Santa Barbara Business Litigation Alert�Protect Your Trade Secrets

With the improving California economy, we are seeing more employee mobility across all industries. While that can be a good thing for employees, certain types of businesses are particularly vulnerable to potential risks associated with employees jumping to the competition. A primary risk is the taking of trade secrets from one employer to another.

While your company may have had the foresight to get its key employees to sign a nondisclosure agreement, what happens if the employee simply ignores that and takes his proprietary knowledge to the competition?

It is increasingly critical for companies, especially those in the technology, software and manufacturing spaces, to have at least a basic understanding of their rights under California law in the event they find themselves in this situation. The problem requires an immediate and aggressive response.

The Basics

As a general rules, most trade secret disputes arise from an employee taking trade secrets from a former employer, or a technology venture gone bad. Trade secrets often comprise customer lists, sensitive marketing information, software, techniques, processes, and other business information that provides a company with a business advantage.

Information is more likely to be considered a trade secret if it is:

• not known outside of the business;
• known only by employees and others involved in the business;
• subject to reasonable measures to guard its secrecy;
• valuable, and
• difficult for others to properly acquire or duplicate on their own.

California is one of the many states that have adopted the Uniform Trade Secrets Act. California’s trade secret law can be found at California Civil Code Section 3426 through 3426.11.

California is unique in that its laws expressly establish that the employer owns trade secrets created by an employee. (California Labor Code Section 2860). However, a California employer does not own trade secrets created on an employee's own time without the use of employee materials.  This is yet another reason why it is strongly recommended to get a written agreement in place with your employees that outlines “what is yours and what is mine.”

What is considered “misappropriation” under California law?

California’s version of the Uniform Trade Secrets Act refers to the theft of trade secrets as misappropriation. Under California law, "misappropriation” refers to the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means – typically theft, misrepresentation, or breach of a duty to maintain secrecy.

Under California law, when does the competitor have “reason to know” that it is unlawfully utilizing a trade secret?

California prohibits use of trade secrets by a company that “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge—to be distinguished from what is commonly referred to as “actual knowledge”. This is an exacting standard. Under this requirement, a California company that is unaware it possessed stolen trade secrets can still be prosecuted under California law if it should have known such secrets were in its possession.

What are the penalties for misappropriation under California law?

Understanding the penalties involved highlights why fast action is critical. Under California law, theft of a trade secret can be prevented from disclosure by the issuance of an injunction by the Court. An injunction is available in response not only to an actual misappropriation, but also to a threatened misappropriation.

The injunction may be terminated when the trade secret ceases to exist. But the termination of the trade secret does not necessarily mean the termination of the injunction. Typically, the injunction may be continued for an additional period of time in order to eliminate any commercial advantage that otherwise would be derived from the misappropriation

What about a monetary recovery? A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits acquired by the theft. This is commonly referred to as “unjust enrichment” under California law.

In particularly horrific situations, California law entitles the aggrieved party to punitive damages in an amount of up to twice the amount of any compensatory award. The aggrieved party may also be entitled to recover the attorney fees it has had to incur, depending upon how malicious the conduct is found to be.

Conclusion

The startup, the established company, the tech company with the unique idea, the software company with the proprietary product—whatever your business, and whatever scale it currently finds itself, you’ve worked incredibly hard to find, establish and grow your niche. While you cannot prevent someone from trying to take your intellectual property to a competitor, you can be prepared to act immediately if it happens to you. Know your legal rights and options before it happens so you can be ready to immediately respond.