Trade Secret Rights and Trade Secret Misappropriation Litigation

[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 provides a general overview of trade secret rights and trade secret litigation. This page discusses what trade secrets are, what types of conduct constitute trade secret misappropriation, and what types of financial damages and court orders may be available in a trade secret lawsuit. Trade secret “misappropriation” refers to the improper use, acquisition, or transfer of a trade secret.

This site’s focus is on California law, as I practice in Los Angeles, California. 

What May Constitute a Trade Secret

Not all confidential and proprietary information constitutes a legally protectable trade secret. Generally, the information must have economic value because it is not generally known, and there must be reasonable efforts made to protect the secrecy of the information. These requirements are discussed in more depth below.

The Types of Information that May Constitute a Trade Secret

A broad scope of information may constitute a trade secret if the requirements regarding secrecy and economic value are met. The information that may qualify for trade secret protection includes, “a formula, pattern, compilation, program, device, method, technique, or process.” California Civil Code § 3426.1(d).

A customer list and customer information may constitute a protectible trade secret if the information is sufficiently difficult to compile and valuable. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514 (1997); Courtesy Temporary Service, Inc. v. Camacho, 222 Cal.App.3d 1278, 1287-88 (1990) (emphasizing time, effort, and expense of acquiring customer list and related information); Whitted v. Williams, 226 Cal.App.2d 52 (1964).

Regarding former employees, general skills and experience learned during employment generally will not constitute trade secrets. Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1524 (1997). In California, agreements by employees not to compete against their employer after their employment ends are unenforceable except in narrow circumstances involving the sale or dissolution of a business or divorce. Cal.Bus. & Prof.Code § 16600. Unlike other states, the agreements are unenforceable even if limited to a particular trade or type of employment within a small geographic area for a limited period of time. KGB, Inc. v. Giannoulas, 104 Cal.App.3d 844 (1980).

What Constitutes Reasonable Efforts to Maintain the Secrecy of Information

Unsurprisingly, to be a trade secret, the information must not be “generally known” either in the general public or in the relevant area of business or industry. California Civil Code § 3426.1(d)(1);
American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal.App.3d 1318, 1326 (1986) (information found not to be a trade secret because, while likely not known to the general public, it was generally known in the relevant business community).

Also, in order to be a trade secret, the holder of the information must use reasonable efforts to maintain its secrecy. Cal.Civ.Code § 3426.1(d)(2). While not technically part of the definition of trade secret in California (as opposed to other states), for a trade secret holder to successfully sue for trade secret misappropriation, the information must not be “readily ascertainable.” Brescia v. Angelin, 172 Cal.App.4th 133, 147, n. 1 (2009). If one could, through reasonable and proper efforts, reconstruct or reverse engineer the information, program, or process, it would be “readily ascertainable.” Id.

The law does not require complete secrecy. This would be impractical, as often people such as employees, vendors, and potential investors need access to the confidential information. The general principal is that secrecy is maintained when the person who views or receives the trade secret knew or should have known of an expectation of confidentiality.

In practice, the best way to ensure that secrecy is maintained is to use confidentiality or nondisclosure agreements. If these agreements are used, secrecy may be maintained even when a seemingly large number of people have received the trade secret. See Technology Center v. Netcom On-Line Communication Services, Inc., 923 F.Supp. 1231 (N.D. Cal. 1995) (distribution to thousands of people did not prevent finding that information was a trade secret). That said, the lack of a confidentiality or nondisclosure agreement does not automatically end the status as a trade secret. Depending on the context, it may suffice that the recipient was told that the information is a trade secret, that documents were marked as “Confidential,” or that other factors are present that make the expectation of confidentiality obvious.

California recognizes property rights in trade secrets. Trade secrets may even be licensed so long as sufficient measures to maintain confidentiality are followed. DVD Copy Control Assn., Inc. v. Bunner, 31 Cal.4th 864, 880 (2003).

The Requirement of Actual or Potential Economic Value

Additionally, to be a trade secret, the information must have actual or potential economic value because that information is not generally known. California Civil Code § 3426.1(d)(1). Information, systems, etc., that are fairly obvious and add negligibly to what others know or could learn with reasonable efforts are not trade secrets. See Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 465-66 (9th Cir. 1990).

Evidence that developing the trade secret took significant time or expense may suffice to demonstrate economic value. Capitol Records, LLC v. BlueBeat, Inc., 765 F.Supp.2d 1198 (C.D. Cal. 2010).

