Unlike patents, copyrights, and trademarks, a trade secret is not protected by any government entity. They are designed to be kept a secret, and at the same time be protected against discovery, theft, or use by individuals or businesses. Trade secrets can include customer information, algorithms, marketing data, software, production methods, formulas, recipes, and so on.
If you are involved in a legal battle over a trade secret, you can contact the Los Angeles Business & Real Estate Law Firm for legal counsel today.
Understanding Trade Secrets
Trade secrets are important intellectual properties owned by innovators. Most states recognize trade secrets as formulas, patterns, physical devices, ideas, processes, or collections of data that:
- Provide the information’s owner with an edge over other competitors in the market, and
- Is handled in a manner that, without theft or wrongful acquisition, could be reasonably expected to keep the general public or rivals from discovering it
Trade secrets can be considered a “do-it-yourself” kind of intellectual property protection, as opposed to other types, like copyrights, trademarks, and patents, which often have to be registered to be completely effective.
To protect your business’s trade secret, you don’t need to register it with a government entity; you could simply keep the details private. There is no time limit on how long a trade secret can be protected provided it remains private. However, protection for a particular trade secret is lost after it has been disclosed to the general public.
California Trade Secret Laws
In 1984, California became one of many states to adopt the Uniform Trade Secrets Act (UTSA), which was then enacted as part of California’s Civil Code. The California Uniform Trade Secrets Act is under the State’s Civil Code sections 3426 through 3426.11. The UTSA and CUTSA are nearly identical. According to the CUTSA, a trade secret is “information, including a pattern, formula, program, compilation, method, device, process, or technique,” that:
- Draws independent economic significance from failing to be publicly known by other people
- Is the focus of reasonable measures to ensure that its secrecy is preserved
It is important to keep in mind that trade secrets are “information,” which is by itself something that can typically be easily acquired by people, usually workers or independent contractors, and perhaps utilized by them alone or distributed to others to achieve a comparable financial gain for themselves.
This raises the question of “reasonable measures.” The simple intent of the owner to maintain privacy is insufficient. According to a ruling of a court in California, reasonable measures include informing staff of the existence of the trade secret, asking them to enter into a contract of confidentiality, restricting the use of the intellectual property in case of necessity, and putting the information under actual lock and key.
What Is the Difference Between the Misappropriation and Theft of Trade Secrets?
According to California law, acquiring and/or exploiting another party’s trade secrets without authorization is classified as misappropriation rather than theft. Misappropriation includes two distinct legal components:
- Unlawful acquisition and
- The use or disclosure of a trade secret
According to § 3426.1(a) of California’s Civil Code, improper methods include bribery, theft, misrepresentation, inducement, or the breach, of the obligation to uphold espionage or secrecy through digital or by any other methods. The second meaning forbids the acquisition or use of such misappropriated trade secrets by other entities or people.
Misappropriation of trade secrets is divided into three unlawful acts:
- Wrongful appropriation
- Unlawful use, and
- Improper disclosure
Keep in mind that misappropriation does not always refer to physically acquiring paperwork or digital assets. In California, it is uncertain whether misappropriation entails what a worker knows before leaving. California employees are provided with substantial protections for carrying out their jobs.
These protections conflict with the rights of both employers and other parties to enact trade secret limitations when their application goes beyond the misappropriation of easily recognizable files, documents, formulas, codes, and lists, among others. Instead, a trade secret owner seeks to expand its rights to include information the employee kept in memory after leaving.
This principle is called the “inevitable disclosure” law, which states that an employee can”inevitably reveal” certain details in another job due to the information they received as they worked for a previous employer. The “inevitable disclosure” law has been adopted by other state regions, but not by California.
Lists of Clients and Customers Considered Trade Secrets
Historically, customer lists have been regarded as trade secrets. In 2016, Congress passed the Defend Trade Secrets Act, which appears to have formalized protections for such databases at the federal scale. A trade secret, according to the DTSA, includes every kind of “financial, scientific, business, engineering, technical, or economic information.”
