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TRADE SECRET PROTECTION FOR CALIFORNIA COMPANIES

July 08, 2013

A. WHAT IS A TRADE SECRET?

A trade secret is business information not protected or protectable by patent, copyright, or trademark that:

  • is not generally known to the public;
  • has independent economic value to the holder; and
  • is the subject of reasonable efforts to maintain its secrecy

and consists of the following:

  • technical information such as formulas; plans, designs, or patterns; processes; methods and techniques; computer software; and negative information (i.e., results or research that didn't work); or
  • business information such as financial information prior to public release; cost and pricing information; internal market analyses or forecasts; customer lists; marketing or advertising plans, and other information (a) not known to competitors that (b) would take competitors time and money to independently develop. (Cal. Civ. Code § 3426.1(d);Whyte v. Schlage Lock Co.(2002) 101 Cal.App.4th 1443, 1452.)

For example, a "confidential customer list" often has independent economic value because its disclosure would allow a competitor to solicit customers who have shown a willingness to use a unique type of service or product as opposed to persons who might not be as interested. (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1522.) Further, cost and pricing information, profit margins, pricing concessions, promotional discounts, payment terms, advertising and marketing strategy, and manufacturing technologies can be a trade secret. (Whyte v. Schlage Lock Co., supra, 101 Cal.App.4th at 1456-57.)

B. WHAT ARE THE CONSEQUENCES FOR MISAPPROPRIATION OF A TRADE SECRET?

If the business information satisfies the above criteria, it is a trade secret and anyone who misappropriates the information will be enjoined from further use and may be liable for compensatory damages, punitive damages, unjust enrichment, royalties and attorney's fees as well as criminally liable under various state and federal criminal statutes. (Cal. Civ. Code §§ 3426.2, 3426.3, 3426.4 (setting forth damages under Cal. Law); see Cal. Pen. Code § 499c (theft of trade secrets); 18 U.S.C. §§ 1831 - 1839 (Economic Espionage Act).)

C. HOW CAN A COMPANY PROTECT ITS TRADE SECRETS?

A Company can protect its trade secrets through efforts that are "reasonable under the circumstances."

· Reasonable efforts to protect trade secrets include:

  • limiting access to the information (e.g., locked files; computer access codes and passwords);
  • always escorting visitors on company premises;
  • continually informing employees through memoranda, labeling and confidentiality agreements what information the company considers to be a trade secret;
  • conducting exit conferences to remind employees of non-disclosure/confidentiality agreements and that such agreements remain in effect post termination;
  • marking documents "Confidential" on each page;
  • limiting access to software programs;
  • using identification badges to prevent unauthorized personnel from entering certain areas;
  • utilizing security guards;
  • using closed circuit cameras with television monitors;
  • including policy statement of confidentiality in employment handbooks and personnel policies;
  • making sure employees return of all documents and software at termination;
  • Notifying the employee and new employer about your concerns of inevitable trade secret disclosure; and
  • Reviewing telephone and computer records to determine if an employee may have disclosed trade secrets or confidential information to a competitor.
  • Confidentiality/Non-disclosure agreements prohibiting the company's trade secrets or confidential information to be used by an employeeaftertermination are generally enforceable in California. (ReadyLink Healthcare v. Cotton(2005) 126 Cal.App.4th 1006, 1018.)
  • In many states, courts will enforce agreements not to competeif they are reasonable and limited as to duration and geographical scope. (Modern Controls, Inc. v. Andreadakis, 578 F.2d 1264, 1267-68 (8th Cir. 1978),but not in California. Agreements not to compete are unenforceable. (Cal. Bus. & Prof. Code § 16600 ("[E]very contract by which anyone is restrained from engaging in lawful profession, trade, or business of any kind is to that extent void.")
  • Non-solicitation agreements (of customers) may be enforceable if the"customer list" is determined to be a trade secret. (Retirement Group v. Galante(2009) 176 Cal.App.4th 1226, 1239-40 (unfair competition to misuse trade secret information). There is authority to the contrary, however. (Dowell v. Biosense Webster, Inc.(2010) (non-solicitation clause void where not narrowly tailored to the protection of trade secrets).
  • Employment agreements, employee handbooks, and personnel policies should state that customer lists and identities of customers will provide a competitive advantage if such information is not known outside the company. If a customer list qualifies as a trade secret, the company should consider including the following language in non-solicitation provisions: "During his/her employment with the Company and following termination of his/her employment with the Company, Employee shall not directly or indirectly solicit Company customers whose identities have become known to Employee in the course and scope of his/her employment."

D. HOW CAN A COMPANY PROTECT ITSELF FROM TRADE SECRET LIABILITY TO OTHER COMPANIES?

Companies that hire or "raid" employees from competitors may be liable for misuse of the former employer's trade secrets. Here are a few tips to avoid problem situations.

  • Do not solicit a competitor's employees.
  • Advertise positions in appropriate publications and let employees initiate contact with your business.
  • Do not request employment agencies to recruit employees from a single competitor.
  • Do not use a competitor's trade secrets in your business. Even if your new employee did not have a trade secrets agreement with his/her former employer, the employee may still violate trade secrets protection by disclosing or using the trade secret in your business.
  • Ask a prospective employee if he/she is subject to a non-competition, non-solicitation, or trade secrets agreement. If so, review the agreement. Determine whether your company can hire the person without breaching the agreement(s).

Trade secret protection is complicated. This Alert is designed to provide a summary of general information. It does not address the entire scope of trade secrets law. Further, it does not offer solutions to individual problems. Employers with specific questions concerning trade secrets issues should consult legal counsel.

Kenneth J. Sargoy, Esq. provides counseling and representation in connection with employment matters. Questions about trade secrets as well as other employment matters may be directed to Kenneth J. Sargoy, Esq., telephone toll free 310-472-7113 or 310-775-2456 or to his e-mail, ken@sargoylaw.com.

THIS ALERT IS A NEWSLETTER AND MAY CONSTITUTE ADVERTISING UNDER APPLICABLE RULES OF PROFESSIONAL CONDUCT.

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