What is a Trade Secret
To determine whether a viable trade secret case exists, it is often necessary to start with the definition of what is a trade secret, and what is not. A trade secret is defined under California law. Generally, it is defined as information, that has independent value due to it not being generally known to the public or by other persons who can obtain economic value from its disclosure or use. The definition is set forth in the California Code, Section §3426.1(d):
(d) “Trade secret” means information, including a formula,
pattern, compilation, program, device, method, technique, or process,
(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.
A trade secret can consist of many things. It can consist of customer lists, manufacturing processes, business models, pricing models, formulas, designs, and other information that a business uses as part of its business operations, that are generally not known or accessible to third parties, including competitors, ordinary employees that work for the business.
Trade secrets become hot button issues when a company’s employees, including high-level employees, decide to either take a position with a competitor or begin their own competing business. When an employee with knowledge of the business and how it works leaves, there is a tremendous potential for the employee to leave with information that is extremely valuable to the business. For example, employees can depart with the businesses pricing models, financial statements, product information, vendor lists, and other very sensitive information.
It is difficult to generalize as to why trade secrets can be problematic for businesses, as it often depends on the nature of the business itself, and how the business makes money. In product related businesses, if a business is a wholesaler that imports goods and resells them to retailers at a markup, that information about where the business obtains its inventory and the margins, if learned by an outside party, could allow the competitor to begin competing and put the business out of business, simply by slashing the margin at which the inventory sold to retailers. For service related businesses, generally it is technical know-how and work product that constitutes the core of the business. Simply downloading all of the businesses information and operational data can allow a third-party to begin competing with the business, and simply walking off with all the information that the business has taken many years, perhaps several decades, in order to refine and use for its business operations.
Examples of Trade Secrets
Trade secrets can consist of various types of information. According to California law, the following have been determined to constitute trade secrets:
- Customer lists
- Lists of vendors
- List of employees
- Documents showing employee compensation
- Research results, methods, procedures, including unsuccessful processes and procedures
- The business model information, including pricing models, materials costs, and suppliers
- The business’s financial information, including financial statements, financial projections, cash flow projections, income, expenses, and other information
- Proprietary software and databases
The above list is not exhaustive. The reality is that there is a very fact sensitive inquiry that is used by courts to determine whether something is or is not a trade secret. For example, disseminating something online and through the Internet can destroy trade secret status. Even an accidental disclosure of the businesses trade secret information can result in the trade secret losing its protected status.
Common Trade Secrets Scenarios
Trade secret cases can take many forms and shapes, but there are a number of scenarios that occur often and regularly in trade secret disputes between a company and its former or departing employee, independent contractor or other business competitor:
- A departing employee taking business proprietary information with them shortly before they leave the company to set up reform a competing company
- The removal, accessing, or misappropriation of vendor lists from the company’s computer systems
- The taking, removal, or duplication of the company’s company lists or prospect lists from its computer systems
- Disputes over the ownership of leads and sales prospects
- The duplication or theft of business development materials, including pricing models, supply lists, supply information, vendor information, or other know-how
- The taking of proprietary processes, software, technical information, plans, specifications, blueprints, or other information developed at the company for the companies use
Who Owns Trade Secrets?
One of the features of California law on trade secrets is in clearly establishing who owns trade secrets. The California Labor Code Section 2860 explicitly states that all trade secrets created by an employee working for Company are owned by the company, and not the employee. Obviously, the company is not going to own trade secrets or inventions that the employee created outside of the scope of work, or on the employees free time. That being said, it is still imperative that your company use employment agreements to make it clear that all work performed by the employee relating to the business of the company is owned by the company. This is necessary because many employees develop new inventions, confidential information, or other data during the course of working for the company, and simply because they develop it on their own time does not necessarily mean that it is not an invention that was materially derived from the value the business provided to the employee. Improvements on the businesses existing processes are more likely than not rightfully the property of the company, not the employee. Nonetheless, many employees routinely learn information about how certain businesses run, make improvements on that model, and then believe that they are the legal owners of that new development. This is not always the case. The fact sensitive inquiry is required to determine who truly owns employee inventions. However, when it comes to trade secrets, California Labor laws are clear on that point.
