Common Issues in Trade Secret Cases

A. Overview

Cases which involve allegations of trade secret misappropriation or unfair competition often arise from typical recurring factual scenarios. One of the most common fact patterns in these types of cases arises when one or more employees terminate their employment, form a new business in the same industry as their prior employer and pursue accounts previously handled by them on behalf of their employer. Another common situation is when a key employee is hired away from his or her employer by one of the employer's competitors, with immediate efforts directed to solicit the former employer's major accounts.

Unfair competition cases often focus upon the methods of a competitor which may be devious or unethical. Sometimes, a competitor misappropriates, directly or indirectly, an asset of another competitor and uses said asset to its own advantage. Often, a legal action is then filed, seeking to enjoin the alleged offending conduct and for money damages.

Is it a trade secret?

A critical issue is whether the information or property thought to be protected as a trade secret is, in fact, a trade secret. Most states have now adopted the Uniform Trade Secret Act, which defines a "trade secret" a follows: " . . . information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable and under the circumstances to maintain its secrecy."

Whether information or property is a trade secret sometimes depends upon whether the information or property possesses independent economic value. One court has construed the term "independent economic value" to mean that its owner is provided a "competitive advance."(1) Examples of trade secrets are product formulas, customer data and operational methods.

A recurrent issue in these cases is whether reasonable efforts were made to protect the secrecy of the alleged trade secrets. These efforts may include taking steps with the company's employees to safeguard the information, the storage of trade secret information in locked cabinets, the use of nondisclosure agreements for licensees and customers, and the use of security systems.

C. Customer list cases.

Customers list information is frequently the focus of trade secret cases. In these cases, the liability of a defendant most often turns upon the question of whether defendants' position of new accounts was the result of his or her misappropriation of trade secrets. Typically, a defendant in these types of cases argues that the information claimed to be secret can be located in public records or other available sources. Theses sources often include telephone directories and industry publications. A list of customers of companies in a particular industry may not be generally known to the public. However, if those customers are known or readily available to other persons in the industry and the compilation process is neither sophisticated nor time consuming, a company's customer list may not be a protectable trade secret.(2)

On the other hand, if customers of a company are not readily recognizable or identifiable and the process of identifying potential customers is expensive and time consuming, a customer list is more likely to be considered a trade secret.(3)

How a trade secret is defined may be critically important in the determination of the case. For example, in a case pitting a temporary help agency against former employees to enjoin them from soliciting customers and/or utilizing or disclosing certain confidential information concerning those customers, the defendants argued that the agency's customer list was not a protectable trade secret because companies who may use temporary help could be accessed through many different public records sources. However, the Court held that if a customer list is acquired by lengthy and expensive efforts which, from a negative viewpoint, indicate those entities that have not subscribed to that company's services, it deserves protection as a trade secret. Even if customer names could be found in telephone or trade directories, such public sources "would not disclose the persons who ultimately made up the list of plaintiff's customers," which constitute confidential information.(4)

D. Noncompetition agreements.

Former employees who form a competing business have often executed employment agreements with their former employer which include noncompete clauses. However, those noncompete clauses are subject to the prohibitions in California Business & Professions Code § 16600, which provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." As such, courts prohibit the enforcement of the former employer's noncompete clause except as is necessary to protect trade secrets. A traffic reporting business was unable to restrain a competitor for allegedly inducing their employees to violate noncompetition clauses of their employment agreements because it was unable to prove that it had any trade secrets in their "very strict and particular requirements regarding the quality, sound and personality of the anchors reporting over its airways . . . "(5) Exceptions to the prohibitions of Business & Professions Code § 16600 include agreements which involve the sale of a business.(6)

E. Can employees use their memories to compete?

Former employees frequently argue that they have the right to take and utilize, from their former employment, all information that could be memorized. There are legal authorities in support of and in opposition to this proposition. Some cases have upheld the right of the employees to do business with a former employer's customers with whom one became personally acquainted and developed a business relationship while formerly employed.(7) Courts have stated "Equity has no power to compel a man who changes employers to wipe clean the slate of his memory."(8) On the other hand, cases have held that, in order to do business, if an employer is forced to impart such select information to certain key employees, the information does not become part of the employees' knowledge which they may freely use at some later time but remains the exclusive property of the employer.(9)

F. Conclusion

Trade secret and unfair competition cases are often vigorously litigated. The outcome of these cases can turn upon what parties consider to be small details.

Footnotes

1. Electro Craft Corp. vs. Controlled Motion, Inc., 332 MW2d 890, 220 U.S.P.Q 811(Minn. 1983).

2. In American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal. App. 3d 1318, 1326, the Court determined that lists of customers who operate manufacturing concerns and who need shipping supplies to ship their products to market was not a protectable trade secret.

3. In Abba Rubber Company v. Seaquist (1991) 235 Cal. App. 3d 1, 20-21, the Court held that plaintiff's customer list of rubber products purchasers were the result of "a winnowing down from a generalized list of companies which may utilize rubber rollers or rubber molded products to a valuable and discrete listing of a more limited number of existing and potential customers. [Those lists] are an enormously valuable resource to [the plaintiff], as well as to any competitor. Indeed, any competitor . . . could not duplicate [those lists] without similar years of effort and expense."

4. Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal. App. 3d 1278, 1288.

5. Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal. App. 4th 853, 862-863.

6. Business & Professions Code § 16601

7. Avocado Sales Co. v. Wyse (1932) 122 Cal. App. 627, 634; Theodore v. Williams (1919) 44 Cal. App. 34, 37-39.

8. Avocado Sales Co. v. Wyse (1932) 122 Cal. App. 627, 634; Peerless Pattern Co. v. Pictorial Review Co. (1911) 147 App. Div. 715, 717, 132 N.Y.S. 37, 39.

9. Klamath-Orleans Lumber, Inc. v. Miller (1978) 87 Cal. App. 3d 458, 465; Empire Steam Laundry v. Lozier (1913) 165 Cal. 95, 102; Alex Foods, Inc. v. Metcalfe (1955) 137 Cal. App. 2d 415, 427.

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