The following is an edited transcript ofmy interview with fellow San Francisco trade secrets attorney David Schwartz. You can listen to the podcast here:
Apple: https://podcasts.apple.com/us/podcast/interview-with-trade-secrets-attorney-david-schwartz/id1558957575?i=1000513491282&itsct=podcast_box&itscg=30200
Google: https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5jYXB0aXZhdGUuZm0vZW1wbG95ZWUtdGhlZnQtaHViLXBvZGMv/episode/YmRhNDFjYjUtNjgxOC00MWQ4LTk5NzItMmVkNTg5NjFlMzcw?sa=X&ved=0CAcQuIEEahcKEwjYtZuEzODvAhUAAAAAHQAAAAAQAQ
Spotify: https://open.spotify.com/episode/2xsHLuwpWb4ao4RicfJDHd
Greg:
My first ever podcast guest will be another attorney in San Francisco, California, who I've known for many years. His name is David H. Schwartz. David has considerable experience in the trade secret arena. We've worked on some cases together. In addition to trade secrets, he does RICO cases, securities cases, and lots of cases involving partners and closed corporations where when one partner has tried to cut out or somehow exclude the other. So, he's got a lot of experience both in the trade secret realm, but also in some other realms. Very interesting guy, well read, smart guy. I think you'll enjoy hearing from him. And, so, here we go. We'll get started. Hi David. Thanks for being on the show.
David:
Hey Greg. Great to be here.
Greg:
Here we are with our first podcast, so we are going to do our best. Anyway, I have known David for many years, as I said, and we've had some cases together. I’m happy to pick his brain about trade secrets and hopefully we can learn a few things. So, David, why don't you go ahead and tell us where you went to law school. Give us your website bio. Pick and choose what you want people to know.
David:
Well, I went to law school at Hastings College of Law in San Francisco. My first job out of law school, I got hired to assist in a criminal trial that was going on in Marin County that ended up lasting about two and a half years. I wanted to do criminal law, so it was a great experience for that. I stayed with the same firm that was defending on that case, which was primarily a personal injury firm, and so I did some personal injury. We had a close relationship with Melvin Belli’s firm, so we got a lot of work through Melvin Belli. I saw some of how he did trial, which was very instructive. Then, I started doing more business-related stuff and eventually gave up on the personal injury and focused on business and commercial litigation.
Greg:
And you've been practicing for how long now?
David:
Too long, I mean, a long time.
Greg:
You're not in your third year?
David:
When I first went to the San Francisco courthouse there were pterodactyls perched on the roof.
Greg:
Yeah, yeah. The ice was melting from the last age... So, Melvin Belli, not trade secret related, but obviously a high profile, interesting character. Do you have any interesting stories or things you learned from being around him, in his sphere?
David:
Well, I think on the positive side, he was an amazing courtroom figure. I'd never seen any lawyer dominate a courtroom the way he did. When he was in the courtroom, everything revolved around him. He just had that sort of knack of knowing how to do that. And, he was very aggressive and bold in his courtroom practice, but effective.
Greg:
And how about outside the courtroom? Any interesting stories from being around him?
David:
Well, he was an incredible marketer of himself. One of my favorite stories is, after the Loma Prieta earthquake, his building was condemned. No one could go inside it to work, so he announced that he was going to provide free consultations to San Francisco residents on earthquake related legal matters. I think he was going to do that on a Saturday morning, starting at 10. He had somebody bring out his French antique desk and chair, and he sat there at 10:00 AM on the sidewalk, in his three-piece suit, with a gold watch fob in his pocket, and waited for people to come up and ask him legal questions. The first people who arrived were representatives of the major television networks, which is I think what he expected all along, and he made the national news, pretty much at the top of the news hour that day.
Greg:
So, a guy that could really command media attention.
David:
Absolutely. Yes. He commanded them. He knew how to get attention.
Greg:
[Joking] I have not tried that to get new clients, but I'll think about it. Putting the desk out on Market Street seems a little - it seems like it's going to get me arrested or something - but it's an idea.
Let's talk about trade secrets. That's what you're here for. I know you've been practicing trade secrets litigation, misappropriation cases on both sides, plaintiff and defense, for many years. Just going back through all your cases in your mind, is there one that stands out, one that was sort of a really interesting, a really hot case from that set?
David:
Well yeah, there's one that I think about, or talk about a lot, because it had some interesting legal issues, and I think it made some interesting law in California on trade secrets.
