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Trade Secret Misappropriation Claims in California

Generally speaking, trade secret misappropriation is the improper use or disclosure of information that a business has spent time and energy developing and has engaged in reasonable efforts to keep secret.

While trade secret law is primarily state law and, thus, can vary from state to state, 47 states have adopted the Uniform Trade Secrets Act, a suggested uniform framework for trade secret statutes. Accordingly, due to adoption of the act, almost all states have some consistency between their trade secret laws. However, because each state’s courts can interpret their trade secret laws differently, some amount of variation still exists between states. This article discusses trade secret misappropriation claims in California.

 

The California Uniform Trade Secrets Act

California has adopted and codified the Uniform Trade Secrets Act at Cal. Civ. Code § 3426 et seq. (the “CUTSA”).  Overall, liability under the CUTSA for misappropriation of trade secrets requires 3 elements:

(1) The existence of a trade secret;

(2) Misappropriation of that trade secret; and

(3) The use of improper means in misappropriating that trade secret.

Each of these elements will be discussed in further detail below.

First, under the CUTSA, a “trade secret” is defined 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.

See Cal. Civ. Code § 3426.1(d). Due to its broad definition, a trade secret can take many forms including formulas, plans, designs, patterns, supplier lists, customer lists, financial data, physical devices, processes, and computer software. Indeed, the trade secret definition is so broad that it includes almost anything that is created or acquired by a business that confers a competitive advantage and is kept secret by its owner.

Importantly, a trade secret will lose its status if it is not subject to reasonable efforts to maintain its secrecy. Whether a trade secret owner engaged in reasonable efforts is determined on a case-by-case basis and depends on a cost-benefit analysis for each circumstance. In general though, it is well established that if an owner discloses the trade secret to others who have no obligation to protect the trade secret’s confidentiality, or if the owner otherwise publicly discloses it, the trade secret right will be extinguished. See Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., 226 Cal.App.4th 26, 57 (Cal. Ct. App. 2014).

Second, “misappropriation” is defined as:

(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; or

(2)          Disclosure or use of a trade secret of another without express or implied consent by a person who:

(A)          Used improper means to acquire knowledge of the trade secret; or

(B)          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; or

(C)          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.

See Cal. Civ. Code § 3426.1(b). At its simplest, misappropriation of a trade secret can be accomplished in two ways. First, a trade secret can be misappropriated directly if the person used improper means to acquire it. Second, a trade secret can also be misappropriated if a person discloses a trade secret that he knew was acquired by improper means or had reason to know had been acquired by improper means.

Accordingly, a person can be liable for trade secret misappropriation even if that person was not the one who improperly acquired it. Disclosing a trade secret that was improperly acquired by someone else can still give rise to liability.

Lastly, “improper means” is defined under the CUTSA as:

 . . . theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.

See Cal. Civ. Code § 3426.1(a). Thus, where an individual obtains a trade secret by theft, fraud, bribery, industrial espionage, breaching a confidentiality agreement, or inducing somebody else to breach a confidentiality agreement, the trade secret will have been obtained by improper means and misappropriation of a trade secret will likely have occurred.

Importantly, reverse engineering or independent derivation alone is not considered improper means and, thus, does not give rise to trade secret misappropriation liability. See id.

 

Procedural Considerations in Litigating Trade Secret Misappropriation Claims in California

While California’s substantive trade secret laws are similar to other states, California has unique procedural requirements with respect to actually litigating trade secret misappropriation claims.

Specifically, Ca. Civ. Proc. Code § 2019.210 governs trade secret misappropriation actions in California and requires the claiming party to give specific disclosures regarding the alleged trade secret before requesting discovery from the other side. The precise language of Ca. Civ. Proc. Code § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.

The primary purposes of this requirement are to promote well-investigated claims, dissuade the filing of meritless trade secret complaints, protect against plaintiffs using the discovery process to obtain a defendant’s trade secrets, help frame the scope of discovery during litigation, and assist defendants in forming complete and well-reasoned defenses such that they do not have to wait until the eve of trial to effectively defend against such claims. See Perlan Therapeutics Inc. v. Superior Court (NexBio, Inc.), 178 Cal.App.4th 1333, 1343 (Cal. Ct. App. 2009).

Importantly, failure to make a reasonable disclosure of the trade secrets in dispute can ultimately result in dismissal of the action. See Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161 (9th Cir. 1998) (dismissing trade secret misappropriation claims where the plaintiff failed to adequately disclose the trade secrets in dispute after being ordered multiple times to do so). Further, a defendant in a trade secret misappropriation action may refuse discovery requests related to the trade secret until the plaintiff complies with § 2019.210.

