By Mark Punzalan
Mark Punzalan is an Intellectual Property and Commercial Litigation attorney who advises emerging and established companies in sensitive legal areas such as trade secret misappropriation, trademark disputes, unfair business practices, and data privacy. Mr. Punzalan is the Principal of Punzalan Law, P.C., a Silicon Valley law firm whose practice areas include Intellectual Property, Securities Law, and Whistleblower Law.
Imagine you are a business attorney representing a company that seeks your legal advice in the following scenarios.
Scenario A: Your client wants to hire certain employees of a competing business. The client merely wants to hire talented individuals in the same industry, and has no intention of learning or using the competitor's proprietary and confidential information. However, your client wants to prepare itself in case the competitor accuses your client of any wrongdoing. How do you advise your client?
Scenario B: After hiring those employees, your client receives a threatening cease and desist letter from the competing business. The letter alleges that in hiring the competitor's employees, your client has engaged in the misappropriation of the competitor's trade secrets. Your client asks for your advice on how to proceed.
In both scenarios, the attorney needs an understanding of trade secrets laws to advise the business client appropriately. While trade secrets issues often surround technology-related companies, businesses in any industry can get embroiled in a trade secret dispute. Indeed, nearly every business has some valuable information that it wishes to keep secret from the public—such as client lists or marketing plans—and these pieces of information may be subject to trade secret protection.
However, many companies fail to consider trade secrets issues until they receive the cease and desist letter described above in Scenario B. Businesspeople from sole proprietors to C-suite-level executives1often have little understanding as to what makes a piece of information a trade secret, how to protect trade secrets, or how to prevent, or protect against, claims of trade secret misappropriation.
In today's competitive business world, companies often receive letters from competing businesses threatening a trade secret lawsuit when perhaps no misappropriation has actually occurred. The letter may be nothing more than an attempt to prevent the poaching of employees and to inhibit competition in that particular industry. California has a strong public policy of encouraging employee mobility among the workforce.2 For this reason, agreements not to compete are generally void subject certain exceptions.3 Moreover, California has a strong public policy in favor of open competition.4 Meritless trade secret accusations can undermine both competition and employee mobility in the workforce.
Over the years, trade secrets lawsuits have become increasingly complex, costly, and time-consuming. These cases also often include an emotional component not seen in many other types of business disputes because feelings of betrayal and anger often cloud the merits of the actual dispute. Although a trade secrets misappropriations lawsuit can never be fully prevented, companies that proactively implement appropriate policies and procedures can reduce the chances of facing a long and costly trade secrets misappropriation lawsuit.
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Generally, a trade secret refers to a "formula, pattern, compilation, program, device, method, technique, or process" or other information that:
- Is not generally known within the particular industry or the public;
- Is economically valuable because it is not disclosed to the public; and
- Is subject to reasonable efforts to maintain its secrecy such that its existence or content is not revealed.5
Trade secrets case law provides many examples of the types of information can be considered trade secrets, and the list is always evolving. Most trade secrets disputes have focused on the types of trade secrets associated with manufacturing and technology companies, such as manufacturing methods6 and software source code.7 One of the most famous trade secret examples is The Coca-Cola Company's formula for its eponymous soda, a formula that the company has protected for decades and has led to billions of dollars in revenue.8
Non-technology companies also usually have some form of information deemed to constitute trade secrets. For instance, courts have found that customer and supplier lists9 and financial and marketing plans10 may be protectable as trade secrets. If a company has expended time and effort to identify customers with particular needs or characteristics, courts have held that such customer information can be protectable as a trade secret.11 Generally, the more difficult it is to obtain the information and the more time and resources the employer has expended to gather the information, the more likely a court is to deem the customer information a trade secret.12 Courts, however, are reluctant to protect customer lists if the information is "readily ascertainable" through public sources.13
However, trade secret law does not always provide easy answers, and courts generally review each piece of information on a case-by-case basis. Conceivably, any piece of business data that provides economic value by being kept secret could be protectable under trade secret laws. A recent case even suggests that a person's LinkedIn contacts (if kept private) could also be considered a trade secret.14 Unlike other types of Intellectual Property such as patents, copyrights, and trademarks, there is no formal registration process for trade secrets, and this lack of clarity may increase the potential for disputes.
The theft or other misuse of trade secrets is commonly referred to as misappropriation. More specifically, misappropriation generally refers to the acquisition of another person or entity's trade secrets by someone who knows or has reason to know that the trade secret was acquired...
