ICC
21st Annual Seminar
Trade Secret Protection
Collides With California's
Right of Mobility
March 15, 2002
John C. Fox
FENWICK & WEST LLP
FENWICK & WEST LLP
The Conundrum
(1) California employees enjoy free mobility of
employment.
(2) Employees sometimes take and use their former
employer's trade secrets and are often perceived to
be doing so (whether correctly or not).
(3) Covenants not to compete are largely illegal in
California, thus often permitting a departing
employee to position himself/herself with a direct
market competitor.
2
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What is a Trade Secret? Common Sense Approach [1]
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3
"Would I care if this were disclosed to my main
competitor?"
"Would my main competitor care if this were
disclosed to me?"
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What is a Trade Secret?
UTSA [1-2]
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4
Information
Economic value
Not generally known
Not readily ascertainable
(by proper means)
Treated as secret
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Technical Information [2-3]
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Formulas
Plans, Designs or Patterns
Processes
Methods and Techniques
Negative Information
Software
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Business Information [3-4]
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Financial Information
Cost and Pricing
Internal Market Analyses or
Forecasts
Customer Lists
Unannounced Business
Relationships
Business Opportunities - Acquisitions
Marketing or Advertising Plans
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Personnel Information [3-4]
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Key Personnel
Compensation Plans
Receptivity to Solicitation
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How Can You Get Into Trouble
With Trade Secrets? [13-16]
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8
Acquisition
Use
Disclosure
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Wrongful Acquisition of
a Trade Secret [14]
The Key Questions to Ask:
 How Did I Get the Information?
 From Whom Did I Get It?
 How Did He/She Get It?
 Does the Person Offering the
Information To Me Have the
Right to Give It To Me?
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Wrongful Use of a Trade Secret
[14-15]
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Use Without Consent of the Owner; and
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Obtained using improper means; or
Obtained in violation of obligation not to disclose; or
Obtained by you under agreement or obligation not
to use the way you are using; or
Obtained by you knowing it was disclosed by
accident
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Wrongful Disclosure
of a Trade Secret [15-16]
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Disclosure Without Consent of the Owner; and
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Obtained using improper means and/or;
Obtained in violation of obligation not to disclose
and/or;
Obtained by you under agreement or obligation not
to use the way you are using and/or;
Obtained by you knowing it was
disclosed by accident.
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Protection of Trade Secrets [18]
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Trade Secrets Are Fragile
and Easily Lost
Confidential Information Not
Automatically a Trade Secret
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Major Sources Of Risk [19-20]
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Mobility of Labor Force
Physical Security
R&D "Cowboys"
Publishing Information - Journals
and Conferences
Personal Computers
E-mail
Company Trash
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The Covenant Not to
Compete Problem [29]
California Business and Professions Code
§16600 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."
14
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Statutory Exceptions
to B&P §16600 [29]
Covenants not to compete are lawful when
entered into as part of:
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The sale of the goodwill of a business;
The sale by a shareholder of all his or her shares in a
corporation, or a sale by the corporation of all or
substantially all of its assets, together with the goodwill;
or
The dissolution of a partnership, dissociation of a
partner from a partnership, or sale or other disposition
of a partner’s interest in a partnership.*
* See Cal. Bus. & Prof. Code § 16601 and 16602.
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The Downside to Overreaching
Covenants Not to Compete [32-33]
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Walia v. Aetna, Inc., 93 Cal.App.4th 1213
(11/12/01) (Rev. granted in Cal. Sup. Ct. 2/27/02)
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$180,000 Compensatory Damage Award
$1,080,000 Punitive Damages (SF) Jury Award
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The Race to the Courthouse [30-31]
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The Application Group, Inc. v. The Hunter Group, Inc.
61 Cal.App.4th 881 (1998), review denied, 1998
Cal.LEXIS 2968 (1998)
Valid Non-Competition Agreement between Maryland
employer and its employee.
Employee joins California company – does §16600
trump the Maryland Non-Competition Agreement?
Comity Analysis: Policies behind §16600 outweigh
Maryland employer’s right to enforce contractual
agreement not to compete.
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Is There Still a Race
to the Courthouse? [31]
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Advanced Bionics v. Medtronic, 87 Cal.App.4th
1235 (2001), review granted, 2001 Cal.LEXIS
3764 (2001)
Dueling Injunctions:
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California first (former employer enjoined)
Minnesota second (former employee enjoined)
What is a well intentioned California employer to
do?
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Protecting Your Company's
Trade Secrets [35-36]
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On Terminating Employees:
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Exit Interviews and Audits
Reaffirmation of Confidentiality
Agreements
Demand Letters
Searching Departing Employee's
Files, Computer, E-mail Box
"Inevitable Disclosure"
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Protecting Your Company From
Trade Secret Liability [51-58]
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Have a written policy against possession or
use of others'
trade secrets
Enforce it
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When Interviewing Potential
Employees [51-52]
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Resist the impulse to pump for
information
Explain your trade secret policy
Ask about confidentiality and
non-competition agreements
with prior employers
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Upon Hiring A New Employee
[52-54]
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Risk analysis
"Woodshed" him/her about bringing nothing
from former employers
Have signed agreement that new employee
has brought nothing
Counsel new employee, as necessary, on
conduct in leaving former employer
Provide assurances to former employer in
some cases
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Once The New Employee
Is On Board [55-57]
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A second "woodshedding"
may be necessary
If you "raid" competitor's employees, are you
sure you are not relying on human resources
trade secrets to do so?
"Clean room" may be
advisable, in some cases
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When You Find Another Company's
Secrets Among Yours [57]
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Isolate and contain it
Investigate
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Remedial Steps to Consider
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Source of information
Extent of contamination
Discipline or termination of offending employees?
Isolate and keep; destroy; or return information?
Confession and negotiation with trade secret
owner?
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Remedies for Trade Secret
Misappropriation [58-62]
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Civil Injunctive Relief
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Damages
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Enjoin use of the secrets
Compel return of materials and information
Compensatory
Punitive
Attorneys' Fees and Costs
Criminal Prosecution
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Civil Litigation [60-62]
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Reasons to consider
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Reasons for caution
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Need to protect
Send a message
Stop others
Swift strong action may lead to a
negotiated settlement
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Cost
Generally cannot prevent someone
from working for a competitor
Risks of cross-complaint
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Criminal Prosecution [62-66]
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Scope of criminal statute is narrower
Impact on civil action where civil action also
brought
Protecting your confidential information is more
difficult
Victim cannot control scope,
timing or conduct of
prosecution
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