How to Protect Trade Secrets
One of the tasks a business struggles with is how to identify what information is actually a trade secret, and what needs to be done in order to protect it. To receive the benefit of California’s trade secret laws, it is important that the company be able to establish that it took steps to protect its trade secrets. For example, the company must have proof that it took steps and made efforts to restrict the access to the data in question. Practically, this means that the trade secret was known to a very few amount of people, not widely known among the company, not accessible through public resources, and generally not available to ordinary level employees. The amount of protection that a trade secret has by the company is material in determining the company’s rights to prevent that trade secret from being used by competitor for solicitation, competition, or other business practices.
The Coca-Cola example is a great analogy use. The formula for Coca-Cola is purportedly kept in a bank vault, locked, and can only be opened upon a resolution of the Coca-Cola Company’s Board of Directors. Only 2 Coca-Cola employees know the formula at the same time ever, and their identities are never disclosed to the public, and they are not allowed to fly on the same airplane.
This example is obviously an extreme case of how far company goes to protect its trade secrets, but an example from the restaurant business can be used as a guide. Secret recipes, quantities, formulations, and other details are all generally considered trade secrets, because the inventor would never disclose the information to a third party, and fears that it would be used against the business. This is a great way to assess whether your confidential information amounts to trade secret information. If you think it can safely be shared with other people, without any impact on your business, then it is probably not a trade secret. Another rule of thumb is to think of trade secrets is anything that takes time, money, or effort to develop, that you wouldn’t want your competitors knowing about.
As a result, there steps that you should take to protect your trade secrets from being disclosed. For example:
- Marketing trade secrets as confidential
- Locking doors and file cabinets that contain trade secret information
- Establishing procedures by which it is ascertained which employees come and go at what times Requiring security passwords to access computers, files, networks
- Requiring employees, contractors, and business partners to sign nondisclosure agreements Keeping track of who has access to what
In order for your information to qualify as a trade secret, you must prove that you took “reasonable precautions” to protect it.
What if an Employee Departs with Trade Secrets
One of the top issues for businesses involves an employee who departs or is on the verge of departing, and is intent on taking business information with them before they exit. Oftentimes, this can involve emailing documents from the employee’s work account to a personal email account, copying files and folders on flash drives or thumb drives, transferring documents out of Dropbox accounts, or simply cutting and pasting large swaths of documents. On a few occasions, employees actually copy physical files, and on rare occasions, the take important files or folders with them out of the office. Most often however, the data taken is electronic in nature, and the employee has taken steps to somehow reproduce copy or transfer it to their own possession so that it can be accessed after the employee leaves the workplace.
What if a Competitor Obtains Trade Secrets
Business competitors rarely obtain trade secret or confidential information belonging to a business from the business itself. In these cases, that would occur through hacking, or some other type of unauthorized access, theft, or other intrusion. These types of scenarios are rare. Most of the times, a competitor will hire an employee belonging to the business, knowing that the employee may have insider knowledge as to how the business is doing its operations. Because an employee cannot unlearn what they already know, the competitor can obtain the information relating to the business simply by bringing an employee in. Furthermore, employees are generally all too forthcoming in divulging details of their current employers’s business operations and what they know, in order to persuade a new potential employer into hiring them. They tend to think that it will show the new potential employer that the employee is going to be immediately loyal to the new prospective employer; however, if the new prospective employer has any sense, they will see this is a red flag, i.e., that the employee will do and say anything to take information from the former employer, which is generally not a good sign for the new prospective employer.
