What Every Lawyer Should Know about Trade Secrets Law
by James D. Nguyen
(County Bar Update, September 2005, Vol. 25, No. 8)
What Every Lawyer Should Know about Trade Secrets Law
By James D. Nguyen, intellectual property litigation partner in the Los Angeles office of Foley & Lardner LLP. Nguyen is co-leader of the firm's trademark & copyright enforcement and litigation team, and also co-chairs the firm's entertainment & media industry team. Foley & Lardner summer associate Jian (Hunter) Shen assisted with this article.
1. What law governs trade secrets in California?
For many years, California trade secrets law was governed by the court-fashioned doctrine of unfair competition. This changed in 1984, when California codified the Uniform Trade Secrets Act almost in its entirety. (Civil Code Sec. 3426 et seq.) Promulgated in 1979, the UTSA is now in force in 43 states; however, some hold-out states are major jurisdictions such as New York, New Jersey, Massachusetts, Pennsylvania, and Texas. In California, the UTSA does not supersede any other statutes relating to trade secrets, which remain in effect, including Business and Professions Code Sec. 16606 (dealing with customer lists), Code of Civil Procedure Sec. 2019(d) (governing discovery relating to trade secret claims), and Labor Code Sec. 6233 (protection of trade secrets in the employment context). Nor does California's adoption of the UTSA affect other contractual, civil, or criminal remedies that may be available, whether or not based exactly on misappropriation of a trade secret. For example, the criminal penalties for trade secret theft in Penal Code Sec. 499c still apply.
2. What are trade secrets?
There are many kinds of trade secrets. Adopting the UTSA definition, California Civil Code Sec. 3426.1(d) defines a trade secret as "information, including a formula, pattern, compilation, program, device, method, technique, or process" that meets two qualifications. First, the information must derive "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." Second, the trade secret owner must take reasonable steps to maintain the secrecy of the information. This is a fact-based inquiry and requires analysis of such factors as the sensitivity of information, who needs access to it, and whether a company's own internal procedures for protecting information are actually followed. Specific examples of trade secrets include formulas (the secret formula for the Coca-Cola soft drink); processes (how McDonald's might prepare its French fries), methods and techniques (Wal-Mart's system for supply chain management); products (computer software); or designs and patterns (blueprint for a certain product). Two common forms of trade secrets are customer lists and proprietary business plans.
3. What constitutes misappropriation of a trade secret?
Trade secrets are most often misappropriated by former employees or by direct competitors. A trade secret can be misappropriated in two ways. First, it is unlawful to acquire another's trade secrets if you know or have reason to know that the trade secret was acquired by improper means. Second, a person cannot disclose or use a trade secret without consent by the trade secret owner if the person: (a) has used improper means to acquire knowledge of the trade secret; (b) knew or had reason to know (at the time of disclosure or use) that knowledge of the trade secret was derived through improper means, acquired under circumstances that impose a duty to maintain the information's secrecy, or derived from a person who owes a duty to protect the information. Civil Code Sec. 3426.6 imposes a three-year limitations period for bringing a claim for trade secret misappropriation.
4. What remedies are available for trade secret misappropriation?
When misappropriation is proven, Civil Code Sec. 3426.3 outlines various remedies that a trade secret owner can obtain:
(a) Damages—to compensate for actual harm suffered by the trade secret owner and to recoup any unjust enrichment earned by the violator;
(b) Royalty—if neither damages nor unjust enrichment can be proven, the court may order the defendant to pay a reasonable royalty for the time period the unlawful use could have been prohibited;
(c) Up to double damages—if violation is willful and malicious;
(d) An injunction—which can be obtained just with evidence of threatened rather than actual misappropriation. In addition, Civil Code Sec. 3426.4 allows a court to award attorney's fees to the prevailing trade secret owner if the misappropriation was willful and malicious. Conversely, a court also may award a defendant its attorney's fees if a misappropriation claim was brought in bad faith.
What are elements of a trade secret protection program?
Companies in California should consider implementing a formal trade secrets protection program. Such a program should include oversight of at least the following areas:
(1) Contracts—maintained and updated to protect confidential data and trade secrets. These include confidentiality agreements with personnel, nonsolicitation provisions, and intellectual property assignment contracts;
(2) Information systems—businesses should implement reasonable measures to ensure the security of their electronic data, including having secured networks; limiting employee access to certain directories; using firewalls, multicharacter passwords, or other methods to limit access or track employee network activity. Trade secret owners also should issue written policies to govern how employees use their electronic storage devices and the company's e-mail system;
(3) Human resources—companies should educate and remind employees of their contractual obligations to protect confidential information and not to use or disclose company trade secrets. This is very important in new-hire orientations and termination interviews;
(4) Legal preparation—trade secret owners should have a legal plan in place setting forth steps to be taken internally and with their attorneys in the event their trade secrets are misappropriated. This same plan can guide action when a company is itself accused of misappropriating another's trade secrets. With careful planning, businesses can minimize their risks and protect their crown jewels.
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