Greg:
Without telling us who the names of the parties…
David:
Yeah. So, who was involved? They were five investment advisors working for an investment advisory company. They all had large books of business, which they had developed while working at the company. But, they felt oppressed by the share of the advisory fees that the company took and they wanted freedom from it. They wanted a way to set up an independent company and keep their business. They were concerned because the person they worked for, that ran the advisory company, was very litigious, and they expected that he would sue them. So, we advised them about how to leave, what steps to take, and they left.
Greg:
Let me ask, did they go to another firm or did they start their own firm?
David:
They started their own firm.
Greg:
Okay.
David;
So, they left and they sent out notices to their clients telling their clients that they had started their own firm. Then they got sued for trade secret misappropriation, claiming that the information that they used to contact their clients was a trade secret of their former employer. The former employer got a preliminary injunction against them, preventing them from soliciting their clients.
Greg:
I think I know the case you're talking about. Did the Injunction prohibit them from soliciting clients or using information?
David:
Soliciting their clients.
Greg:
Period?
David:
Yes.
Greg:
So, the injunction was broad in the sense that it said you cannot call John Doe because John Doe is a client of the old firm. So it prohibited your clients from contacting any clients from the old firm?
David:
Well, yes, on the basis that they had obtained the information as to who the clients were, and how to contact them, was a trade secret. I think that underlay the injunction, but the prohibition was a flat prohibition against the solicitation.
Greg:
Got it. So, the injunction shut the guys down from sending any more of the letters that you just talked about?
David:
Yes. Right.
Greg:
Or making phone calls, trying to get the people to come over.
David:
Right.
Greg:
And so, what did you do when the trial court issued this injunction, or what was the next step?
David:
We filed a writ petition for a mandate on the preliminary injunction and that was initially denied by the court of appeal. We filed a petition for review to the state Supreme Court, which ordered the court of appeal to issue an order to show cause and hear the writ petition. And so, I think taking the hint, the court of appeal granted the relief we asked for. Basically, we were saying you can't enjoin the solicitation of clients in California because that violates the public policy in the Business and Professions Code that protects everyone's right to practice the profession or business of their choice.
Greg:
And, of course, as we're recording now, I’m going to get it wrong; but is that Business and Professions Code 16600?
David:
Yes.
Greg:
Okay. So, the court came down in your favor and said the injunction is too broad. Maybe you could enjoin using information that's been in some way determined to be a trade secret, but you can't just ban these people from calling these other people or otherwise contacting them?
David:
Yeah, I don't remember the specific language in the opinion but our argument, which the court accepted, was you can prohibit the use of trade secret information, but you can't prohibit the solicitation. It would have to be rewritten, which I don't think it ever was, to say you cannot use any trade secret information. One of the things that we contended and ultimately were successful on, in defending the case, was that the contact information for the advisory clients was not a trade secret. The way in which investment advisory businesses work, you had the investment advisor, but then you have a custodian of the accounts for each client, and that custodian was a separate company, a broker-dealer. Each of our clients were agents of that broker-dealer, in addition to being agents of the investment advisor. The investment advisory firm had never obtained a confidentiality agreement with the broker-dealer not to reveal the identities, nor had established that the contact information of the clients was a trade secret of the investment advisory firm. In fact, because the plaintiff had let the information about these clients be distributed to a third party, it was not a secret under California law.
Greg:
Obviously, there's an issue of whether or not something's a secret, truly a secret, and whether or not the employer took reasonable measures to keep it secret. And if I understand you correctly, what you're saying is, these investment advisors and this investment firm maintained a client list, if you will, and had they just kept it to themselves, then maybe that would have been a trade secret. But, to service the clients, they gave that information to a broker-dealer, who actually held the money for the clients. And, in giving that information away without any agreement, they sort of opened it wide open. So, it was no longer a secret because somebody else had it and that's the end of that.
David:
Yeah.
Greg:
That sounds like a unique situation, but it definitely highlights the need in any trade secret case to really see where the information goes. In that case, the information was given to a joint service provider without a confidentiality agreement. Do you think there would be a significant difference if the investment firm in that case had required the broker-dealer to keep the information confidential?
David:
Well, I don't it was ever reached, but there were arguments given the particular situation that I think might well have said no, it wouldn’t matter. Even if there was such an agreement, because my clients were fiduciaries of their clients, and if they moved, they had a fiduciary duty as agents of the broker-dealer to continue to monitor the client's accounts, and that aspect of their business was highly regulated. So, in fact, the broker-dealer didn't want this information to be a trade secret, or wouldn't have agreed that it was the investment advisor’s trade secret, because the broker-dealer wanted these people to still be responsible and carry out their responsibilities for the individual clients. Otherwise, it could have conceivably made a big mess if the clients were abandoned. We also had that argument that, in fact, you couldn't make it a trade secret given the regulatory structure of the investment advising and brokerage business.
