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Trade Secret Disputes: What Qualifies as a Trade Secret?

William B. Hanley Feb. 12, 2021

The formula for Coca-Cola is reportedly locked in a vault in the company’s headquarters in Atlanta, Georgia. Now, that makes it a trade secret, right?

Actually, trade secrets can be less zealously guarded than the Coke recipe but still qualify as protected assets.  Devices, software, algorithms, manufacturing techniques, customer lists, even recipes can be legally protected trade secrets in California, provided they meet certain criteria.

If you’re involved in a trade secret dispute and your business is located in or around Irvine or Newport Beach, California, contact William B. Hanley, Attorney at Law.

What Is a Trade Secret in the state of California?

Along with many states, California has adopted the Uniform Trade Secrets Act (UTSA), which was compiled by legal experts as a model code. The California version, adopted in 1984, contains its own unique aspects, but it largely follows the UTSA.

The California code starts by defining a trade secret as “information,” but qualifies this definition by specifying this information must be “a formula, pattern, compilation, program, device, method, technique, or process” that:

  • Derives independent economic value from not being generally known by others and is not reasonably and independently ascertainable by another party

  • Is the subject of “reasonable efforts” to maintain its secrecy

Note here the code’s use of the word “information.” Information by its very nature may be routinely used and accessible by a company’s employees and outside contractors, making it vulnerable to theft and disclosure for others’ benefit. Therefore, this information must be the focus of “reasonable efforts” to safeguard it to qualify as a trade secret.

Reasonable efforts must go beyond a mere desire to keep the information confidential, and following various court rulings, such efforts include one or more of the following:

  • Requiring employees to sign a confidentiality agreement

  • Advising employees of the trade secret’s existence and confidentiality

  • Limiting access to a need-to-know basis

  • Maintaining customer lists and other proprietary information in a secure database

  • Keeping the trade secret under lock and key (where possible)

Misappropriation of Trade Secrets

Rather than using the term “theft,” California law views the illicit acquisition, use, or disclosure of a trade secret as misappropriation. Illegal acquisition is by definition the obtaining of a trade secret through “improper means.”

Under Civil Code Section 3426.1(a), improper means include "theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy or espionage through electronic or other means." Use and disclosure after the acquisition by improper means are also considered misappropriation.

Misappropriation by Former Employees

There’s an 80% chance that, if your company’s trade secret has been misappropriated, a former employee is somewhere in the chain of acquisition, use, and/or disclosure.

Departed employees charged with misappropriation have often argued that it is impossible to “wipe clean” their memories from employing the trade secret on their former job. They also have argued further that, by human nature, it is inevitable that a trade secret lodged in memory will be revealed. This has been termed the “inevitable disclosure doctrine.”

The California UTSA recognizes employees’ memories as depositories of trade secrets that can be misappropriated. Thus, both of the above arguments have been basically rendered null by the UTSA and subsequent court interpretations.

Penalties for Misappropriation

Under California law, a company cannot use another’s trade secret if it merely “has reason to know” that the material constitutes a trade secret. This is the principle known as constructive knowledge, as opposed to actual knowledge.

The usual penalty is an injunction to stop the use of the trade secret, though the injunction sometimes may include a provision to pay royalties based on the use of the trade secret. The plaintiff can also seek compensation for financial losses due to the misappropriation of their trade secret. In extreme cases, the court may also double the damages or make the trade secret violator pay attorneys’ fees.

How an Attorney Can Help

Unlike patents, trademarks, and copyrights, no government agency registers and protects trade secrets. That responsibility lies with the company that develops and employs the trade secret.

In a trade secret misappropriation lawsuit, the company with the trade secret can be challenged on different fronts. For instance, was the trade secret really that hard to duplicate on one’s own? Or, did the owner of the trade secret really make “reasonable efforts” to protect it?

Protecting a trade secret is a proactive process, especially since the California Court of Appeal ruled in 2018 that confidentiality and non-solicitation pacts between employer and employee are not enforceable. In the same case, AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the company’s customer list was also deemed not protectable as a trade secret because it was not maintained on a proprietary database.

Trade Secrets Attorney Serving Irvine, California

If your company is involved in a trade secret dispute in Irvine, or anywhere in Orange, Los Angeles, or San Diego counties, contact William B. Hanley, Attorney at Law. Attorney William B. Hanley has practiced business litigation law in California since 1974. He will meet with you, discuss all the details, and work with you on the best strategy going forward to stop trade secret misappropriation and pursue fair compensation.