What is a Trade Secret?

Claims of trade secret misappropriation involving misuse of a customer list are frequently litigated. Often a plaintiff claims its customer list is a trade secret because the company has spent a lot of time, effort, and money in compiling a list of customers who have a proclivity to purchase the company's unique product(s). The defendant, on the other hand, will argue that the customer list is not a trade secret because the same information can easily be obtained from the internet and/or other publicly available sources such as the Yellow Pages. To make matters worse, there is no bright line rule as to what constitutes a trade secret. This is why California courts look at customer list – trade secret claims on a case by case basis. To assist courts in making this determination, the California Legislature has enacted the Uniform Trade Secret Act that is codified in Civil Code § 3426.1(d) (“UTSA”).

The first prong of the UTSA states that the information at issue must have independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use. The term "independent economic value" means that the secrecy of the information provides a substantial business advantage. And the value must be more than trivial to the owner. In addition to a defense of general knowledge, if the information at issue is readily ascertainable by proper means -- even if not generally known-- it does not have any independent value.

In addition to the foregoing, courts have found that: (1) a list identifying buyers of products that are inherently difficult to sell merits protection; (2) a list containing specialized information on each customer such as discounts offered and purchase history is more likely to be protected as trade secret; and (3) a list is more likely to be deemed trade secret if the customer’s purchase decisions are influenced primarily by its special needs or susceptibilities, as opposed to factors such as price, quality, reliable delivery and efficient service.

Finally, whether or not a customer list is a trade secret requires an objective analysis because a party's belief that something is a trade secret is not dispositive. Nor is a contract labeling information as a trade secret because a contract cannot make a trade secret where none exists under the law.

If you are involved in a dispute concerning misappropriation of trade secrets, it is vital to have the experienced business litigation attorneys of Fisher & Talwar on your side. Available remedies for trade secret misappropriation include: injunction, exemplary damages, attorney fees and costs, compensatory damages and payment of royalties. Attorneys at Fisher & Talwar are skilled in litigating misappropriation of trade secret claims. Contact Los Angeles trade secret attorneys at Fisher & Talwar at 213-891-0777 or vt@fishertalwar.com for immediate assistance.

Are Non-Compete Agreements Enforceable In California?

Often, employment agreements contain some form of a covenant to prevent an employee from working for a competitor after he leaves his current employer. Such agreements generally contain the following type of language:

Employee will not render services, directly or indirectly, for a period of one year after separation of employment with a competitor of a former employer.

The enforceability of these types of agreements depends on the nature of the information that the employer is trying to protect. Unlike many other states, in California these types of non-compete or anti-solicitation agreements are generally void and not enforceable. This is true even if the non-compete agreement is narrowly tailored, i.e., limited in geographic location and time. This is because California Business and Professions Code §16600 states: "Except as provided in this Chapter, every contract by which anyone is restrained from engaging in lawful profession, trade, or business of any kind is to that extent void." However, the Business & Professions Code provides an exception to this general rule where the (a) non-compete agreement is in the context of dissolution of a partnership/limited liability company; or (b) the sale of the goodwill of a business.

As one court recently stated: "California courts have consistently declared section 16600 is an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice…[and]…the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.” D'sa v. Playhut Inc. (2000) 85 Cal.App.4th 927. This means that even if an employee has agreed in writing not to compete, he has a right to work with competitors of the former employer and even transact business with customers of the former employer.

There is, however, a third exception to the above-referenced rule that arises in the context of protecting trade secrets. California courts have routinely held that a non-compete agreement is valid and enforceable if it is necessary to protect trade secrets of the former employer. It is also important to understand that even if an employee has not signed a non-compete agreement, he or she may still be enjoined from working for a competitor if the employee is disclosing or using the trade secrets of the former employer. Thus, a written and fully executed non-compete agreement is not necessary to prevent an employee from working for a competitor if the employee is using trade secrets of the former employer. But, in the context of protecting trade secrets, a non-compete agreement is enforceable and generally strengthens an employer's legal position in the event a lawsuit is filed.

In sum, the enforceability of non-compete agreements depends on the underlying interest sought to be protected. If the employer is able to establish that the information is a legitimate trade secret of the company, the court will likely grant an injunction preventing the former employee and his or her new employer from misappropriating the trade secrets.

If you are involved in a trade secrets misappropriation claim it is vital to have the experienced business litigation attorneys of Fisher & Talwar on your side. Attorneys at Fisher & Talwar are skilled in litigating misappropriation of trade secret claims. Contact Los Angeles trade secret attorneys at Fisher & Talwar at 213-891-0777 or vt@fishertalwar.com for immediate assistance.

