Source: https://www.thoits.com/category/trade-secrets-news-publications/
Timestamp: 2019-04-18 13:17:47+00:00

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A recent decision by the California Court of Appeal, Third Appellate District, highlights the ethical standards that attorneys and clients must maintain when dealing with information during discovery that is alleged to have “trade secret” status regardless of whether the information actually meets the definition of a trade secret.
In Wallis v. PHL Associates, Inc., et. al., (2008) 168 Cal.App.4th 882, the Court of Appeal affirmed an award of sanctions against an attorney and her plaintiff clients because they violated a protective order after a confidential declaration, filed by the defendant under seal pursuant to the protective order, appeared in the publicly available court file. The declaration included attachments that contained the alleged trade secrets.
After the plaintiffs’ attorney discovered that the declaration, which was labeled as “confidential”, had been placed in the Court’s public file, instead of being filed under seal as requested by defendant, she notified her clients of its public availability. Under California law, one of the requirements of trade secret status is that the information be kept secret by its owner. So, in order to try to defeat the defendant’s claim that the declaration’s attachments contained trade secrets, the attorney and her clients instructed third parties to view and copy the declaration. The defendant claimed this was bad faith conduct and filed a motion asking that the attorney and plaintiffs be sanctioned.
The plaintiffs’ attorney argued that the declaration no longer contained trade secrets since it was made available to the public, and thus was not subject to the protective order. The Court rejected this argument and sanctioned both the attorney and her clients in the amount of $43,678.42. It also did not find persuasive the attorney’s explanation that she had gone so far as to discuss the issue with the State Bar prior to informing her clients of the existence of the declaration in the public file, and the State Bar informed her that she had a “paramount” duty to inform her clients about the declaration.
In reaching its decision, the Court explained that the attorney and her clients’ actions were frivolous and in bad faith, and that the attorney’s arguments lacked merit. The Court made clear that whether the declaration actually contained trade secrets was immaterial. What was important was that the attorney and her clients had violated the terms of the protective order. The Court also quashed any notion that the ends may have justified the means by finding that the limited, inadvertent disclosure of the declaration did not negate the confidentiality of the declaration since defendant filed the document under seal in compliance with the protective order.
This case is important because it highlights the Court’s disdain for tactics over substance in the context of trade secret litigation. One of the challenges in trade secret disputes is to balance the dissemination of sensitive information through discovery while trying to ensure that the information remains confidential. Protective orders are designed to facilitate the safe exchange of information and attorneys are supposed to act as gate keepers to ensure that the information disclosed by the other side is not made public and in many circumstances not even made available to their own clients. Thus, it is not surprising that the Court upheld an order for sanctions against both the attorney and her clients who took steps to try to circumvent the protective order and negate the trade secret status of information that the owner took reasonable steps to keep secret.
1 California’s version of the Uniform Trade Secrets Act defines misappropriation of trade secrets to include the acquisition, disclosure, or use of trade secrets by a person who knows or has reason to know that the secret had been acquired by improper means or even by accident or mistake. Civ. Code, § 3426.1, subd. (b)(1), (b)(2)(B),(C). (See Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal. App. 4th 575).
Identifying Trade Secrets with “Reasonable Particularity”: What is Required?
Unfortunately, because of the lack of uniformity in published cases and the lack of guidance on the degree of detail necessary to meet the standard, the ambiguity of the phrase “reasonable particularity” often results in discovery disputes.
Plaintiffs will frequently contend that a list of general categories and concepts is sufficient to identify their alleged trade secrets, supported by cases consistent with their position. In Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, for example, general descriptions such as pricing of products sold to customers, profit margins and market research data were found sufficient.
Defendants, on the other hand, will typically argue that plaintiff’s list of general categories and concepts are too generic and insufficient to meet the “reasonable particularity” standard of Section 2019.210. They find support in cases such as Myrio Corp., 2001 U.S. Dist. LEXIS 10461, where the court required that plaintiff serve an Amended Identification of Trade Secrets, and it ordered that the alleged trade secrets be concisely described in narrative form.
