specific legal meaning and is divided into two distinct types of misuse: acquisition by improper means, and the use or disclosure without express or implied consent. (Civil Code § 3426.1) Under the first type of misuse, “improper means” may include: “theft, bribery, misinterpretation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” (Civil Code § 3426.1(a)) Under the second type of misuse, courts have extended the definition to capture situations in which a former employee’s use or disclosure of confidential customer information to solicit new customers or accounts for a new employer constitutes the “misappropriation” of a trade secret.” (Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Garcia, 127 F.Supp.2d 1305, 1306 (C.D. Cal. 2000))

In an effort to reflect California’s commitment to protect proprietary business information, California courts constructed a broad definition of “trade secrets” that often captures information commonly and frequently accumulated in the normal course of running a business. Under California law, a trade secret may include a pattern, formula, program, device, method, technique, or process. While these examples may not appear to rise to the level of a protection deserving of source code, for example, such information may be eligible for protection as a trade secret if such information has two salient characteristics: (1) it gains independent (actual or potential) economic value from not being generally known to the public or to other parties (competitors, associates) which could obtain economic value from its disclosure or use; and (2) it is subject to efforts that are reasonable under the circumstances to maintain its secrecy. (Civil Code § 3426.1(d)) Therefore, as long as a company takes reasonable measure(s) to protect what it considers proprietary business information, and if the value of the information is actually or potentially based on the fact that it is a secret, then California courts will consider extending the trade secrets doctrine to protect customer lists, plans, spreadsheets, corporate records, offers and so on.

Not only is it pertinent to understand what types of proprietary information may benefit from protection under the trade secrets doctrine, it is also worth mentioning that even if employers do not actually know of an employee’s misappropriation of a former employer’s trade secret, the current employer may be held liable. Under the UTSA, liability is based on constructive knowledge, not actual knowledge. (Civil Code § 3426.1(b)(2)(B)(ii)(iii)) This standard may implicate an employer in situations where an employer should have known of the misappropriation, as shown in one case where an employer repeatedly used proprietary information which had been previously protected as a trade secret by an employee’s former employer. (Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215 (2002)) While the current employer did not actually know of the misappropriation, the Court stated that the employer’s repeated use of such proprietary information was one factor which it relied on to impute constructive knowledge of the misappropriation to the current employer. (Id., at 226) Of course, the standard of constructive knowledge is fact-specific, but it is something to keep in mind.

Remedies to Mitigate Misappropriation.

The most important step toward protecting a company’s trade secrets is for the hiring party to always reduce its intentions to writing. As will be discussed in a subsequent article, California Courts generally do not uphold non-competition agreements. An alternative is to prepare nondisclosure agreements. While nondisclosure agreements vary—depending on the nature and scope of the disclosure, the parties involved, and the value of the trade secret—most, if not all nondisclosure agreements should include a clear description of the trade secret, permissible uses of the trade secret, a duty of confidentiality, a remedy for non-compliance with the duty of confidentiality (such as injunctive relief), a duty to disclose prior agreements which could prevent the employee from using proprietary information acquired from a prior employer and the term of the agreement (which may last indefinitely or until a certain event, such as when the information is released to the public through a channel other than misappropriation). While it is highly improbable that any company can prevent the misappropriation of its trade secrets, creating a nondisclosure agreement, among several steps it should take to help mitigate potential misappropriation and liability.