Los Angeles Business Law Blog

California Uniform Trade Secret Act (UTSA) Preempts common law unfair competition claims as well as claims based on Business and Professions Code § 17200.

In the recent case of K.C. Multimedia, Inc. v. Bank of America Technology & Operations Inc. (2009) 171 Cal.App.4th 939, California Court of Appeal held that UTSA preempts common law claims and statutory unfair competition claims that are based on the same nucleus of facts as the misappropriation of trade secret claim. This holding has brought California state law in line with federal court cases that have applied California law.

In K.C. Multimedia, Inc., plaintiff claimed defendants misappropriated its technology that enabled defendants' end-users to access personal bank account information. The complaint asserted causes of action for trade secret misappropriation, breach of confidence, conversion, breach of contract, tortuous interference with contract and unfair competition. However, prior to trial, the trial court dismissed three causes of action -- breach of confidence, unfair competition, interference with contract -- on the grounds they were preempted by UTSA. Plaintiff appealed the preemption ruling, claiming it was contrary to California law.

The Court of Appeal affirmed the lower court’s ruling and held that the comprehensive nature and breadth of UTSA suggests a legislative intent to preempt other claims based on trade secret misappropriation. The Court of Appeal began its analysis by highlighting the general principles that underpin the statutory preemption doctrine and stated:

“The general rule is that statutes do not supplant the common law unless it appears that the Legislature intended to cover the entire subject or, in other words, to occupy the field. General and comprehensive legislation, where course of conduct, parties, things affected, limitations and exceptions are minutely described, indicates a legislative intent that the statute should totally supersede and replace the common law dealing with the subject matter."

Against this backdrop, the Court of Appeal examined the UTSA codified in §§3426-3426.11 and noted:

“Among other things, CUTSA defines key terms, provides various forms of relief, spells out methods of preserving the secrecy of trade secrets, and sets forth the limitations period. The stated purpose of UTSA is to provide unitary definitions of trade secret and trade secret misappropriation, and a single statute of limitations for the various property, quasi-contractual, and violation of fiduciary relationship theories of noncontractual liabilities utilized at common law. The Uniform Act also codifies the results of the better reasoned cases concerning the remedies for trade secret misappropriation.”

The court then focused on the §3426.7 and observed the following:

"CUTSA includes a specific provision concerning preemption. That provision, section 3426.7, reads in pertinent part as follows: (a) Except as otherwise expressly provided, this title does not supersede any statute relating to misappropriation of a trade secret, or any statute otherwise regulating trade secret. (b) This title does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of trade secret, or (3) criminal remedies, whether or not based upon misappropriation of trade secret. Section 3426.7 thus expressly allows contractual and criminal remedies, whether or not based on trade secret misappropriation and implicitly preempts alternative civil remedies based on trade secret misappropriation. At the same time, § 3426.7 implicitly preempts alternative civil remedies based on trade secret misappropriation.’”

Based on the foregoing, the Court of Appeal concluded that §3426.7(b) “would appear to be rendered meaningless if, in fact, claims which are based on trade secret misappropriation are not preempted by the state's statutory scheme.” Id. at 958.

In K.C. Multimedia, Inc. v. Bank of America Technology & Operations Inc., California Court of Appeal followed in the footsteps of recent federal courts cases (Cacique, Inc. v. Robet Reiser & Co. Inc. (9^th Cir. 1999) 169 F.3d 619, 626 Accuimage Diagnostic Corp v. Terarecon, Inc. (ND CA 2003) 260 F.Supp.2d 941, 953-954; First Advantage Background Services Crop. v. PrivateEyes (ND CA 2009) 569 F.Supp.2d 929; and Digital Envoy, Inc. v. Google, Inc. (ND CA 2005) 370 F.Supp.2d 1025, 1034-1035) in holding that the Uniform Trade Secret Act preempts common law claims and statutory unfair competition claims that are based on the same nucleus of facts as the misappropriation of trade secret claim.

If you are involved in a dispute concerning trade secrets it is vital to have the experienced business litigation attorneys of Fisher & Talwar on your side. Attorneys at Fisher & Talwar are skilled in litigating misappropriation of trade secret claims. Contact Los Angeles trade secret attorneys at Fisher & Talwar at 213-891-0777 or vt@fishertalwar.com for immediate assistance.