In Brescia, a dispute arose after respondent refused to provide discovery to claimant on the basis that he had not identified his trade secrets with “reasonable particularity”. The claimant named two alleged trade secrets: his pudding formula and his manufacturing process. He claimed that his formula produced a unique high-protein, low carbohydrate pudding unlike any other healthy alternative pudding on the market, and he listed the fifteen ingredients by common name and the percentage of the total pudding. Claimant also listed the same fifteen ingredients by their supplier and brand name, and he described each step in the mixing, testing, and code marking of the pudding. While this level of specificity seems adequate to alert respondent what formula and process comprise the alleged trade secrets, respondent argued that the description did not meet the “reasonable particularity” standard because it did not permit respondent to ascertain whether and in what way the information is distinguished from matters already known, and to permit the court to fashion appropriate discovery. The Court disagreed and concluded that claimant’s showing was adequate to permit respondents to prepare a defense.
Brescia is significant because it balances the important policy considerations behind Section 2019.210. On the one hand, the statute attempts to ensure that defendants understand the specific claims against them so that they can prepare an adequate defense. At the same time, Brescia limits a defendant’s ability to try to exploit Section 2019.210 in order to prevent a plaintiff from commencing discovery. Finally, in its analysis the Court emphasized the flexibility that courts have in determining the degree of particularity that is reasonable in each case. When more sophisticated technologies, for example, are at issue, courts will almost certainly require a plaintiff to be more specific when identifying their alleged trade secrets. Similarly, if the technology at issue is not complex, general categories and concepts may satisfy the “reasonable particularity” standard of Section 2019.210.
A recent decision by the California Court of Appeal clarifies the impact of California’s Uniform Trade Secret Act on other related common law claims. In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., et. al. (2009) 171 Cal.App.4th 939, the Court of Appeal upheld the trial court’s dismissal of plaintiff’s causes of action for breach of confidence, tortious interference with contract and statutory unfair competition. The court held that California’s Uniform Trade Secret Act (“CUTSA”) preempts common law claims and provides the exclusive remedy for any claims based on the same nucleus of facts as a misappropriation of trade secrets claim under CUTSA.
In K.C. Multimedia, Inc., a dispute arose after plaintiff supplied defendant Bank of America Technology & Operations, Inc. with technology services. Plaintiff claimed that during the business relationship, the bank misappropriated plaintiff’s trade secrets, which consisted of prototypes for two banking applications that were designed to simplify customers’ access to on-line banking information. The trial court dismissed plaintiff’s common law claims after it determined that these claims were based on the same nucleus of facts as plaintiff’s claim for misappropriation of trade secrets. After defendant subsequently defeated plaintiff’s claim under CUTSA at trial, plaintiff unsuccessfully appealed the trial court’s dismissal of plaintiff’s other common law claims.
K.C. Multimedia, Inc. is consistent with previous federal decisions interpreting California case law. For example, in First Advantage Background Services Corp. v. PrivateEyes, Inc. (N.D. Cal. 2008) 569 F. Supp.2d 929, the court found that CUTSA preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets.
Why is K.C. Multimedia, Inc. Significant?
By clarifying the preemption effect of CUTSA, K.C. Multimedia, Inc. should help narrow the scope of discovery and disputed issues in trade secret litigation. Until recently, California state law was unclear as to whether there was a legal distinction between a misappropriation of trade secret claim under CUTSA and claims for the misuse of confidential information that did not meet the legal definition of a trade secret. Many plaintiffs alleging a claim for misappropriation under CUTSA would often capitalize on California’s lack of uniformity in published cases and lack of guidance on the issue by alleging a host of related causes of action in their complaint such as breach of confidence, breach of the duty of loyalty, unfair competition and interference with contract. Instead of having a single statute of limitations, potentially numerous statute of limitations could apply to different claims based on the same nucleus of facts. Moreover, in the event that a defendant successfully demonstrated that the information at issue did not meet the legal definition of a trade secret1, plaintiffs could rely on a second line of attack to argue that the use of this “confidential information” was still actionable, although attorney’s fees and treble damages otherwise available under CUTSA may not be recoverable.