When is Trade Secret Litigation Necessary
Trade secret litigation may be necessary if an employer, insider, outsider, or other individual obtains information or confidential information belonging to a business that is truly valuable. The exact nature of the information will depend on the type of business, and how the business earns income. There are some businesses who could really suffer if pricing models, vendor lists, and supplier information were revealed. This would allow a competitor to simply compete by reducing its margin, and otherwise learning all the tricks of the trade. On other occasions, if databases, or other information that has taken a long time to assemble has been taken for example, such as a company’s entire customer contact list, which includes their customers’ order history, preferences, or other information, the business may feel that its source of income is up for grabs by the competitor. In these circumstances, if the information taken is truly valuable, or for any number of other reasons, trade secret litigation may be a necessity. In those instances, it will be necessary to retain a trade secret litigation lawyer to help identify what were the companies trade secrets, how are they unlawfully accessed, and what steps need to be taken in order to mitigate the damage on the company.
How to Bring Claims for Trade Secret Misappropriation
A claim for trade secret misappropriation theft is initiated by the filing of a lawsuit asserting violations of California’s Uniform Trade Secrets Act. Generally, there are other claims that accompany trade secret claims. These include claims for breach of contract, for example if there was an employment agreement or other confidentiality agreement that the employee signed while at the company. These types of lawsuits also generally include claims for intentional interference with business relationships, as well as intentional interference with prospective economic relationships. If the employee was a high-level employee, such as a partner, member, or other fiduciary, a claim for breach of fiduciary duty may also be appropriate. In addition, these types of lawsuits can also include claims under California’s Unfair Competition Law. California prohibits competitors from unlawfully accessing and acquiring data by violation of law, in order to compete with competitors.
California Trade Secret Statute of Limitations
In California, the statute of limitations for a trade secret action is generally 3 years. The lawsuit must be brought within three years of the date that the misappropriation of the trade secret was discovered by the business owner or could have been through the exercise of ordinarily diligent investigation. This is called the discovery rule: if the owner of the trade secret could’ve discovered that the trade secret was misappropriated through ordinary and diligent investigation, the statute of limitations will begin running.
California Trade Secret Discovery and Trade Secret Identification
One of the most interesting aspects of California trade secret law involves the requirements for discovery of trade secrets and trade secret identification. During the course of a trade secret lawsuit, California law requires the plaintiff seeking to protect their trade secrets to identify exactly what they’re considering as there trade secrets. This must be done before discovery commences, and generally the parties in a trade secret lawsuit are not permitted to do discovery until the business’s trade secret identification is complete. The purpose of this law is to ensure that trade secret lawsuits are not brought in bad faith, and that there is a legitimate trade secret being asserted, before a fishing expedition is permitted into discovery matters.
How to Prove Trade Secret Violations Occurred
Generally, and trade secret litigation, the key to proving that a trade secret violation occurred is based on the quality of the data leading up to the actual misappropriation. For example, if a business has good audit trails on what data was accessed, when, by whom, or for example surveillance on when individuals came into or left the building on weekends or after hours, shortly before they quit, or data that otherwise demonstrates that activity took place indicating that information was being removed by the employee, then it is going to be much easier to prove that the trade secret violation occurred. However, not all employers can afford such surveillance or audit techniques. As a result this is why it is so necessary to effectuate measures from the data ever being accessed by any unauthorized individuals to begin with, rather than try to prove that it was unlawfully removed or disclosed later on. As with many things in the legal world, an ounce of prevention is worth a pound of cure.
Is Injunctive Relief Necessary?
If your company’s trade secrets have been misappropriated by third-party, timing is extremely crucial. One of the top litigation strategies and protecting a trade secret plaintiffs business proprietary and confidential information is in seeking injunctive relief. Injunctive relief refers to relief from the court that bars a defendant from doing or not doing something. In the trade secret context, getting a restraining order or preliminary injunction can bar the perpetrator from continuing to misuse the company’s data without the company’s permission or consent. Successfully seeking a Temporary Restraining Order or preliminary injunction can make a big difference in terms of the litigation. Once injunctive relief has been obtained, it usually causes a huge disruption to the competitors’ prospects and can often result in a quick resolution to the plaintiff’s claims. Accordingly, it is a strategy that is used quite often in trade secret cases. Axis Legal Counsel regularly counsels clients in seeking injunctive relief and leveraging the immediacy of the type of relief afforded by the court to and the anti-competitive activities being undertaken by the perpetrator. If it can be proven that there is a likelihood of success and a threat of irreparable relief being suffered by the company, seeking a temporary restraining order or injunctive relief is an excellent tool in the arsenal for the company.
