Trade Secrets

In 2020, California courts addressed several important questions in trade secret law.  Questions such as:  What information qualifies as a trade secret?  What is trade secret misappropriation?  And how are penalties assessed misappropriation?

          What is a trade secret?

 

Generally, a trade secret is any type of information that is (1) valuable because it is unknown, and (2) the subject of reasonable efforts to maintain its secrecy.[1] There are two sources of trade secret protection: California’s Uniform Trade Secret Act (“CUTSA”) and the federal Defend Trade Secrets Act (“DTSA”).  Courts analyze both claims together because the elements for each are substantially similar.[2]

  1. Amgen Inc. v. Cal. Correctional Heath Care Service (2020) 47 Cal.App.5th 716

Although not a trade secret case at heart, Amgen Inc. v. California Correctional Heath Care Services clarifies what information qualifies as a trade secret.  This case involves a preliminary injunction sought by Amgen in response to a California Public Records Act (CPRA) request, which is California’s equivalent of a FOIA request.  Amgen, a drug manufacturer, disclosed information about an upcoming price increase to 170 of its wholesale buyers pursuant to a law aimed at increasing transparency in pharmaceutical pricing.[3]  A news agency submitted a CPRA request to California Correctional Health Care Services, a wholesale buyer of Amgen’s drug, for information about Amgen’s price increase notice.  Amgen stepped in, claiming that the information was protected from disclosure as a trade secret.  Reversing the trial court, Court of Appeal held that once the information was disclosed to the wholesale buyers, it no longer qualified as a trade secret.

The court took issue with the first element of the definition, which it described as “the self-evident principle that a trade secret must, in fact, be secret.”  By disclosing information (via the price increase notice) to wholesale buyers, the information lost trade secret status.  The court reasoned that wholesale buyers derived economic value from the information through negotiations for lower prices with either Amgen or its competitors—an intended outcome of the law.  Thus, the price increase information lost trade secret protection upon disclosure to those who drive economic value from it (i.e., wholesale buyers). 

The court found it inconsequential that the disclosure was compelled and rejected the argument that the information was protectable because other competitors that did not yet have the information (e.g., other drug manufacturers) could also derive economic value from it. 

  1. Attia v. Google LLC (9th Cir. 2020) 983 F.3d 420

Federal courts also hold that disclosing information is generally fatal to its status as a trade secret.  In Attia v. Google LLC, the Ninth Circuit Court of Appeals held that filing information in a patent application “extinguishes” trade secret protections.  Attia sued Google for trade secret misappropriation in 2014.  The information at issue, however, was filed in a patent application and became publicly available in 2012.  Thus the court reasoned that Attia did not have standing to bring a claim because placing “the information in the public domain … necessarily extinguished its trade secret status.” 

Attia also noted an important distinction between the CUTSA and the DTSA with respect to clams for misappropriation that occurred before the statutes took effect (i.e., pre-enactment misappropriation).  California’s Uniform Trade Secret Act, by its express terms, does not apply to misappropriation that occurred before the adoption of the statute (i.e., January 1, 1985).[4]  The federal DTSA does not include such a provision, which the court interpreted to mean that “misappropriation of a trade secret prior to the enactment of the DTSA does not preclude a claim arising from post-enactment misappropriation or continued use of the same trade secret.”  Thus, the DTSA could provide an alternative cause of action for trade secret misappropriation prior to the enactment of the CUTSA in 1985. 

What is trade secret misappropriation?

Trade secret misappropriation is the “improper” acquisition or use of trade secrets.[5]  Both the CUTSA and DTSA define improper to include theft, bribery, misrepresentation, breach or inducement of a breach of a duty and espionage.[6]

  1. Hooked Media Group, Inc. v. Apple Inc. (2020) 55 Cal.App.5th 323

In Hooked Media Group, Inc. v. Apple Inc., the court held that mere possession of trade secrets by a departing employee is insufficient to establish “improper” use by the subsequent employer.  Three of Hooked Media’s “most important” engineers left to work for Apple after preliminary acquisition meetings between the two companies were unsuccessful.  The engineers created an app for Apple similar to Hooked’s app and Hooked claimed that Apple could not have created its app in such a short amount of time without using Hooked’s trade secrets.  Although the evidence suggested that the former Hooked engineers “drew on knowledge and skills they gained from Hooked to develop a product for” Apple, the court determined that “California’s policy favoring free mobility for employees specifically allows that.” 

In other words, California rejects the “inevitable disclosure” doctrine, “under which a claim for trade secret misappropriation is stated if an employee’s new job will inevitably lead to reliance on the former employer’s trade secrets.”  Absent that doctrine, Hooked Media failed to establish that Apple’s use of the information was “improper” and therefore could not prevail on its misappropriation claim.  The concurring opinion further details that information shared with Apple during acquisition negotiations was not improperly acquired because Apple refused to enter into a nondisclosure agreement. 