K.C. Multimedia, Inc. makes it clear that plaintiffs alleging a claim for the misuse of “confidential information” face the same legal standards required for proving a misappropriation of trade secret claim under CUTSA. Moreover, they can not plead around this legal standard or seek relief under an alternative theory by alleging various other common law or statutory causes of action based on the same nucleus of facts.
The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009) is a clear warning to plaintiffs who pursue an action for misappropriation of trade secrets for the primary goal of stifling legitimate competition or without having any evidence to support the claim. The court examined all of the varied positions taken by the plaintiff, FLIR Systems, and found them all to be without merit, bad faith tactics and wholly lacking in evidentiary support. FLIR Systems paid the price for this: not only did the company lose the case it filed, the Court of Appeal affirmed the trial court’s order that because of its bad faith, FLIR Systems must pay the defendants more than $1.6 million in attorney fees and costs.
The defendants were shareholders and officers of Indigo, which manufactured and sold microbolometers, a device used in connection with infrared cameras, night vision, and thermal imaging. FLIR Systems purchased Indigo in 2004. The defendants had created a significant portion of Indigo’s technology. After the sale of the company, defendants continued working at Indigo.
In 2005, defendants decided to start a new company called Thermicon to mass produce bolometers. Before leaving Indigo, defendants approached FLIR Systems and offered it a non-controlling interest in Thermicon. FLIR Systems rejected the offer and wished defendants success in their new endeavor.
In early 2006, defendants entered into negotiations with another company, Raytheon, to acquire licensing, technology, and manufacturing facilities for Thermicon. Fearful that Thermicon would pose a competitive threat, FLIR Systems sued defendants, claiming that defendants could not mass produce low-cost microbolometers based on the Thermicon time line without misappropriating FLIR Systems’ trade secrets. Upon learning of the lawsuit, Raytheon terminated its negotiations with defendants, and defendants decided not to go forward with Thermicon.
FLIR Systems dismissed its claim for damages, apparently because the company had not suffered any damages, but nevertheless proceeded to trial seeking a permanent injunction prohibiting defendants from making use of FLIR Systems’ trade secrets, selling certain microbolometers in commercial markets less than 12 months after defendants entered into a license with any third party to purchase intellectual property, or using a specified FLIR Systems database.
After substantial testimony, the trial court found no misappropriation or threatened misappropriation of trade secrets. Instead, the trial court found that the action was brought in bad faith, based on the theory of “inevitable disclosure1,” a doctrine not recognized by California courts because it contravenes a strong public policy of employee mobility that permits ex-employees to start new entrepreneurial endeavors. (See Continental Car-Na-Var v. Moseley (1944) 24 Cal.2d 104, 110; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462.) In addition, FLIR Systems was ordered to pay defendants’ attorney fees and costs in the amount of $1,641.216.78 pursuant to Section 3426.4 of the California Uniform Trade Secrets Act which provides: “If a claim of misappropriation is made in bad faith, … the [trial] court may award reasonable attorney’s fees and costs to the prevailing party”,.
The trial court based its finding on the complete lack of evidence of economic harm, threatened or actual misappropriation of trade secrets, or ongoing wrongdoing, and the overwhelming evidence that FLIR Systems’ motivation for filing suit was for an anticompetitive purpose. It was uncontroverted that defendants received no funding for Thermicon, did not start a new business, had no employees or customers, did not lease a facility or develop technology, and did not design, produce, sell, or offer to sell infrared products.
The trial court further found that FLIR Systems maintained the action in bad faith by imposing unnecessary settlement conditions. In a settlement letter, defendants described their plan to acquire technology from a third party, restated that they would not misappropriate FLIR Systems’ trade secrets, attached copies of their business plan, and agreed to have a third party monitor and review the technology that defendants would develop. In response, FLIR Systems demanded $75,000, a non-competition covenant, and an agreement that defendants would not hire FLIR Systems’ employees or challenge Indigo’s patent applications. Weighing against FLIR Systems was the fact that its Chief .
Intellectual Property Officer testified that the $75,000 demand was “inflamatory”. The trial court found that the other settlement terms were not related to the trade secret action and were made for an anticompetitive purpose2.
