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Trade Secret Misappropriation and Liability for Employees’ Actions

Liability for the Actions of Employees in Trade Secret Cases

[About the author: Scott Lesowitz is a Harvard Law School graduate and former Assistant United States Attorney based in Los Angeles, California. His e-mail address is scott@lawbylg.com, and his phone number is 323-452-9909.]

This article addresses whether an employer is liable when an employee uses a former employer’s trade secrets without the new employer’s knowledge. “Liable” here means held responsible for the acts of employees in a lawsuit.

No California state court opinion directly addresses whether an employer is automatically liable when an employee uses trade secrets without the employer’s knowledge. Outside of California state court, the courts are divided. The majority rule is that the employer is automatically liable for trade secret misappropriation (a term that includes trade secret theft, usage, or disclosure) of an employee when the act of misappropriation is within the scope of employment. As detailed more fully below, California likely would follow this majority rule.

The tension in the law stems from the conflict between general principles of when an employer is automatically liable for an employee’s conduct and the Uniform Trade Secrets Act’s use of the term “knew or had reason to know” regarding liability for the use or disclosure of a trade secret. Trade secret misappropriation is not a strict liability tort.

Broadly speaking, under the law in general, an employer is liable for the acts of employees committed in the scope of employment. This is true even if the employer did not authorize the bad acts or know about the bad acts. Yamaguchi v. Harnsmut, 106 Cal.App.4th 472, 481-82 (2003). This is the doctrine of “respondeat superior.” However, if an employee “deviates from the employment duties” and commits bad acts for personal purposes, the employer is generally not liable. Id. For example, if a delivery driver causes a car accident while making a delivery, the delivery driver’s employer will probably be found liable. However, if the delivery driver causes a car accident while delivering a personal item to a friend during a break, the employer will most likely not be found liable.

On the other hand, the text of the California Uniform Trade Secrets Act states that one may liable for use or disclosure of a trade secret only if he had originally acquired the trade secret improperly. This improper acquisition can either be through using “improper means” to acquire the trade secret oneself or acquiring the trade secret from someone else when the recipient “knew or had reason to know that” the trade secret had been improperly acquired. California Civil Code § 3426.1(b)(2).

Thus, we see the tension: on the one hand, the law generally makes employers automatically liable for an employee’s conduct related to the employment. On the other hand, the Uniform Trade Secrets Act (which has been adopted in 49 states, including California) seems to require knowledge. (If the employer knew of had reason to know of the trade secret violation at the time it occurred, the fact that the employer did not directly participate is irrelevant; there is no question that there will be liability. PMC, Inc. v. Kadisha, 78 Cal.App.4th 1368 (2000).)

Based on these general principles, what happens when an employee uses trade secrets acquired from a former employer in a manner that benefits the new employer without the new employer’s knowledge? This question is surprisingly little addressed in the case law. No California appellate court decision directly addresses it. This is despite my personal experience that the situation arises in practice.

In federal litigation, district courts (the trial courts) seem to accept that an employer may be liable for a current employee’s use of trade secrets of the former employer even when the new employer does not know of the misappropriation. (In legal-speak, these courts apply the doctrine of respondeat superior in trade secret cases). Language Line Services, Inc. v. Language Services Associates, Inc., 944 F.Supp.2d 775, 783 (N.D. Cal. 2013); U.S. Legal Support, Inc. v. Hofioni, 2013 WL 6844756 (E.D. Cal. 2013); Manitowoc Cranes LLC v. Sany America Inc., 2017 WL 6327551, *5 (E.D. Wis. 2017) (noting that other district courts have applied the doctrine of respondeat superior under their versions of the Uniform Trade Secrets Act).

The few state courts that have addressed the issue are divided. Most seem to accept the doctrine of respondeat superior (automatic liability for the employer). Examples of acceptance of automatic liability (or perhaps one would say strict liability) are Thola v. Henschell, 140 Wash.App. 70, 80 (Court of Appeals, Wash. 2007) (in my opinion overstating the implications of California’s Kadisha ruling); Hagen v. Burmeister & Associates, Inc., 633 N.W.2d 497 (Supreme Court, Min. 2001) (accepting the doctrine of respondeat superior but finding no liability because the defendant provided no evidence regarding respondeat superior).

Infinity Products, Inc. v. Quandt, 810 N.E.2d 1028 (Supreme Court of Ind. 2004) rejected automatic liability. There, the court noted that the Uniform Trade Secret Act’s text states that the user of the trade secret “knew or had reason to know” of some type of impropriety. Additionally, its state’s version of the Uniform Trade Secrets Act states that it “displaces all conflicting laws.” Further, the commentary for the uniform act in place when the state adopted the uniform act in 1982 (i.e., the actual text and analysis recommended by The National Conference of Commissioners on Uniform State Laws) stated that the uniform act’s preemption (displacement of other law) language includes “duties imposed by law,” which Quandt deemed to include the doctrine of respondeat superior. See Commentary to Section 7 in place prior to the 1985 amendments). In Quandt, the employer was found not liable for an employee’s use of a former employee’s confidential and proprietary customer information in order to solicit customers.

California courts likely would not follow Quandt. First, courts tend to follow what the majority of other courts. Second, the California Uniform Trade Secret Act does not say that it “displaces” conflicting law. See California Civil Code, § 3426.7. However, California courts have found that California’s Uniform Trade Secrets Act “preempts common law claims that are based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.” K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal.App.4th 939, 958 (2009).

That said, I personally believe that the majority of courts, which apply respondeat superior (automatic liability) are wrong. They rule against the plain language of the Uniform Trade Secret Act.

It is important to note that once an employer realizes that trade secrets are being used in a manner that benefits the employer, the employer must stop the use of the trade secret. Otherwise, the employer commits trade secret misappropriation and face a likely successful lawsuit. The mere use of a trade secret constitutes misappropriation. It is irrelevant whether the actual user of the trade secret initially obtained the proprietary or confidential information wrongfully. California Civil Code, § 3426.1(b).

[About the author: Scott Lesowitz is a Harvard Law School graduate and former Assistant United States Attorney based in Los Angeles, California. His e-mail address is scott@lawbylg.com  and his phone number is 323-452-9909. This page is for educational purposes only. No legal advice or assistance are given.]

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