The Elements of Trade Secret Misappropriation in a Lawsuit

If the information, program, process, etc., qualifies as a trade secret, the trade secret holder may sue those who commit “misappropriation.” Misappropriation includes acquiring a trade secret through improper means (such as trade secret theft), disclosing a trade secret, and using a trade secret. Cal.Civ.Code § 3426.1(b).

Improper means of acquiring a trade secret include theft, misrepresentations, breach of duty (including soliciting an employee to act against the interests in his or her employer), or electronic espionage. However, reverse engineering by itself is not inherently an improper means of acquiring a trade secret. See California Civil Code § 3426.1.

Improper use of a trade secret can include using the information in manufacturing, research, production, development, marketing, and soliciting business. See PMC, Inc. v. Kadisha, 78 Cal.App.4th 1368 (2000).

To be found liable in a lawsuit for disclosing or using a trade secret, the defendant must have known or had reason to know that the information was a trade secret. Cal.Civ.Code § 3426.1(b)(2); Cypress Semiconductor Corp. v. Superior Court, 163 Cal.App.4th 575, 585 (2008). A lawsuit may be brought even though there has been no actual use of the trade secret. San Jose Construction, Inc. v. S.B.C.C., Inc., 155 Cal.App.4th 1528, 1544 (2007) (wrongfully acquiring a trade secret may make one liable for misappropriation even if the trade secret is returned before use).

The mere fact that a former employee possesses a trade secret without additional evidence that the trade secret will be misused or disclosed is insufficient to obtain court intervention. Pellerin v. Honeywell Intern., Inc., 877 F.Supp.2d 983 (S.D. Cal. 2012). California law is especially protective of the rights of employees to compete against their former employers. Except for narrow exceptions related to the sale or dissolution of a business or divorce, agreements that an employee will not compete against the employer post-employment are categorically invalid. This is true even if the restrictions are of a very limited scope. See California Business and Professions Code § 16600.

As with other torts (wrongs), an employer may be liable (financially responsible) for the acts of trade secret misappropriation committed by an employee. Relatedly, one may be liable for trade secret misappropriation when acting through an agent. Silvaco Data Systems v. Intel Corp, 184 Cal.App.4th 210 (2010).

Injunctions, Damages, and Attorneys’ Fees

Temporary Restraining Orders and Injunctions

When a trade secret misappropriation victim can establish that she will suffer irreparable harm from an imminent act of misappropriation or from misappropriation that is ongoing, the victim may be able to quickly receive an order from the court, a temporary restraining order or preliminary injunction. The order may bar the perpetrator from committing acts of misappropriation or require that the perpetrator perform affirmative acts. See ReadyLink Healthcare v. Cotton, 126 Cal.App.4th 1006 (2005); Masonite Corp. v. County of Mendocino Air Quality Management Dist., 42 Cal.App.4th 436 (1996).

To receive a pre-trial or post-trial injunction, the plaintiff need not have suffered monetary loss. A real threat of misappropriation may be sufficient. Central Valley General Hospital v. Smith, 162 Cal.App.4th 501, 524 (2008). (However, regarding former employees whose new employment is of a nature that suggests trade secrets would be used or disclosed, California rejects the inevitable disclosure doctrine. Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443 (2002)).

Enforcing an injunction is generally quicker and cheaper than pursuing a new lawsuit. The punishment for violating an injunction can be severe.

Monetary Damages

In terms of financial compensation, a plaintiff (victim) in a trade secret misappropriation case may be entitled to recover the amount of actual damages (financial loss) that the plaintiff suffered. The plaintiff may also be awarded the profits that the defendant (wrongdoer) earned from the misappropriation.

If the plaintiff cannot prove either the amount of damages that it suffered or the amount of profits that the defendant earned, the plaintiff may be awarded the amount of a reasonable royalty. See Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal.App.4th 26, 66-68 (2014).

The Availability of Attorneys’ Fees

The winning party in a trade secret lawsuit may be able to recover its reasonable attorney’s fees and costs for expert witnesses.

For a plaintiff to receive such an award, the misappropriation must have been “willful and malicious.” A defendant must show that the lawsuit was “made in bad faith.” California Civil Code, § 3426.4; Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., 236 Cal.App.4th 243 (2015) (defendant awarded attorneys’ fees); FLIR Systems, Inc. v. Parrish, 174 Cal.App.4th 1270 (2009) (same); Gemini Aluminum Corp. v. California Custom Shapes, Inc., 95 Cal.App.4th 1249 (2002) (same); Mattel, Inc. v. MGA Entertainment, Inc., 801 F.Supp.2d 950 (C.D. Cal. 2011) (granting award to party that brought trade secret claim).