In short, the Court of Appeal agreed with the trial court that FLIR Systems’ conduct was objectively specious and subjectively motivated by bad faith, and that it had no evidence whatsoever to support its claim. Even the testimony of the company’s officers and its independent expert witnesses undermined its case, and reinforced the finding that the action was a baseless, bad faith tactic.
FLIR Systems signals a warning to any party contemplating prosecuting a specious trade secret action, and highlights the strength of California’s public policy in favor of employee mobility. In too many instances, employers alleging misappropriation of trade secrets against their former employees do not conduct adequate pre-litigation due diligence prior to filing a claim, or they simply file a claim under the California Uniform Trade Secret Act based on speculation that an employee with intimate knowledge of the company’s business will use that information to unlawfully compete, or worse, for an anticompetitive purpose. This often has a devastating effect on the defendant employee’s ability to subsequently survive or prosper in a competitive industry when potential and actual customers will avoid maintaining a business relationship due to the risks and negative perception associated with litigation. As FLIR Systems demonstrates, a company that believes it may be a prudent business tactic to file a claim under the California Uniform Trade Secret Act, without evidence of a threat of misappropriation or actual misappropriation of trade secrets having already occurred, should reconsider filing suit or risk paying the defendants’ attorney fees and costs. Too often such actions are filed as a legally driven tactic to secure a competitive advantage, rather than as an effective response to actual wrongdoing based on real evidence. FLIR Systems should give pause to any party considering such tactics.
2 The proposed non-competition clause was an unlawful trade restraint. (Bus. & Prof. Code, § 16600) and the prohibition against hiring FLIR Systems’ employees and challenging Indigo’s patent applications violated public policy.
Customer Information. What do Courts Require Before Information About Customers is Given Trade Secret Status Under California’s Uniform Trade Secret Act?
With employee mobility on the rise due to a poor economy and entrepreneur-driven technology industries, employers increasingly have to deal with problems associated with former employees exploiting the knowledge and contacts they developed during their employment to set up competing enterprises. In many situations, there is little that an employer can legally do to prohibit their former employees from using information the former employee was paid to develop to compete against them. California courts have long found that public policy favors employee mobility, innovation and robust competition over employers’ desire to prevent their former employees from gaining a competitive advantage at their former employers’ expense.
Trade secret litigation, especially in the Silicon Valley, can be very complex depending on the information, technology, formula or process at issue. In many cases the alleged trade secrets consist of non-technical business information, which can still have significant commercial value, such as unique information about customers. Although not scientifically complex, trade secret cases involving customer lists have been frequently litigated. However, the identities of customers alone is often not considered a trade secret because it takes little time and effort to independently cultivate this information. The former employee will typically argue that the identities of customers claimed to be a trade secret can be located in public records such as telephone directories and industry publications, so these are not a protectable trade secret.
While the identity of customers is generally not protectable, information about them may be as long as the information has an “independent economic value” by not being known to the general public and “reasonable steps” have been taken to protect its secrecy.
In San Jose Construction, Inc. v. S.B.C.C., (2007) 155 Cal.App.4th 1528, the Court of Appeal rejected the former employee’s argument that a collection of project documents was not a trade secret within the meaning of California trade secrets law. San Jose Construction involved an employer’s suit against a former employee and his new employer for misappropriation of trade secrets. The employers were local competitors in commercial construction, and the former employee had taken project documents from his former employer shortly before he left to join the competitor and immediately compete for the same projects.
Similarly, in Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal. App.3d 1278, the court issued an order prohibiting former employees from using customer information in starting their own temporary employee placement business where the customer information included key customer contacts, profit margins, specialized requirements, and was of irrefutable commercial value and not readily ascertainable to other competitors. In reaching its decision, the court relied on the employer’s well-documented and substantial efforts made to compile the confidential customer information.
While courts analyze customer list trade secret allegations on a case-by-case basis using CUTSA’s requirements of value and secrecy, the reality is that without more, the mere identities of customers will not constitute a trade secret in most cases. Recent decisions make it clear, however, that a compilation of information about customers that requires significant time and effort to cultivate, as long as reasonable steps are taken to protect its secrecy, may be trade secrets.