  1. InteliClear, LLC v. ETC Global Holdings, Inc. (9th Cir. 2020) 978 F.3d 653

 

Plaintiffs claiming trade secret misappropriation must identify the information at issue with “sufficient particularity” to distinguish the alleged trade secret from matters of general knowledge.  However, that need must be balanced by the fact that overly detailed descriptions could result in public disclosure and loss of trade secret protection.  The Ninth Circuit held that use of “hedging language” in describing trade secret information is not fatal to a misappropriation claim as long as there is at least one sufficiently identified trade secret. 

InteliClear sued ETC Global Holdings for trade secret misappropriation under California and federal trade secret laws.  InteliClear alleged the trade secrets at issue included “unique design and concepts” and “unique software, formulas, processes… and logic,” which the court found insufficient alone.  But, declarations submitted by InteliClear “expanded upon the initial definition and described specific features” such as “specific tables, table columns, account identifiers, codes and methodologies.” The court held that allegations about “the uniquely designed tables, columns, account number structures, [and] methods…” were sufficiently particular descriptions of potential trade secrets.  While some of the allegations “left open the possibility of expanding its identifications later,” the court found this acceptable because no discovery had occurred and the claims would be refined through that process.

  1. Albert’s Organics, Inc. v. Holzman (N.D. Cal. 2020) 445 F.Supp.3d 463

Albert’s Organics, Inc. v. Holzman provides another example of commonly alleged trade secret:  a customer list.  Albert’s Organics, a specialty produce distributor, sued its former employees for creating a competing business and misappropriating Albert’s trade secrets. The court dismissed as overly broad allegations regarding “supplier information, pricing, financing, personnel files and records, proposed and contemplated investments, [and] financial records,” but found that Albert’s customer list could qualify as a trade secret if “considerable time, effort, and resources” was spent developing it.  Albert’s alleged that its list contained—and the defendants misappropriated—names of customers and suppliers, pricing and financing information, annual sales, investment commitments and profitability information.  Further, Albert’s took steps to protect this information by training employees, including the defendants, on maintaining confidentiality.  The court found these allegations sufficient to establish a claim for misappropriation of a trade secret information in Albert’s customer list information. 

How are damages assessed for trade secret misappropriation?

  1. Ajaxo v. E*Trade (2020) 48 Cal.App.5th 129

 

The central dispute in this case arose from series of meetings between Plaintiff Ajaxo and Defendant E*Trade.  E*Trade was interested in developing “wireless stock trading capabilities” and Ajaxo possessed such technology.  The two companies entered into a mutual nondisclosure agreement during negotiations, but E*Trade ultimately selected another vendor.  In two separate trials and appeals, Ajaxo prevailed on its breach of contract claim, but lost its claim for trade secret misappropriation.  Now the third opinion in this litigation, the Court of Appeal affirmed the use of the Georgia-Pacific factors in trade secret cases and clarified the meaning of “action” in determining the prevailing party. 

The Georgia-Pacific factors are 15 guideposts used to determine reasonable royalties in patent infringement cases.[7]  Royalties are available where actual damages and unjust enrichment cannot be proven.[8]  The Court of Appeal approved the trial court’s use of the factors in evaluating reasonable royalties for trade secret misappropriation, because the factors were compatible with the “flexible and imaginative” approach required in such cases.[9] 

The court also affirmed the trial court’s finding that E*Trade was the prevailing party and entitled to recover its litigation costs.  Although Ajaxo recovered nearly $1.3 million from E*Trade’s breach of the nondisclosure agreement, that judgment was fully satisfied, including costs, before a judgment was rendered in the second trial on Ajaxo’s claim for trade secret misappropriation.  Thus, the misappropriations claim was a distinct “action,” meaning E*Trade prevailed within the meaning of the statute allowing for recovery of litigation costs.[10]

Non-Compete Agreements and Employment Contracts

 

California courts also had the occasion to consider contractual restraints on competition last year.  California’s overarching policy favoring free competition is embodied by section 16600 of California’s Business and Professions Code, which voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind” with limited exceptions.[11]

  1. Techno Lite, Inc. v. Emcod, LLC (2020) 44 Cal.App.5th 462

Plaintiff Techno Lite sold lighting transformers.  Two Techno Lite employees started a separate company, Emcod, which also sold lighting transformers.  The two employees continued to work for Techno Lite based on the promise that their new company Emcod would not compete with Techno Lite.  After discovering that Emcod was selling transformers to Techno Lite’s customers, Techno Lite sued Emcod.  Techno Lite prevailed at trial and Emcod was found liable for fraud based on its false promise to not compete with Techno Lite.  Emcod appealed, arguing that the promise not to compete was against public policy and violated California Business & Professions Code § 16600.  A promise that is void and against public policy, Emcod argued, cannot form the basis for a fraud claim. 

The court rejected Emcod’s argument.  Section 16600 of the Business & Professions Code invalidates “any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends.”  It does not, as Emcod argued, apply to prohibits on competition during employment and therefore could serve as a basis for fraud. 