Confidentiality and Non-Disclosure Agreements
Oftentimes, preventing a dispute concerning a company’s trade secrets begins with crafting a proper confidentiality and nondisclosure agreement that an employee or independent contractor is required to sign. A solid confidentiality agreement will address issues of soliciting the company’s employees, soliciting vendors, soliciting customers, and the confidentiality of the company’s trade secrets or other confidential business information. Many times, companies use form documents that are found on the Internet that are a poor substitute for a properly prepared confidentiality and nondisclosure agreement. This can prove to be a costly mistake. Axis Legal Counsel has a plethora of experience with confidentiality and nondisclosure agreement issues, and our experience allows us to help identify susceptibilities in your current documents that you may not have been aware of.
Non-Compete Invalidity in California
As many businesses already know, in California is difficult to enforce a noncompetition agreement. But noncompetition and nonsolicitation are two very different things. There is no rule against competing with the business in California, however a competitor, former employee, or former contractors not allowed to solicit companies clients or customers or attempt to poach its employees.
Bringing a Legal Action for Trade Secret Misappropriation
If you are thinking about bring a legal action for trade secret misappropriation, there are certain elements that will have to be met. Generally, the California Uniform Trade Secrets Act will require trade secret plaintiff to show that the subject they are claiming is a trade secret falls under the protection of the Act. The owner of the trade secret will also have to prove that reasonable precautions were taken to prevent disclosure of the trade secrets being asserted. Finally, the owner of the trade secret must also demonstrate that the trade secrets were acquired by the perpetrator using unlawful means. In this respect, if a perpetrator can show that the item in question was not really trade secret, and that the information was accessible through outside sources or other sources, the trade secret dispute may not be successful. For this reason, it is important to consult with an attorney who regularly handles trade secret matters to ensure that there is enough there for the matter to be viable and for an initial legal action to be brought.
Legal Fees and Costs in Trade Secret Cases and California Trade Secret Attorneys Fees
Another hallmark of California law on trade secrets involves the recovery of attorneys fees and costs in trade secret litigation.
According to California law, namely, Civil Code section 3426.4, a company is authorized to seek its attorneys fees and costs and trade secret litigation, if the misappropriation of the trade secret occurred in bad faith, or was done maliciously. The law authorizes the court to award reasonable attorneys fees, as well as reasonable costs, including to cover the services of retained expert witnesses by a prevailing party.
The payment of attorneys fees and costs is not mandatory, it is discretionary, as the statute uses the word “may.”
In addition, the statue authorizes a fee award to either a prevailing plaintiff or prevailing defendant.
Remedies and Damages Trade Secret Litigation Cases
In the event your attorneys and you decide that it is appropriate to bring a civil action for trade secret misappropriation, a variety of remedies are available:
- Obtaining an injunction prohibiting the actual or threatened misappropriation
- Recovering monetary damages
- Disgorging the benefit obtained by the perpetrator as a result of the wrongful accessing and disclosure
- Seeking punitive damages if the actions taken by perpetrators are willful and malicious
- Seeking your attorneys fees and costs of the actions taken by the perpetrators were willful and malicious
Getting Legal Advice
Getting legal advice for trade secret matter does not have to cost a fortune. Axis Legal Counsel understands the cost-effectiveness is a key point for business owners and trade secret matters. Most business plaintiffs who retain our services are surprised at how affordable and cost-effective pursuing their legal claims can be.
If you are seeking advice on a potential trade secret matter, contact us today at 213-403-0310. Call us for free consultation and as little as 15 minutes, you can get peace of mind asked to an overview of your legal rights with respect to the trade secret matter affecting your business.
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