Is Identifying Trade Secrets with “Reasonable Particularity” Whatever the Court Decides?
Code of Civil Procedure section 2019.210 requires that a plaintiff alleging misappropriation of trade secrets identify the trade secrets with “reasonable particularity” prior to commencing discovery. Unfortunately, because of the lack of uniformity in published cases and the lack of guidance on the degree of detail necessary to meet the standard, the ambiguity of the phrase “reasonable particularity” often results in discovery disputes. An important decision by the California Court of Appeal, Second Appellate District, Brescia v. Angelin (March 2009) 172 Cal. App.4th 133, provides guidance on this conflict by striking a balance between the level of specificity required depending on the complexity of the alleged trade secrets, while at the same time recognizing that plaintiffs should not have to prove that the information at issue meets the legal definition of a trade secret without the benefit of discovery.
In Brescia, a dispute arose after respondent refused to provide discovery to claimant on the basis that he had not identified his trade secrets with “reasonable particularity”. In his trade secret disclosure statement, the claimant provided a very concise and succinct description of his pudding formula and manufacturing process. While the level of specificity was clearly detailed enough to alert respondent of what formula and process comprised the alleged trade secrets, respondent argued that the description did not meet the “reasonable particularity” standard because it did not permit respondent to ascertain whether and in what way the information is distinguished from matters already known, and to permit the court to fashion appropriate discovery. The Court disagreed and concluded that claimant’s showing was adequate to permit respondents to prepare a defense.
A more recent decision by the California Court of Appeal, Fourth Appellate District, Perlan Therapeutics v. Superior Court of San Diego County (November 2009) 178 Cal.App.4th 1333, may promote the lack of uniformity in published cases by highlighting the broad discretion that trial courts have in deciding such disputes. After analyzing the significance of the Brescia decision and an earlier case, Advanced Modular Sputtering, Inc. v. Superior Court, (2005) 132 Cal.App.4th 826, the Perlan Therapeutics Court explained that the Brescia and Advanced Modular courts abused their discretion by applying improper understandings of the legal meaning of “reasonably particular.” Perlan Therapeutics supports the position that plaintiffs must identify their alleged trade secrets with a high level of precision, while it also suggests that plaintiffs may be required to distinguish between information that is confidential as opposed to information that is generally known in a particular industry. Most importantly, Perlan Therapeutics emphasizes that trial courts have broad discretion in determining whether the level of detail in a trade secret disclosure statement is sufficient and that courts of appeal when reviewing such decisions should do so under an “abuse of discretion” standard rather than de novo.
In Perlan Therapeutics, a dispute arose after two of Perlan Therapeutics’ former employees left the company and formed a competing enterprise related to protein based therapeutics for viral infections. At issue in this case was plaintiff’s amended trade secret disclosure statement that the court noted contained highly technical language that was too general in nature and was also publicly available, so it failed to meet the requirements of Section 2019.210. Specifically, plaintiff’s amended trade secret disclosure statement was inadequate because it failed to describe the alleged trade secret with reasonable particularity and failed to demonstrate that the information disclosed was not generally known to the public. In affirming the trial court’s decision, the Perlan Therapeutics Court cited to Brescia recognizing that Section 2019.210 requires an exacting level of specificity, but does not require a trade secret claimant to, in every case, explain how the alleged trade secret differs from information available in the public domain.
Perlan Therapeutics does not further clarify what level of specificity is required in a trade secret disclosure statement under Section 2019.210. Instead, it emphasizes the broad discretion that courts have in determining the degree of particularity that is reasonable in each case. The practical effect of Perlan Therapeutics is that to the extent possible, plaintiffs will forum shop for judges who have a history of allowing plaintiffs to commence discovery after serving trade secret disclosure statements with a lower degree of specificity than others, which may result in a wide range of decisions even when the facts of some cases are similar. In some cases, for example, depending on the sophistication of the judge and how he or she perceives the technology at issue, plaintiffs may be forced to distinguish between protected information and information that is publicly available, while other judges may not require the same standards.

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