Greg:
I see. So, because they're investment advisors, regulated by the SEC and otherwise, they have a duty to watch over their client's accounts and make sure that the trades that the clients want are getting executed and what not, and whether they get fired or leave or whatever, that duty does not go away. It's between them and the client, and that would potentially trump, even if there were agreements between the employer and the joint service provider/broker-dealer, the ability to access. They needed to access that information no matter what.
David:
That was the argument.
Greg:
Sounds like the injunction and getting that overturned was a big deal and then the real lever in the case was determining that the information that the employer was claiming as a secret was actually given away. How did that case end up? How did it resolve?
David:
What was interesting also, procedurally interesting, is: at the start of the trial, we made a motion in limine to require an evidentiary hearing on whether the plaintiff could introduce evidence to show that it had trade secret right in the client contact information. We contended that it could not prove the preliminary fact that what they had, that information, was secret. The court granted the motion and held a hearing, which went on for about five days, and at the end of the hearing ruled that the information wasn’t a secret. Therefore, the plaintiff could not put-on evidence that the information was a trade secret.
Greg:
I have used this before in another context - this evidentiary prehearing - to have experts testify and the judge can determine whether or not they should be allowed to testify at trial. But you're saying you can use this technique to have an evidentiary hearing to determine whether or not there's actually a trade secret involved. And if there isn't, that's again the end of that, right?
David:
Yeah.
Greg:
It sounds like you guys had some luck with this.
David:
Yeah. The plaintiff, the investment advising company, the original one, had two basic claims. One was the theft of the contact information for its actual clients, which was established was not a trade secret. So, their trade secret claim fell apart at that point. They had a second claim, which was, they claimed that my clients had taken their database of leads. These people were not clients, but were, you know, possible clients. They still had that claim, but they apparently did not view that claim as particularly valuable so, after the ruling on the motion in limine, the case settled.
Greg:
Nice, nice work. That's great. That does sound like an interesting technique, and that brings up a couple of questions I have for you. Speaking of techniques that can be used in litigation and discovery, there is a special rule in a trade secret case, as a precursor to having to respond to discovery, you can demand that the plaintiff identify their trade secrets. We've done that and we fought about that the identification. Of course, the employer defines it as broad as possible in the vague-est terms, and the departing employee or whoever's accused of using or misappropriating the trade secret says that's too broad and you have to narrow it down. Do you have any thoughts about this discovery tool? I mean, is this one of those ideas that somebody had that a legislator said “fine, let's put it in there” without really thinking how it was going to work out, and it has no practical effect, or, do you think it's an important tool to be used in the process by the defense?
David:
Oh, it's definitely an important tool for the defense. And I would suggest too, with regard to plaintiff's pursuing trade secret claims, that they pay a lot of attention to it, because judges identifying the trade secrets is key. There are a lot of employers who bring these suits who basically think that everything that has the name of the company on it, or is in a folder that has the name of the company on it, is a trade secret and they're vastly overbroad in terms of what they consider trade secrets. In my experience, if the defense starts to poke holes in what is on your list of trade secrets, the plaintiff's credibility starts to erode very quickly with the judge. I've seen this, particularly in federal court. You just start to poke some holes and say, well, they have 1,200 trade secrets, but we've identified 300 of them which have been published in periodicals, so they're not trade secrets. And the judge is now turning to the plaintiff and getting upset. So, yes, I think it's important on both sides and it's definitely a key. It's a requirement under California law. Whether it's required under the federal law varies from court to court, whether they apply it or not.
Greg:
Stepping back a bit, we talked about this one case. You've obviously litigated a number of trade secret cases. What are some of the things that you've learned doing more than one, getting into it, and seeing the law change over time? It's obviously one of those areas of law that has changed, as there's a federal law now, not just California, and you obviously shaped the law with the injunction, that kind of thing. Whether you want to give advice to litigators on the prosecuting side or the defense side, I mean, or on this issue of what is a trade secret: what are some of the inside tips that you can give somebody that's getting into trade secret litigation?
