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Trade Secrets

Portrait of William Campbell

Trade Secrets – What They Are and Why You Should Care

Potrait of William Campbell

From the Desk of William Campbell

While doing business, it is the common course to develop tools and devices to assist in growth and ultimately to make money.  Sometimes, those tools and devices garner protection as trade secrets.  If an employee or a person entrusted with a trade secret takes it and uses it for their ends, the owner of that trade secret may have a cause to sue.  In California, the Uniform Trade Secret Act (Cal. Civ. Code §3426 et seq.) creates a cause if action to recover “actual loss caused by misappropriation” of a trade secret. (Cal. Civ. Code §3426.3).

What Is a Trade Secret?

The Uniform Trade Secret Act defines a “Trade Secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

  1. Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
  2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” [Cal. Civ. Code §3426.1(d)]. “To be protectable as a trade secret under either Restatement section 757 or [California’s Uniform Trade Secret Act], the confidential material must convey an actual or potential commercial advantage, presumably measurable in dollar terms.” (Religious Technology Center v. Wollersheim, (9th Cir. 1986) 796 F.2d 1076, 1090).

What Is Misappropriation?

The term Misappropriation under the Uniform Trade Secret Act is the:

  1. Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means
  2. Disclosure or use of a trade secret of another without express or implied consent by a person who:
    1. Used improper means to acquire knowledge of the trade secret
    2. At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was: (i) Derived from or through a person who had utilized improper means to acquire it; (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use
    3. Before a material change of his or her position knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.” [Cal. Civ. Code §3426.1(b)].

“A misappropriation within the meaning of the UTSA occurs not only at the time of the initial acquisition of the trade secret by wrongful means but also with each misuse or wrongful disclosure of the secret.” (Cadence Design Systems, Inc. v. Avant! Corp., (2002) 29 Cal.4th 215, 223).

Are Customer Lists Trade Secrets?

It seems, in today’s use of California’s Uniform Trade Secret Act, the use of customer lists has topped the charts as a basis for liability.  First, the fact that the term customer list is not in the statutory definition of a trade secret does not mean a customer list can never be a trade secret.  The Court in Am. Paper said, “We cannot agree with respondents’ argument that the Legislature’s failure to include customer lists in its definition of trade secrets represents an intentional exclusion of same. The very language of Civil Code section 3426.1, subdivision (d), is inclusive, not exclusive.” (Am. Paper & Packaging Prods. V. Kirgan, (1986) 183 Cal.App.3d 1318, 1323-1324).  There is no doubt that “[a]customer list is one of the types of information which can qualify as a trade secret.” (ABBA Rubber Co. v. Seaquist, (1991) 235 Cal.App.3d 1, 18).   In fact, “information can be a trade secret even though it is readily ascertainable, so long as it has not yet been ascertained by others in the industry.” (Id. at 21).  What this means is that arguing that the identity of customers is discoverable does not mean a customer list is not a Trade Secret.

The Employer and Employee Problem?

It gets a little tricky here because we have competing policies.  On the one hand, we want to protect an employer’s trade secrets, but on the other, we want individuals to be employed, and we also want to encourage competition in the marketplace. First, “every individual possesses a form of property, the right to pursue any calling, business or profession he may choose. A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.” (Alex Foods, Inc. v. Metcalfe, (1955) 137 Cal.App.2d 415, 424).

So, can a former employee go out and start soliciting its former employer’s customers?  No. “The fact that a defendant was employed by plaintiff for years during which he learned the names, addresses, and requirements of plaintiff’s customers justifies injunctive relief where the defendant undertook to use such information in unfair competition to the detriment of plaintiff.” (Id. at 427).  “Equitable protection may be invoked against the subsequent use by a former employee of knowledge of the ‘peculiar likes and fancies and other characteristics’ of the former employer’s customers where such knowledge will aid him in securing and retaining their business.” (Id. at 427).  However, a former employee “could not be enjoined from accepting this business and making sales thereafter to such customers.” (Id. at 429).

The skinny here is a former employee can accept business from a former employer’s customer, but they cannot actively go out and use trade secret information to solicit them.  Ultimately, “merely informing customers of one’s former employer of change of employment without more, is not solicitation, and that equity will not enjoin a former employee from receiving business from the customers of his former employer, even though the circumstances be such that he should be prohibited from soliciting such business.” (Id. at 428).

Indeed, it’s a fine line.  In the business world, it’s more likely than not that a former employee will find themselves sued for misappropriation of a trade secret even if there was no solicitation of a former employer’s customer.  It is just the way of things.

Can the California Uniform Trade Secret Act Supersede Other Causes of Action?

In short, yes.  In Silvaco Data Systems v. Intel Corp., (2010) 184 Cal.App.4th 210 the Plaintiff charged the Defendant with “misappropriation of trade secrets under California’s Uniform Trade Secrets Act, Civil Code sections 3426 through 3426.11 (CUTSA), as well as with conversion, conspiracy, and violations of the unfair competition law, Business and Professions Code section 17200 et sequitur (UCL).” (Id. at 216).  In Silvaco the Court cited a 2009 case which held that “CUTSA ‘preempt[s] claims based on the same nucleus of facts as trade secret misappropriation.” (Silvaco Data Systems v. Intel Corp., (2010) 184 Cal.App.4th 210, 232; citing K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., (2009) 171 Cal.App.4th 939, 962).   The Court in Silvaco agreed with K.C. Media stating that “a legislative intent to supersede other grounds of civil liability does flow from statutory implication, context, legislative history, and general principles of statutory supersession.”  (Id. at 232).  Ultimately, the Court in Silvaco found that Plaintiff’s causes of action for conversion, conspiracy, and violations of the unfair competition law.

Business and Professions Code Section 17200 was superseded by California’s Uniform Trade Secrets Act because those causes of action “are either ‘based upon misappropriation of a trade secret’ (§ 3426.7, subd. (b)(2)) or they are based upon no legally significant events at all.” (Id. at 236; overruled in part on other grounds, Kwikset Corp. v. Superior Court, (2011, Cal.) 51 Cal.4th 310).

Punitive Damages

Under California Civil Code §3294 “where is it proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.”   It is common in misappropriation of trade secret cases that the Plaintiff will seek punitive damages under California Civil Code §3294.  What this means is that the defendants’ exposure could be dramatically increased.

The Bottom Line

Obviously, California’s Uniform Trade Secret Act is a complicated area of law.  If you are being sued, you need to get in front of the lawsuit as fast as you can.  You will need a lawyer and a law firm that understands the law and a track record of success.  Here at Fitzgerald & Campbell, APLC we understand the law, and we know how to fight cases in and out of Court.  We can provide you with the defense you deserve and help you GET YOUR LIFE BACK!

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