Trade Secret Law Unlocked
“About the author: Scott Lesowitz is a cum laude graduated of Harvard Law School and a former Assistant U.S. Attorney. His practice is located in Beverly Hills, California.His e-mail address is scott@syversonlaw.com.”
For the main page of this trade secret website, we begin with a general overview of what may constitute a trade secret and a general overview of trade secret misappropriation lawsuits. “Misappropriation” is a legal term that includes improperly acquiring a trade secret (such as trade secret theft), disclosing a trade secret without authorization, and using a trade secret without authorization. The subpages and internal articles focus on important topics in greater detail.
This site’s focus is on California law, as I practice in the Los Angeles, California, area. However, virtually every state in the country, including California, has adopted the Uniform Trade Secrets Act with some states making adaptations. Therefore, the law and legal principles of trade secret law are similar throughout most of the country.
What May Constitute a Trade Secret
Not all confidential and proprietary information constitutes a legally protectable trade secret. Several requirements must be satisfied.
Information that May Constitute a Trade Secret
A broad scope of information may constitute a trade secret if the requirements regarding secrecy and economic value are met. California’s trade secret statute states that the information that may qualify for trade secret protection includes, but is not limited to, “a formula, pattern, compilation, program, device, method, technique, or process.” California Civil Code § 3426.1(d).
However, an employee’s general skills and experience learned during employment generally will not constitute trade secrets. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1524 (1997).
Customer lists and customer information may constitute protectable trade secrets. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514 (1997); Courtesy Temporary Service, Inc. v. Camacho, 222 Cal.App.3d 1278, 1287-88 (1990) (emphasizing time, effort, and expense of acquiring customer list and related information); Whitted v. Williams, 226 Cal.App.2d 52 (1964). However, as a company’s customers are often relatively easy to discover, and since protecting customer lists may inhibit free competition, customer lists can be one of the more difficult pieces of information for which to receive trade secret protection. See Aetna Bldg. Maintenance Co. v. West, 39 Cal.2d 198 (in bank, 1952).
Notably in California, agreements not to compete are unenforceable except in narrow circumstances (the exceptions regarding the sale or dissolution of a business or the dissolution of a marriage). California Business and Professions Code § 16600. Unlike other states, the agreements are unenforceable even if limited to a particular trade or type of employment within a small geographic area for a limited period of time. KGB, Inc. v. Giannoulas, 104 Cal.App.3d 844 (1980).
The Requirements regarding Secrecy
Unsurprisingly, to be a trade secret, the information must not be “generally known” either in the general public or in the relevant area of business or industry. California Civil Code § 3426.1(d)(1);
American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal.App.3d 1318, 1326 (1986) (information found not to be a trade secret because, while likely not known to the general public, was generally known in the relevant business community).
Relatedly, in order to be a trade secret, the holder of the information must use reasonable efforts to maintain its secrecy. California Civil Code § 3426.1(d)(2).
The law does not require complete secrecy. This would be impractical, as there will be people such as employees, vendors, and potential investors who need to know the information or have access to the information. The general principal is that secrecy is maintained when the person who views or receives the trade secret was on notice that there was an expectation of confidentiality.
In practice, the best way to ensure that secrecy is maintained is to use confidentiality or nondisclosure agreements. If these agreements are used, secrecy may be maintained even when a seemingly large number of people have received the trade secret. See Technology Center v. Netcom On-Line Communication Services, Inc., 923 F.Supp. 1231 (N.D. Cal. 1995) (trade secret status maintained even though the trade secret was distributed to thousands of people).
While not technically part of the definition of trade secret in California (as opposed to other states), for a trade secret holder to successfully sue for trade secret misappropriation, the information must not be “readily ascertainable.” Brescia v. Angelin, 172 Cal.App.4th 133, 147, n. 1 (2009). If one could, through reasonable and proper efforts, reconstruct or reverse engineer the information, program, or process, it would be “readily ascertainable.” Id.
A practice tip for attorneys is that a defendant in a trade secret lawsuit must plead that a trade secret is readily ascertainable as an affirmative defense. In California, unlike other states, a plaintiff need not prove that the purported trade secret is not readily ascertainable. Rather, the defendant is required to prove that an alleged trade secret is readily ascertainable. Abba Rubber Co. v. Seaquist, 235 Cal.App.3d 1, 21, n. 9 (1991).
Economic Value
Additionally, to be a trade secret, the information must have actual or potential economic value because that information is not generally known. California Civil Code § 3426.1(d)(1). Evidence that developing the trade secret took significant time or expense may be sufficient to demonstrate economic value. Capitol Records, LLC v. BlueBeat, Inc., 765 F.Supp.2d 1198 (C.D. Cal. 2010). While presumably one would not file a lawsuit over something that lacks value, in Gemini Aluminum Corp. v. California Custom Shapes, Inc., 95 Cal.App.4th 1249 (2002), the court found a trade secret lawsuit to be frivolous largely because of the lack of value of stale information.