  1. Brown v. TGS Management Co., LLC (2020) 57 Cal.App.5th 303

Brown v. TGS Management affirms the principle that Section 16600 renders provisions restricting competition in employment agreements void ab initio (from the beginning).  The plaintiff in Brown appealed an arbitration award in favor of his employer, TGS Management.  As a condition of his employment with TGS Management, Brown signed an employment agreement that restricted his ability to compete with TGS Management if he ever left the company.  The agreement also obligated Brown to forfeit any bonuses if TGS discovered that he engaged in actions that could be the basis for termination, even if those actions were discovered after Brown’s employment with TGS ended.  The arbitrator determined that Brown forfeited almost a million dollars in bonuses and declined to declare the noncompete provision void.

Although arbitrator’s decisions are generally not reviewable, the Court of Appeal found that an exception applied because affirming the arbitrator’s decision would be inconsistent with Brown’s statutory rights and the express legislative intent of Section 16600.  Section 16600 rendered the noncompete provision of Brown’s employment contract void ab initio and a violation of a void provision could not be the basis for finding that Brown forfeited his bonuses.  Further, the court held that because the noncompete provisions were facially void, the refusal to declare them void exceeded the arbitrator’s powers. 

  1. Ixchel Pharma v. Biogen (2020) 9 Cal.5th 1130

Employment contracts—where Section 16600 renders prohibitions on competition after employment void—are different from contract between businesses, according to the California Supreme Court.  In Ixchel Pharma v Biogen, the Court first held that a claim for tortious interference with an at-will contract requires a wrongful act independent of the alleged interference.  Because at-will contracts are terminable by either party without cause, there is no legally protected interest in either party’s future benefit under the contract.  This is in contrast to contracts for a specific duration, where the parties have agreed to future performance of their contractual obligations.  Thus, a claim for interference with an at-will contract must be based on an independent wrong—something other than the alleged interference. 

Second, the Court held that Section 16600, as applied to business contracts, imposes a “rule of reason.”  That is, where a contract allegedly restrains a business’s ability to compete (as opposed to a former employee’s), courts consider whether that agreement harms competition more than it helps in light of (1) the facts specific to the restrained business; (2) the nature of the restraint and its effects; and (3) the history of restraint and reasons for its adoption.[12] 

The combined takeaway of these cases is that Section 16600 renders void any contract restraining an employee’s competitive abilities after employment, but not during employment; and as applied to businesses, Section 16600 prohibits only unreasonable restraint on competition. 

  1. Midwest Motor Supply v. Superior Court (2020) 56 Cal.App.5th 702

Midwest Motor Supply held that modifications to employment contracts after January 1, 2017 render a forum selection clause voidable by the employee, even where the modifications take the form of secondary contracts.  Defendant Midwest Motor Supply hired plaintiff in 2014 as a sales manager and both parties entered into an employment agreement.  The 2014 employment agreement contained a forum selection clause that required any lawsuit between the parties be filed in Ohio.  In 2017, Midwest provided plaintiff with a “Compensation and Annual Plan” letter, which revised plaintiff’s compensation, sales goals, and bonuses set forth in the 2014 employment contract.  Midwest provided a similar letter revising plaintiff’s compensation in 2018.  The court held that these letters modified the 2014 employment contract containing the forum selection clause and therefore triggered section 925 of the California Labor Code, which renders forum selection clauses in employment contracts “entered into, modified, or extended on or after January 1, 2017” voidable by the employee.[13]

[1] Civil Code, § 3426.1, subd. (d); see also 18 U.S.C. §§ 1839, subds. (3) and (5).

[2] InteliClear, LLC v. ETC Glob. Holdings, Inc. (9th Cir. 2020) 978 F.3d 653.

[3] Health & Safety Code, § 127677.

[4] Civil Code, § 3426.10 (“This title does not apply to misappropriation occurring prior to January 1, 1985. If a continuing misappropriation otherwise covered by this title began before January 1, 1985, this title does not apply to the part of the misappropriation occurring before that date.”).

[5] Civil Code, § 3426.1, subd. (b); 18 U.S.C. § 1839, subd. (5).

[6] Civil Code, § 3426.1, subd. (a); 18 U.S.C. § 1839, subd. (6).

[7] Georgia-Pacific v. U.S. Plywood Corp. (S.D.N.Y. 1970) 318 F.Supp. 1116.

[8] Civil Code, § 3426.3, subd. (b) (“If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of reasonable royalty…”).

[9] University Computing Co. v. Lykes-Youngstown Corp. (5th Cir. 1974) 504 F.2d 518.

[10] Code Civ. Proc., § 1032, subd. (a)(4).

[11] Bus. & Prof. Code, § 16600 (“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”).

[12] In re Cipro Cases I & II (2015) 61 Cal.4th 116.

[13] Labor Code, § 925, subd. (f).


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