Trade Secrets: What Business Owners Should Know about Trade Secret Misappropriation and Available Remedies

 

trade-secret1Most all businesses have trade secrets. However, management is often unsure of what exactly constitutes a trade secret, and how the law provides a remedy for misappropriation of trade secrets. It is beneficial for any business manager to understand the nature of trade secrets, as well as what legal recourse is available if a trade secret is misappropriated.

Trade secrets are defined in California Civil Code section 3426.1(d) as “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 under the circumstances to maintain its secrecy.”

In plain terms, a trade secret is a valuable piece of intellectual property that the owner has developed and desires to protect. A trade secret can be as simple as a customer list developed for a certain industry. If an employee or competitor were to take that customer list without consent and then use it for financial gain, then that would be a trade secret misappropriation.

 

Legal Background

Modern trade secret law was modeled in most jurisdictions after the Uniform Trade Secrets Act (“UTSA”), which was published in 1979 by the Uniform Law Commission. The UTSA was amended in 1985, and has been enacted by 47 states, including California. In California, the UTSA has been codified in Civil Code Section 3426 et seq. as the California Uniform Trade Secrets Act (“CUTSA”).

Under the CUTSA “Misappropriation” means:

    • (1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
    • (2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
      • (A) Used improper means to acquire knowledge of the trade secret; or
      • (B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:
        • (i) Derived from or through a person who had utilized improper means to acquire it;
        • (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
        • (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
    • (C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

 

The above statutory misappropriation test has many components that should be thoroughly analyzed by an attorney. Nevertheless, the statute does provide a fairly clear framework for determining a misappropriation. A misappropriation falling within the statutory framework is unlawful, and businesses should seriously consider legal action for any significant misappropriation.

 

Recourse for Misappropriation of Trade Secrets

Jack
JACK HOLCOMB
Email: [email protected]
Phone: (310) 551 – 0600
Practice Areas
Business Litigation
Entertainment Litigation
Contractual Disputes
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California law generally provides for four remedies for trade secret misappropriation:

    • (1) Damages: A business that has suffered a trade secret violation is entitled to recover economic damages in court. These damages consist of not only the losses of the plaintiff, but also the profits of the defendant flowing from the misappropriation. Further, the plaintiff is entitled to recover punitive damages if it can be proven that the defendant misappropriated the trade secrets in a malicious or willful manner. Civil Code Section 3426.3 provides for punitive damages up to twice the amount of the actual damages suffered.
    • (2) Attorney’s Fees: In addition to damages, a plaintiff is entitled to its attorney’s fees if the plaintiff proves that the trade secrets were misappropriated in a malicious or willful manner. This certainly provides a sword for the plaintiff on the fence about pursuing a misappropriation action in court.
    • (3) Injunction: Courts also have the power to enjoin defendants from using wrongfully misappropriated trade secrets under Civil Code Section 3426.2. This can be especially important for a business that is concerned that the misappropriation be stopped immediately. Once a complaint is filed, the plaintiff can immediately move for a temporary restraining order and temporary injunction.
    • (4) Criminal Penalties: Finally, it is useful to know that California also imposes criminal penalties for intentional stealing of trade secrets under Penal Code sections 499c and 502. Although any threat of criminal reporting in an attempt to settle a dispute could amount to extortion, reporting the misappropriation to the police is an additional consideration.

 

Conclusion

In summary, trade secrets are valuable intellectual property and the law provides businesses with remedies when there has been a wrongful misappropriation. If you believe a trade secret has been misappropriated, it is best to contact an attorney immediately. The attorneys at Kramer Holcomb Sheik are experienced in prosecuting and defending trade secret lawsuits, and can provide you with matter specific advice in moving forward.