Determining whether a claimant has complied with § 2019.210 and adequately identified the trade secret with reasonable particularity is up to the trial court. Accordingly, whether a plaintiff’s disclosure is adequate is determined based on the specific circumstances of each case. See Perlan Therapeutics Inc. v. Superior Court (NexBio, Inc.), 178 Cal.App.4th 1333, 1343 (Cal. Ct. App. 2009).

If a defendant believes a plaintiff’s disclosure is inadequate, the defendant will likely want to file a motion to force the plaintiff to give an adequate disclosure before responding to the plaintiff’s discovery requests.

Importantly, protection orders under Ca. Civ. Code § 3426.5 may be necessary in order to protect the confidentiality of any trade secrets disclosed between the parties. Specifically, Ca. Civ. Code § 3426.5 provides:

In an action under [the CUTSA], a court shall preserve the secrecy of an alleged trade secret by reasonable means, which may include granting protective orders in connection with discovery proceedings, holding in-camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.

Thus, where confidential trade secrets are being disclosed between the parties, a party may want to move for a protection order to prevent the trade secret from being publicly disclosed.

 

Employer Ownership of Trade Secrets Developed by an Employee

Similar to having unique procedural requirements for trade secret misappropriation claims, California is also unique in that its labor laws expressly provide that an employer owns any trade secrets developed by an employee. Specifically, Ca. Labor Code § 2860 provides:

Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.

Thus, where California law is applicable, an employee hired by an employer to develop an invention or to develop trade secrets within the scope of employment has no ownership interest in those trade secrets; instead, the employer owns them. See Cappa v. Crosstest, Inc., A113327 (Cal. Ct. App. Mar. 28, 2008).

However, where the person is an independent contractor there is no employer-employee relationship and, thus, Ca. Labor Code § 2860 would not apply. In determining whether a person is an employee or independent contractor California courts have enumerated several factors:

 – First, the most important factor is the degree of control exercised over the person’s manner and means of accomplishing the intended result or what the person was hired to do. Factors for making this determination include:

(1) the extent of control which the employer may exercise over the details of the person’s work;

(2) whether the person is engage in a distinct occupation or business;

(3) the kind of occupation and whether work is usually done in that occupation under the direction of the employer or without supervisions;

(4) the requires in the particular occupation;

(5) whether the employer or the person supplies the instrumentalities, tools, and the place of work for the person doing work;

(6) the length of time for which the person is doing work for the employer;

(7) the method of payment, for example, payment for time or by job;

(8) whether or not the work done is part of the regular business of the employer;

(9) whether or not the parties believe they are creating the relation of master and servant; and

(10) whether the principal is or is not in  business.

–  Second, other factors California courts consider are whether there was an agreement between the employer and the person; how their working relationship was categorized in that agreement; whether the employer has the ability to discharge the person “at will”; whether the person has the ability to set her own hours; and any other factors that weigh on the degree of control the employer exercised over the person.

See id. In general, the more control and authority the employer exercises over the person more likely it will be found that the person is an employee and acting under the control of the employer. While no factor is dispositive in itself, the main thrust of the analysis is how much discretion the person has in determining how to perform the work she has been hired for.

 

Damages in Trade Secret Misappropriation Claims

Damages and remedies obtainable in a trade secret misappropriation claim include an injunction to prevent the offending activity; damages for actual loss caused by the misappropriation; damages for unjust enrichment not reflected in actual loss calculations; and, where actual damages are not provable, the court may order payment of a reasonable royalty for the time period the use of the misappropriated trade secret could have been prevented. See Cal. Civ. Code §§ 3426.2, 3426.3.

Additionally, if it is found that the trade secret was misappropriated willfully and maliciously, the court may award exemplary damages up to twice the amount of the underlying damages. See Cal. Civ. Code § 3426.3.

Attorneys’ fees and costs may also be awarded to the plaintiff where willful and malicious misappropriation occurs or, conversely, where it is determined that plaintiff filed the action in bad faith. See Cal. Civ. Code § 3426.4.

 

Statute of Limitations for Trade Secret Misappropriation Claims in California

Under Cal. Civ. Code § 3426.6, trade secret misappropriation claims “must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.”

Notably, a continuing misappropriation constitutes a single claim such that a claim will begin to accrue when the misappropriation was discovered or should have been discovered, and not each time the trade secret is used. That is, the first discovered or discoverable misappropriation of the trade secret commences the running of the limitations period. See id.; Glue-Fold, Inc. v. Slautterback Corp., 82 Cal.App.4th 1018, 1024-26 (Cal. Ct. App. 2000).

© 2016 J.D. Porter, LLC; Jordan Porter. Denver, Colorado.

Disclaimer: The information on this website is intended to be general information only and not legal advice. Laws change frequently and the information on this website may not be up to date, nor is the information intended to be fully comprehensive. For legal advice specific to your case please contact J.D. Porter, LLC or another licensed attorney.