Client lists have always been safeguarded by California courts. U.S Court of Appeals for the Ninth Circuit, which oversees California and other western jurisdictions, once held that a client list is not subject to trade secret laws because it “enables a rival to lead its sales attempts towards reaching potential clients who have previously conducted business with” the intellectual property owner. It’s crucial to remember that the laws typically only protect “compilations,” not just any random list of clients.
An employee is normally allowed to solicit their previous company’s clients, provided that it is logical for them to know these clients and their contact information off the top of their head. On the contrary, a staff member will probably be deemed to have stolen the intellectual property of their previous employer if they compile a large number of clients along with their contacts and transaction details.
For their case to be successful in court, businesses that want to keep client data a secret should take specific measures. The list needs to first be kept on paper or digitally. If not, a departing worker could argue that the customer data was gathered for their use. That is to say, there has to be an item that may be taken without permission and whose existence can be demonstrated in court.
The list also ought to only be shared when necessary. Courts can hesitate to grant trade secret protection to a list when every staff member has access to it. Additionally, the list should have more information about each client than just their name and contact details. It should also contain information about their wants and needs as well as pricing policies that were employed specifically for them.
Instead of relying solely on contracts with workers—which courts increasingly view skeptically—to safeguard your customer details as intellectual property, you should consult with a competent and seasoned attorney for guidance on the necessary paperwork and storage requirements.
The Doctrine of “Inevitable Disclosure”
If a business can show that a former worker’s employment with their rival would undoubtedly result in the exposure of trade secrets, they could be able to stop the former worker from being employed by the competitor.
Due to concerns that it restricts workers’ freedom of association, the doctrine of inevitable disclosure has been deemed unconstitutional in some jurisdictions. Courts often refuse to use the doctrine except if there is other evidence of malicious conduct, bad faith, or recruitment by a rival without similar technology. In the end, the court will have to make a decision based on some very fact-specific factors, including the details of the worker’s knowledge.
Proving a CUTSA Claim
The plaintiff must demonstrate two factors to win a California Uniform Trade Secrets Act claim:
- The information in question was a trade secret
- There was a misappropriation of the information
Proving the Information was a “Trade Secret”
According to the California Uniform Trade Secrets Act (CUTSA), the term “trade secret” refers to any detail that is worth value due to its secrecy. Normally, all that’s required to prove the first aspect of a CUTSA argument is that the details or data have an independent value even though it’s unknown to others and that the corporation has taken necessary measures to secure it.
The plaintiff should identify the confidential details in question when submitting a claim under the CUTSA. To comply with the CUTSA’s statutory requirements, plaintiffs should determine the trade secret with sufficient particularity and provide such information to the court and the accused party.
Many entrepreneurs opt not to submit patent applications to the United States Patent and Trademark Office (USPTO.) Instead, they count on trade secret protections since doing so carries the risk of exposing their confidential information accessible to the general public.
It’s a solid justification as well as why a firm planning to pursue a trade secrets lawsuit should consult an attorney first. A skilled lawyer could be able to assist you in obtaining a protective court order that protects the documents and restricts the public’s access to any confidential data exposed in the proceedings.
Proving the Information was “Misappropriated”
When a trade secret is “misappropriated” under CUTSA’s second aspect, it means the defendant obtained it, used it, or revealed it without authorization. The most common examples, in this case, are espionage or theft. However, even if the accused person was a staff member with access to confidential information, it can still be considered misappropriation if he or she had a responsibility to keep the information secret and subsequently violated that obligation.
In a CUTSA lawsuit, the plaintiff is not required to prove that the accused party took the secret information. For instance, it can be considered a trade secret misappropriation under the CUTSA if a former staff member recalls specific information and utilizes or publishes it later without permission. This is a significant distinction between the CUTSA and other trade secret legislation, which allow former employees to assert that they can’t be obligated to “wipe clean” their memory.
Federal Trade Secrets Acts
The Defend Trade Secrets Act allows business owners with trade secrets to sue in federal court. On the other hand, the previously Uniform Trade Secrets Act offers another alternative to business owners in California and other jurisdictions. There’s also federal legislation that makes trade secret theft illegal in some circumstances. Theft of a trade secret and disclosure to a foreign organization are both prohibited under the Economic Espionage Act of 1996.