Therefore, information, systems, etc., that are fairly obvious and add negligibly to what others know or could learn with reasonable efforts are not trade secrets. See Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 465-66 (9th Cir. 1990). The default rule is that reverse engineering is permissible. California Civil Code § 3426.1(a).
The Elements of Trade Secret Misappropriation
If the information, program, process, etc., qualifies as a trade secret, the trade secret holder may sue those who commit “misappropriation.” Misappropriation includes acquiring a trade secret through improper means (such as trade secret theft), disclosing a trade secret, and using a trade secret. California Civil Code § 3426.1(b). A lawsuit may be brought even though there has been no actual use of the trade secret. San Jose Construction, Inc. v. S.B.C.C., Inc., 155 Cal.App.4th 1528, 1544 (2007) (wrongfully acquiring a trade secret may make one liable for misappropriation even if the trade secret is returned before use); Dealertrack, Inc. v. Huber, 460 F.Supp.2d 1177, 1184 (C.D. Cal. 2006) (allegation of misuse of trade secret is not required to successfully sue for misappropriation).
To be found liable in a lawsuit for disclosing or using a trade secret, the defendant must have known or had reason to know that the information was a trade secret. California Civil Code § 3426.1(b)(2). As opposed to other forms of intellectual property violations, trade secret misappropriation is an intentional tort. Cypress Semiconductor Corp. v. Superior Court, 163 Cal.App.4th 575, 585 (2008). The mere fact that a former employee possesses a trade secret without additional evidence that the trade secret will be misused or disclosed is insufficient to obtain relief or an order from a court. Pellerin v. Honeywell Intern., Inc., 877 F.Supp.2d 983 (S.D. Cal. 2012).
If someone performs a wrongful act to acquire confidential or proprietary information, but the information does not qualify as a trade secret, then there can be no trade secret misappropriation.
As with other torts (wrongs), an employer may be liable for the acts of trade secret misappropriation committed by an employee. Relatedly, one may be liable for trade secret misappropriation when acting through an agent. Silvaco Data Systems v. Intel Corp, 184 Cal.App.4th 210 (2010).
Injunctions, Damages, and Attorneys’ Fees
Temporary Restraining Orders and Injunctions
When a trade secret misappropriation victim can establish that she will suffer irreparable harm from an imminent act of misappropriation or from misappropriation that is ongoing, the victim may be able to quickly receive an order from the court (a temporary restraining order or preliminary injunction) that bars the perpetrator from committing acts of misappropriation or that requires the perpetrator to perform affirmative acts that prevent injury. Usually this will consist of prohibiting the perpetrator from using a trade secret. See ReadyLink Healthcare v. Cotton, 126 Cal.App.4th 1006 (2005); PMC, Inc. v. Kadisha, 78 Cal.App.4th 1368 (2000); Masonite Corp. v. County of Mendocino Air Quality Management Dist., 42 Cal.App.4th 436 (1996).
To receive a pre-trial or post-trial injunction, the plaintiff need not have suffered monetary damages (loss). A sufficient threat of misappropriation may be sufficient. Central Valley General Hospital v. Smith, 162 Cal.App.4th 501, 524 (2008). (However, regarding former employees whose new employment is of a nature that suggests trade secrets would be used or disclosed, California rejects the inevitable disclosure doctrine. Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002)).
Enforcing an injunction is generally much quicker and much cheaper than pursuing a new lawsuit. The punishment for violating court orders (including temporary restraining orders and preliminary injunctions) can be severe. In the extreme, violating a court order may lead to jail.
Monetary Damages
In terms of financial compensation, a plaintiff (victim) in a trade secret misappropriation case may be entitled to recover the amount of actual damages (financial loss) that the plaintiff suffered. The plaintiff may also be awarded the profits that the defendant (wrongdoer) earned from the misappropriation.
If the plaintiff cannot prove either the amount of damages that it suffered or the amount of profits that the defendant earned, the plaintiff may be awarded a reasonable royalty in the amount for which the trade secret would be licensed. See Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal.App.4th 26, 66-68 (2014)
Attorneys’ Fees
The winning party in a trade secret lawsuit may be able to recover its reasonable attorney’s fees and costs for expert witnesses. An award of attorneys’ fees and expert witness costs is not automatic.
For a plaintiff to receive such an award, the misappropriation must have been “willful and malicious.” California Civil Code, § 3426.4. A defendant must show that the lawsuit was “made in bad faith.” See Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., 236 Cal.App.4th 243 (2015) (defendant awarded attorneys’ fees); FLIR Systems, Inc. v. Parrish, 174 Cal.App.4th 1270 (2009) (the same result); Gemini Aluminum Corp. v. California Custom Shapes, Inc., 95 Cal.App.4th 1249 (2002) (also the same result); Mattel, Inc. v. MGA Entertainment, Inc., 801 F.Supp.2d 950 (C.D. Cal. 2011) (granting award to party that prevailed in its trade secret claim that it brought).