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What Constitutes Trade Secret Theft and Wrongful Acquisition

What It Means to Acquire a Trade Secret by Improper Means

[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.]

The topic of this article is what it means to acquire a trade secret through “improper means.”

If one commits “misappropriation” of a trade secret, he or she may be sued for trade secret misappropriation. California Civil Code, §§ 3426.1., 3426.2, 3426.4. The common categories of “misappropriation” are (1) acquiring a trade secret through “improper means” directly, (2) obtaining a trade secret from someone else knowing, or having reason to know, that this person acquired it through “improper means,” (3) disclosing a trade secret without consent, and (4) using a trade secret without consent knowing, or having reason to know, that the information was obtained through “improper means.” California Civil Code, § 3426.1(b).

This leads to the question: what is the definition of “improper means?” What are the methods of obtaining a trade secret that one can be sued for and what are the methods of obtaining a trade secret that one cannot be sued? What is trade secret theft, and what is not trade secret theft?

California’s trade secret misappropriation statute defines “improper means” as including “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” California Civil Code, § 3426.1(a). This is a broad list. (However, notably, the statute specifically states that reverse engineering is excluded from methods of obtaining a trade secret.) What do these various terms mean? Below are insights on each category (except for bribery, which, I take for granted, speaks for itself).

Theft

“Theft” does not merely mean breaking into an office and taking a trade secret while nobody is looking. An important case where an acquisition was found improper even though it constituted neither a tort or crime is E. I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970). There the defendant (the party being sued) took aerial photographs of a competitor’s plant that was under construction. While decided before the Uniform Trade Secrets Act was enacted, Christopher is still cited and referenced. Rummaging through a competitor’s garbage was also held to constitute improper “improper means.” Camp, Dresser & McKee, Inc. v. Steimle and Associates, Inc., 620 So.2d 363 (LA Crt. App. 1993) (abrogated on other grounds by Killeen v. Jenkins, 752 So.2d 146 (Sup. Crt. LA 1999)).

Misrepresentation

One example of acquisition of a trade through a misrepresentation is Phillips v. Frey, 20 F.3d 623 (5th Cir. 1994). There the defendants (wrongdoers) induced the plaintiff (the victim) to disclose trade secrets to them by leading the plaintiff to believe, falsely, that the defendants had a serious interest in purchasing his company. Another example of acquiring a trade secret through misrepresentation is where the defendant falsely claimed a right to receive a trade secret to third parties in possession of the trade secret. Dun & Bradstreet Software Services, Inc. v. Grace Consulting, Inc., 307 F.3d 197 (3rd Cir. 2002) (false claim to licensees of being authorized to act as a consultant).

Breach of a Duty to Maintain Secrecy

The quintessential question in determining whether there was a duty to maintain secrecy is whether the recipient of trade secret information knew or should have known that the disclosure of the information was made in confidence, and the recipient implicitly or explicitly accepted a duty of confidence such as by accepting a disclosure of the trade secret.

The clearest way a duty to maintain secrecy arises is by a person signing a nondisclosure agreement prior to receiving a trade secret. However, while the presence or absence of an NDA is a very important factor, an NDA is not required to trigger a duty to maintain secrecy. Direct Technologies, LLC v. Electronic Arts, Inc., 836 F.3d 1059, 1070-71 (9th Cir. 2016) (discussing that a duty to maintain secrecy may be implied by implicit business expectations); Alex Foods, Inc. v. Metcalfe, 137 Cal.App.2d 415, 426-27 (1955) (affirming preliminary injunction against former employee who had not signed a confidentiality agreement); Southwest Whey, Inc. v. Nutrition 101, Inc., 117 F.Supp.2d 770, 779 (C.D.Ill.2000) (“[I]it is important to note that a restrictive covenant or confidentiality agreement is not a prerequisite to recovery under [the Uniform Trade Secrets Act].”).

Electronic Espionage

Electronic “espionage,” can include not only sophisticated hacking but any accessing of data without authorization. This can mean accessing data that one has no permission to view or use. Additionally, it can mean accessing data that one is normally authorized to view or use but accessing the data for a purpose that would harm the owner or possessor of the data or enrich the accessor of the data.

An example of such access beyond authorization is an employee entering a database of customer information that he or she normally uses as part of his or her work duties and downloading the customer information in order to use it to start a competing business. Henry Schein, Inc. v. Cook, 191 F.Supp.3d 1072 (N.D. Cal. 2016) (granting temporary restraining order where employee had obtained the trade secrets by downloading them prior to leaving to work for a competitor). Note though, that there is no separate violation of the Computer Fraud and Abuse Act in the Ninth Circuit when the employee had permission to access the information for some purpose. U.S. v. Nosal, 676 F.3d 854 (9th Cir. 2012).

[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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