If you violate the provisions, you could spend no more than 15 years behind bars and pay a hefty cash fine of $5 million. Additionally, it should be highlighted that the CUTSA allows private civil lawsuits as well as criminal prosecutions under the Economic Espionage Act.
Penalties for Violating Trade Secrets
Misappropriating another entity’s trade secret can be punished if the misappropriating entity “has grounds to be aware” of the misappropriated trade secret existence. The misappropriating party only has to have what is known as “constructive knowledge,” not actual knowledge, about the trade secret. In other words, a business entity can face legal action under California’s trade secret provisions so long as it has reason to know about the misappropriation.
Injunctions that restrict further use of an entity’s trade secrets are often issued as a result of violations of confidentiality agreements regarding trade secrets. The injunction would occasionally call for royalties payment generated from sales of goods or services using the trade secret. A misappropriation victim can also pursue compensation for financial losses linked to the crime. In the most severe circumstances, a court has the authority to award punitive damages equal to two times the value of financial losses incurred.
Compensation
If the court determines that an accused party has misappropriated or taken advantage of a complainant’s trade secret(s), the following compensation could be imposed:
Injunctive Relief
A court would issue an order under CUTSA directing the accused party to stop infringing on the plaintiff’s legal rights and take appropriate measures to protect the privacy of the plaintiff’s data. The most significant effect of this is that, under the trade secrets law, the court has the power to order an individual or entity to stop disclosing someone else’s trade secrets if it determines that doing so results in misappropriation. However, the court’s authority to do so could be limited by the First Amendment of the United States Constitution.
Damages
A defendant can be ordered by a court to compensate the plaintiff for financial damages to make up for the economic losses incurred as a result of violating the trade secret. This could encompass both the plaintiff’s damages and the defendant’s gains as a result of the misappropriation.
If the accused was found to have acted deliberately or wilfully, the court would award the complainant punitive damages of up to two times the value of the actual damages.
Legal Fees
If the complaining party wins a lawsuit and the defendant is found to have committed an intentional or malicious act, the court would award the plaintiff’s attorneys’ fees. If the accused party wins the case, the court would grant legal fees if it determines that the complainant engaged in bad faith in pursuing the complaint. The court could also give attorneys’ fees if a petition to lift an injunction is submitted or opposed in bad faith.
FAQS
The following are some of the most frequently asked questions about trade secrets.
What Kind of Information Do Trade Secrets Protect?
Three commonly used methods of protecting intellectual property are copyright, patents, and trademarks. However, trade secrets are yet another incredibly helpful measure of security that often safeguards sensitive or vital technical information. Below are some examples of what a trade secret can protect:
- Ideas that give an entity a competitive edge, allowing an individual or company to “lead the pack” in their industry. This could involve a new product concept or marketing strategy
- Almost any other data with a value that is unknown among rivals like a list of clients sorted according to how profitable their companies are
- Valuable details about the operation of a firm, such as pricing structures, customer databases, and marketing strategies
- The term “negative know-how” refers to knowledge gained through research and development about what to avoid doing or what doesn’t work well. This knowledge is frequently almost as helpful as the items or procedures that do work
- Competitors’ awareness that a service or product is in development, as well as its technical or functional characteristics, such as the internal structure of an upcoming software program
What Options Does a Company Have If an Individual Steals or Unlawfully Shares Confidential Information?
Each jurisdiction has legislation that prohibits the illegal disclosure or theft of a trade secret. The Uniform Trade Secrets Act, which is a model law created by legal experts, served as the foundation for the majority of these laws. If someone steals private information, the person who owns the trade secret may enforce their rights against the perpetrator by seeking the court to grant an order known as an injunction.
This prevents the secrets from being shared or used in the future. The owner of the trade secret could also be entitled to compensation for any economic harm incurred as a result of improperly obtaining and applying the trade secret.
Find a Business Litigation Attorney Near Me
Whether you’re a defendant or a victim in a trade secret misappropriation case, you’ll need the support and guidance of a trade secrets lawyer to help you navigate the legal process. We at the Los Angeles Business & Real Estate Law Firm will look into the case, develop a solid strategy, engage in negotiations, and, if necessary, defend your interests in court. Call us now at 310-796-7794 to speak with our attorneys.
