A trade secret is a piece of confidential or proprietary information – including a practice, formula, method, program, technique, customer list, or process – of a company that is not known publicly and that a company takes reasonable steps to keep secret. Trade secrets are a form of intellectual property protected under common law, contract law, and statutory law.
Like other forms of intellectual property (IP), trade secrets contribute to a company’s competitive edge and valuation. Trade secret law aims to protect the innovation involved in the development of trade secrets.
Unlike other types of IP such as trademarks, copyright, and patents, there is no registration process for protecting trade secrets. Most often, this information is protected through contracts and company policies such as non-disclosure clauses in employment contracts and independent contractor agreements, internal company policies about use and handling of sensitive information, terms and conditions of purchase, and stand-alone non-disclosure agreements (NDAs).
However, California law disfavors certain kinds of anti-competitive clauses in contracts (such as clauses prohibiting an employee from working for a competitor after leaving employment). Therefore, California businesses should seek legal counsel to determine the most appropriate way to protect their trade secrets.
Similarly, individuals accused criminally or civilly of trade secret theft should consult an attorney who is knowledgeable and experienced in this area of the law to determine the best defenses against actual or threatened claims against them.
Trade secret theft occurs when confidential and proprietary information of a company is knowingly disclosed or used by someone without authorization for the financial benefit of someone other than the owner(s) of the trade secret.
An area of concern for many Bay Area, Silicon Valley, and tech companies throughout California is the theft of trade secrets by employees, independent contractors, consultants, or others who have access to highly proprietary information. Where a particular process, technique, method, or practice may not be protectable under patent or copyright law, technology companies rely on trade secret law to safeguard sensitive information from disclosure to competitors and the public.
Employees with access to such proprietary information may commit trade secret theft by utilizing the information they have access to for their personal benefit, or by disclosing that information to others. Such allegations can have significant professional implications, in addition to legal and financial consequences.
An analysis of trade secret theft, particularly in the form of customer or client lists, is different in California than other jurisdictions because California law prohibits any restraint on trade in a contract unless an exception under California’s Business and Professions Code applies.
When it comes to the misappropriation of customer or client lists, the proper avenue for relief is through a tort claim rather than a breach of contract claim. Under California law, provisions in an employment contract or independent contractor agreement that prohibit solicitation of clients or customers will not be useful in stopping the disclosure or use of the list. However, if the company can prove that the customer list constituted a trade secret that has been improperly acquired or non-consensually used or disclosed, then the company may seek relief in a tort action.
If a plaintiff is successful in proving each element of a trade secret theft claim, several remedies may be available to the trade secret owner(s) including:
Theft of trade secrets is a federal criminal offense under the Economic Espionage Act, which can result in fines of up to $250,000 and incarceration for up to ten years. It may also be punishable under the Defend Trade Secrets Act (DTSA), which amended the Economic Espionage Act and made it easier for companies to bring a civil claim for damages in federal court. The DTSA prohibits the taking or copying of trade secrets without authorization and the knowing receipt of stolen trade secrets. As a result, additional consequences to trade secret theft include a judgment against the defendant for monetary damages in a civil tort claim.
Whether you have suffered from the theft of your trade secrets or you have been accused of trade secret theft (including in connection with switching employment from one company to a competing company), it is important to know the potential legal defenses that may be relevant to these disputes.
Potential defenses to trade secret theft may include:
At Delahunty & Edelman LLP, we represent both business owners who have suffered from the theft or misappropriation of their trade secrets, as well as those accused of trade secret theft. With years of experience and a depth of knowledge in handling trade secret litigation, our attorneys are prepared to efficiently resolve these matters when appropriate. When negotiation or settlement is not in our client’s best interest or litigation is unavoidable, we are equipped to pursue an aggressive litigation strategy to protect our clients’ legal, financial, and professional interests.