Information on Miscellaneous Trade Secret Matters

Generally, if an employee develops or invents a trade secret while performing work for his or her employer, the employer will own the trade secret. If the employee develops or invents the trade secret in his or her own time without the employer’s equipment, supplies, or facilities, it is likely that the employee will own the trade secret rights. California law restricts an employer’s right to enforce agreements requiring an employee to assign all inventions developed during the employment to the employer. Cubic Corp. v. Marty, 185 Cal.App.3d 438, 451-52 (1986).

Trade secret misappropriation can occur through someone memorizing the trade secret. There does not need to be a physical or electronic transfer of information or a copying of information.

California substantially adopted the Uniform Trade Secrets Act. Almost all states have adopted the Uniform Trade Secrets Act. This means that trade secret cases from other states will often be persuasive authority for California courts.

However, California did not adopt the Uniform Trade Secrets Act unaltered. Practitioners should be mindful of the possibility of differences between the California trademark statutes and the Uniform Trade Secrets Act. For example, in California, the definition of “trade secret” does not include that the information must not be “readily ascertainable.” Rather, the defendant has the burden of proof of establishing that a trade secret claim should fail because the information is “readily ascertainable.”

As discussed earlier, California recognizes ownership rights in trade secrets. California has broad standing rights when it comes to pursuing trade secret misappropriation claims. For example, a former owner of a trade secret may sue to recover damages for the period in which he or she owned the property. Jasmine Networks, Inc. v. Superior Court, 180 Cal.App.4th 980 (2009). Additionally, a licensee of a trade secret may have standing to sue for trade secret misappropriation even though it is not the actual owner of the trade secret. BladeRoom Group Limited v. Facebook, Inc., 219 F.Supp.3d 984 (N.D. Cal. 2017).

An interesting and emerging question in trade secret law is the degree to which information is readily ascertainable if sophisticated technological methods can be used to locate the information or reverse engineer the information. (If the method is unlawful or breaches a contract the acquisition will likely be considered wrongful universally.) Courts have looked to the difficulty and expense of the methods used to obtain the information. For example, that one could use a sophisticated, expensive, and time-intensive process to obtain information on the Internet likely will not be grounds for finding the information readily ascertainable. In such a case, while the defendant might not be liable for its acquisition of the trade secret, it would be liable if it used or disclosed the trade secret.

One concern of plaintiffs in trade secret litigation is that the trade secret will be publicly revealed in litigation. There are rules allowing for the use of vague descriptions of the trade secret in the complaint and delayed disclosure of the trade secret to the defendant. During litigation, courts will often use discovery protective orders to protect the confidentiality of materials disclosed during civil discovery.

Unfortunately for trade secret holders, sometimes a wrongdoer’s widespread or public disclosure of trade secrets may render the information no longer a trade secret. That is because in such a situation the trade secret will forever be generally known. In such a situation, the plaintiff would be able to sue the wrongdoer for that wrongdoer’s use and disclosure of the trade secret. Subsequently, the information would be in the public domain free for public use.

In 2016, the federal government adopted legislation allowing many plaintiffs to sue for trade secret misappropriation under federal law. See 18 U.S.C. § 1836. This makes it easier to sue for trade secret misappropriation in federal court as diversity of citizenship is not required to sue under federal law.

However, this expansion of federal liability does not make much of a practical difference in most litigation. The federal statute follows the Uniform Trade Secrets Act and so does California law for the most part. If a plaintiff wants to litigate its trade secret dispute in California state court, the plaintiff likely should (after confirming that there are no negative ramifications) file a lawsuit in state court that only includes trade secret misappropriation claims under state law, not under federal law. Otherwise, the plaintiff may risk the defendant removing the action to federal court.

Trade secret law is a relative newcomer when it comes to intellectual property protection. Courts were initially reluctant to recognize a property right to trade secrets. The first published California case that the author could locate that recognized enforceable trade secret rights and used the term “trade secret” was an equity case in 1913 that granted an injunction restricting the use of trade secrets. Empire Steam Laundry v. Lozier, 165 Cal. 95 (1913). That case cited only two earlier California cases, neither of which would be classified as a clear precursor to trade secret cases that merely used different terminology.

Over time, courts began to recognize trade secret rights within the contexts of unfair competition and breach of duty. When the American Law Institute published the original Restatement of Torts in 1939, the Institute recognized that courts had begun to recognize trade secret misappropriation claims. However, the specifics of trade secret law were largely undefined, and the Restatement left many legal issues open.

This page has focused on civil litigation involving trade secrets. Please note that trade secret misappropriation can, under certain circumstances, constitute a crime. For example, Section 1832 of Title 18 of the United States Code makes certain acts of trade secret misappropriation a felony.

[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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