David:
Well, if you're representing someone who's likely to be a defendant, the earlier you can intervene, the better. Take, for instance, if they come to you before they've left their employer. You want to do a very thorough job advising them about what it is they can take and what it is they cannot take. It's very important that they not take anything. I think that there is a back-and-forth argument about whether a trade secret can be simply something that's in someone's head in their memory, or whether you have to actually take materials, documents, or files, or code - something that's tangible in that way. That might vary depending upon the situation. Certainly the situation where the trade secret is like a customer list, a client list, I think there's a good argument that you cannot enforce trade secret prohibitions on someone using their memory. Although you might be able to do it if they had the company's customer list on their phone. What you want to do is make sure that your client is as clean as possible when they leave, so that they can honestly represent that they walked away with nothing. In many situations like the same case we're talking about, my clients, they visited their advisory clients in their homes. They knew how to get there. These people called them on their cell phones, so they had all kinds of means of actually getting in touch with these people or making contact with them that they could utilize outside of having the paper or electronic Rolodex that was in the original employer's possession, and taking that for their own use.
Greg:
Yeah. On the flip side, you're talking about what people can't do. I get calls from people leaving and wanting to know what they can take, and I try to also tell them what they can take. I'll tell you what I tell them, and you can tell me if it's good or bad, and [joking] we can decide to be friends or not after that.
What I tell them is, okay, so person A, they want to leave their employer and start their own company or join a competing company. I say, look, if I can get the information - me, Greg Wood - not having worked at your employer, either through the yellow pages or I can buy a list, or you mentioned periodicals - I had a case involving guys that installed flooring and their clients were apartment buildings and you could get the list of apartment buildings from a rental guide that had a directory in the back and basically their customer lists - if I can do it, if I, Greg Wood, can go out and get the information somehow without working at the company, some legitimate means and not through hacking or breaking into the building at night, then you can take it> But, if you have to work there to get the information and there's no other way to get it, then there's a good chance of it being determined to be a trade secret and you should leave it behind. What do you think of that?
David:
Well, turn that around. What is the damage? How do you assess damages or injunctive relief in a trade secret case? It's based either on the advantage, which the misappropriator gained by taking the information or by the detriment that the trade secret holder suffered. So, in a competitive situation, often what you need to look at is just how much of an advantage did the misappropriator gain? Well, in your example, if the misappropriator could in a day or in a week recreate basically the information they had at work, why not just do that? I would suggest to them, yes, that's an argument. It's not a trade secret, but why force the argument? Don't take that information, spend a week recreating it from third-party sources. Then you can say, how did you contact all these people? Well, I looked them up on X index, which is available to everybody.
Then you're clean and you don't have to have the argument that anybody can do that. The lawyers on the other side will come up with arguments about why nobody can do that. It may all be BS, but it gets resolved at a trial. I think you're much better off, in most cases, if the client can spend the extra week or the extra month even, if that's what it takes, to minimize your actual risk of a serious claim.
Greg:
And this is actually important, right? Because when you get down to trial and you think about how the evidence is going to be presented, if the claim is, “they took our property and they used it,” that’s the employer story. For the employee to be able to show, “no, actually here's, here's my LinkedIn, I sent out this batch of communications to these people, which included some of those clients and it included others or whatever,” it shows their efforts to drum up business, and that would go a long way to showing that they did not use the property. Right? That they used their own efforts. Yes, they got some of the same clients at the end of the day, but maybe they got some new ones too, and maybe they didn't get them all. Is that in line with your thinking?
David:
Yes, so I think once the person who is leaving the employer starts to take things, you never know what they take. Using the customer list concept, the names and addresses, and maybe the names of the purchasing agents or whatever, of the customers you can find. How much they bought of a particular product in the last year, at what price, that could well be a trade secret. In some instances, it isn't because everybody in that sector knows what everybody else is doing, but it may be, and I think you run the risk that, your client either intentionally or inadvertently includes information that the employer can make a legitimate claim that's trade secret information, and you had no right to take it.
Greg:
Right. So, the idea is, if you tell somebody, “yeah, you can take the customer list,” in all likelihood, they're going to take the best customers. They're not going to take the 3,000 that they know aren't going to buy anything, because they know they’ve been selling to them unsuccessfully for three years. They're going to take the 10 that actually buy stuff, and that right there, even if the names and the numbers can be obtained using other means, their selection of who to take and what to take puts them at risk, exposes them because now they're using information that's really not public, that you really can't obtain.
David:
mm-hmm.
Greg:
Yeah, I agree a hundred percent. [Joking] Glad I set that up for you.
Well, I don't have any other questions. Thank you very much for joining us. We are going to see you, or at least hear from you, again given your wealth of knowledge.
David:
Been a pleasure, Greg.