Current Issues In California Trade Secret Law
By Dylan W. Wiseman

According to recent statistics, more than 80 percent of information theft facing businesses in the United States occurs internally. This means that a company's greatest threat for taking sensitive information comes from within its employees.

Lawyers inexperienced in this area often venture into trade secret litigation with visions of Ian Fleming characters and high adventure dancing in their heads. What inevitably awaits is the brutal, hard-fought furor of trade secrets disputes. By the time most inexperienced attorneys understand the law, the case is already lost. This area moves at the lightning-fast pace of temporary restraining orders and preliminary injunctions. This article provides an introduction to several current issues under California's Uniform Trade Secrets Act (Civil Code sections 3426.1-3426.11, "the UTSA").

When most people think of a "trade secret" they envision the formula to Coca Cola or the design schematic from a bio-medical research lab. While the UTSA certainly protects such information, the UTSA also affords protection to much more common pieces of information. If a company takes reasonable measures to protect its information, and if the information is valuable because it is kept secret, California courts will recognize that common, every-day pieces of data can be afforded protection as a trade secret. For example, customer lists, business plans, spreadsheets, corporate minutes and agendas, and bid specifications can be afforded protection as trade secrets.

Rather than "theft," the UTSA uses the term "misappropriation." "Misappropriation" has a specific legal definition, which is found in Civil Code section 3426.1(b). Under Civil Code section 3426.1(b),there are two distinct types of "misappropriations." First, there is the acquisition by improper means. Second, the UTSA also prohibits the use or disclosure of trade secrets.

" Improper means" is defined in Civil Code section 3426.1(a) and "includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means." Thus, if a former employee were to physically take or copy a trade secret, that information would be acquired by improper means.

In this digital age, most cases concerning acquisition of trade secrets by improper means involve the saving or transferring of data to an electronic storage medium like a Zip drive, CD burner, or other storage device containing a USB port. As a result, forensic evidence can be crucial for proving such cases. When companies confront such a problem, they should never have their own information technology ("IT") professionals conduct any type of forensic work. While a company's in-house IT staff may be good at updating software and making sure that its network runs smoothly, they are generally ill-equipped to handle any meaningful forensic work. Further, a company's in-house IT professionals may complicate the chain of evidence.

The theft of electronic data is a crime in California under Penal Code section 502, and most law enforcement agencies are generally reluctant to proceed with cases where a company's in-house IT staff handles the evidence. Lawyers who practice in this area work with forensic teams who can move at a rapid pace and are mindful of the evidentiary issues.

The second definition of "misappropriation" under the UTS includes the use or disclosure of trade secret information. Cases interpreting this provision of the UTSA have held that a former employee's use or disclosure of confidential customer information to solicit new accounts on behalf of a new employer constitute the misappropriation of a trade secret.

When a company alleges that its trade secret has been used or disclosed, it is a common misconception that the wrongdoer must physically abscond with a customer list or design schematic. If the information that is being used or disclosed is a trade secret, the UTSA affords protection to the contents of the employee's memory. Under the UTSA, a company is not required to show that a former employee physically took trade secret information. Prior to the UTSA's enactment, former employees could argue that they could not be expected to "wipe clean" the contents of their memories, and thus were entitled to use the employer's trade secret information. According to many recent cases, the so-called "wipe clean" doctrine is dead and is no longer viable after the UTSA's enactment.

However, courts have placed limits upon relying upon the contents of an employee's memory to form the basis of a misappropriation claim. Quite often, employees will depart and work for a direct competitor in the same type of field, and work in the same or similar type of project. Under those circumstances, it could be argued that the former employee will inevitably disclose the former employer's trade secrets. California, however, has flatly rejected the so-called inevitable disclosure doctrine and requires that some evidence of use or disclosure be presented. See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 1459-60 (2002). Thus, the former employer must have actual evidence of the use or disclosure of trade secret information. For example, an employer satisfies its evidentiary burden by showing that the former employee used trade secret information to solicit its customers, or can otherwise show that its trade secret information is being used or disclosed.

Similarly, a recent case commented upon the circumstances under which employers can rely upon contractual non-solicitation provisions to prevent employees from contacting their former accounts. Thompson v. Impaxx, Inc., 2003 Daily Journal D.A.R. 13,261 (2003). However, in that case, the employer admitted that the identities of its customers were not trade secrets and could easily be deduced by public means.

When facing a use or disclosure claim, the former employee's new company may assert that they did not know that the employee had used or disclosed trade secret information. Under the UTSA, the standard is not actual knowledge of wrongdoing, but rather constructive knowledge. (Civil Code section 3426.1(b)(2)(B)(ii)(iii).) If the facts show that a company's principals knew or should have known that the alleged wrongdoing was occurring, liability may attach to the company. It is extremely important to contain the use of such information because "The potential damages encompassed by a continuing misappropriation may expand with each illicit use of disclosure of the trade secret." Cadence Design Systems, Inc. v. Avant!, 29 Cal. 4th 215, 226 (2002).

Whether the dispute involves the yet-to-be-patented designs for a left-ventricular assist device or a valued customer list, local, regional, or national companies have likely invested substantial sums to protect the sanctity of such information. To protect their investment, companies should make certain that they have solid legal and technical measures to safeguard the information that is the lifeblood of their success.

The author, Dylan W. Wiseman, is with the Sacramento office of Littler Mendelson. Mr. Wiseman has represented apparel designers, biomedical companies, inventors, high-tech and e-commerce firms, real estate companies, casinos, healthcare companies, sporting goods companies, and television stations in disputes involving trade secrets and unfair competition. Mr. Wiseman also counsels and defends businesses accused of engaging in trade secret misappropriation and acts of unfair competition. Mr. Wiseman's intellectual property protection practice also includes preparing non-disclosure agreements, intellectual property assignment provisions, and non-solicitation covenants.