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Attorneys

Third Party Trade Secret Misappropriation and the Statute of Limitations

July 29, 2008

Third Party Trade Secret Misappropriation and the Statute of Limitations

By James Kachmar

A California appellate court was recently faced with the issue of when the statute of limitations runs on a claim for trade secret misappropriation against a third party when the plaintiff’s trade secrets are stolen and sold to that third party. On May 30, 2008, the appellate court issued its opinion in Cypress Semiconductor Corporation v. Superior Court (Silvaco Data Systems) and held that the statute of limitations on a cause of action for trade secret misappropriation begins to run when the plaintiff has reason to suspect that the third party knows or reasonably should know that the information in its possession is a trade secret. The appellate court held that the third party’s actual state of mind did not matter for purposes of the running of the statute of limitations.

Silvaco develops and licenses electronic design automation software. This software allows its customers to design their own software products. Silvaco created a software product known as SmartSpice and maintained that its source code was a trade secret.

In late 1998, a former employee working for a competitor incorporated the SmartSpice trade secrets into a product called DynaSpice. Silvaco began to suspect in 2000 that its trade secrets had been misappropriated and sued both the former employee and the competitor. However, Silvaco did not take any action to notify any of its competitor’s customers who had licensed DynaSpice for their own use.

In August 2003, Silvaco and the competitor entered into a settlement agreement and stipulated judgment. The competitor agreed to stop licensing DynaSpice and to inform its customers that the DynaSpice software contained Silvaco’s trade secrets and that they should terminate their use of DynaSpice. Cypress Semiconductor, one of the competitor’s customers, learned of the judgment in late August 2003.

After entering into the stipulated judgment, Silvaco notified the competitor’s customers that the DynaSpice program contained its trade secrets. Cypress was contacted by Silvaco in September 2003. Despite receiving this notice, Cypress allegedly continued its use of DynaSpice. In May 2004, Silvaco sued Cypress for trade secret misappropriation.

Prior to trial, Silvaco asked the court to exclude evidence related to Cypress’ statute of limitations defense. Silvaco argued that Cypress did not have knowledge of the competitor’s wrongful misappropriation of trade secrets until August 2003 when it received notice of the judgment and therefore, the statute of limitations could not have begun to run until that time. The trial court agreed with Silvaco and concluded as a matter of law that the trade secret misappropriation claim against Cypress did not accrue until August 2003. Therefore, Silvaco had filed suit within the three-year statute of limitations period.

Cypress filed a petition for writ of mandate with the appellate court to challenge the ruling on its statute of limitations defense. The appellate court reversed the trial court’s ruling and found that it was a question of fact for the jury as to when the statute of limitations began to run.

The appellate court began its analysis by considering whether the “single claim” rule contained in section 3426.6 of the California Uniform Trade Secrets Act (“CUTSA”) was applicable. The single claim rule provides that “a continuing misappropriation constitutes a single claim.” Based on this section, Cypress argued that the statute of limitations for trade secret misappropriation began to run as to all third party actions when Silvaco learned of the original misappropriation by its competitor. The appellate court noted that the single claim rule was based on the view that the interest protected by trade secret law is the contractual or confidential relationship within which trade secrets are disclosed, such as between an employer and employee. The single claim rule considers a breach of that confidence to be a single wrong. The appellate court noted that other jurisdictions viewed the interest protected by trade secret law as a “property” right and that each unauthorized use of the property gives rise to a new cause of action with its own statute of limitations.

In holding that the single claim rule did not apply, the appellate court held that “a plaintiff may have more than one claim for misappropriation, each with its own statute of limitations when more than one defendant is involved.” The court noted that although the CUTSA adopted the single claim approach for purposes of statute of limitations, it did not completely reject the property view of trade secret law. Therefore, the court held that “a cause of action for misappropriation against a third party defendant accrues with the plaintiff’s discovery of that defendant’s misappropriation. Any continuing misappropriation by that defendant constitutes a single claim.” The court noted that Silvaco did not allege that Cypress was involved in the original misappropriation. The court concluded that, under those circumstances, Silvaco had a separate claim against Cypress for misappropriation with its own limitations period.

The court then turned its attention as to when the statute of limitations began to run. Silvaco maintained that the limitations period only began when Cypress learned that it possessed Silvaco’s trade secrets in August 2003. The court rejected this argument and reasoned “it is not the law that accrual of a cause of action depends upon the existence as a matter of fact of a winning claim. Accrual does not wait ‘until a plaintiff is in a position to present evidence which will (regardless of what evidence the defense musters) establish facts which make liability a legal certainty.’” Instead, the court, relying upon prior California Supreme Court precedent, held that the statute of limitation begins to run when “a plaintiff has “reason at least to suspect a factual basis . . . the elements of a cause of action, coupled with knowledge of any remaining elements . . . .”

Cypress argued that only Silvaco’s discovery of its alleged misappropriation was pertinent to the statute of limitations analysis. Although the court partially agreed with this argument, the court noted that the defendant’s statement of mind is not irrelevant “since a cause of action for misappropriation incorporates an element of knowledge on the part of a defendant.” However, the court noted that the lower court erred in focusing upon Cypress’s actual innocent mental state prior to August 2003. The court concluded that “the proper focus for purposes of running of the statute of limitations is not upon the defendant’s actual state of mind but upon the plaintiff’s suspicions.” Thus, the court held that the statute of limitations “began to run when Silvaco had any reason to suspect that the [competitor’s] customers knew or should have known that they had acquired Silvaco’s trade secrets.”

Cypress also argued that, if Silvaco knew that its competitor’s customers had its trade secrets, it had a duty to notify the customers of its claim within the statute of limitations period. The court declined to find such a duty within the CUTSA. However, the court noted that the provisions of the CUTSA encourage prompt notice nevertheless. The court recognized that a trade secret loses its protected status if the owner does not undertake reasonable efforts to keep it secret. The court concluded that “the failure of the trade secret owner to take prompt action to protect its trade secrets or to alert good faith acquirers to the existence of its trade secret claims can serve as a defense in the event the trade secret owner eventually decides to pursue a misappropriation claim against a third party. These defenses, however, are separate from the statute of limitations defense.”

The court’s decision in the Cypress Semiconductor case emphasizes the need for any party that believes its trade secrets have been misappropriated to act promptly to identify, notify and, if necessary, file a legal action against anyone it believes has misappropriated its trade secrets. Failure to do so poses a risk that a trade secret owner may be time barred from pursuing its legal options. At the very least, it will raise a question of fact for the jury to resolve.