A recent California Court of Appeal decision reaffirmed what those who practice trade secret law already knew, but do not always focus upon, in trade secret litigation –the purported trade secret cannot qualify for protection under California’s trade secret statute unless there is a showing that the information has a demonstrated economic value from not being known to third parties who can obtain economic value from its disclosure or use.

The Court’s decision appears to add an additional wrinkle to this proposition by suggesting that to show independent economic value, one must also demonstrate that there is a discrete advantage to third parties who could utilize the information to the disadvantage of the original owner, thereby creating economic value in its secrecy. Secrecy and usefulness alone will not establish independent economic value.

In Yield Dynamics, Inc. v. Tea Systems Corp., 154 Cal. App. 4th 547 (2007), the California Court of Appeal for the Sixth Appellate District upheld the trial court’s decision granting a former employee’s motion for nonsuit and dismissing a software design company’s trade secret misappropriation claim on the basis that it had failed to demonstrate that segments of its computer source code had independent economic value.

The text of the Court’s entire opinion can be located at this link http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=6&doc_id=286480&doc_no=H029604

California defines a trade secret under the Uniform Trade Secrets Act as information that “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 it disclosure or use, and is subject to efforts that are reasonable under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d)(1), (2) (2007).

On appeal, the software design company argued that testimony that segments of its source code that were taken would provide “some help” to a programmer to create new routines or to save time programming and that this helpfulness was alone sufficient for a finding of independent economic value in the segments. The appellate court rejected this argument and stated that testimony merely suggesting that the information was useful in carrying out a certain activity does not compel a finding that the information was sufficiently valuable to afford an economic advantage over others.

Appellant also argued that the segments achieved independent economic value because it kept the segments in confidence and entered into non-disclosure agreements with its employees. The Court was unpersuaded and stated that secrecy only exhibits an opinion that secrecy may be advantageous.

The Court also found that appellant failed to establish independent economic value because there was testimony that the segments were not of high quality and were not designed for use by others. The Court noted that the testimony suggested that the segments had no value to anyone outside of the parties themselves. According to the Court, appellant failed to establish that the segments “in and of themselves would provide a competitive advantage to a competitor.” The Court found that there was no evidence that appellant derived independent economic value in keeping the segments from others’ use.

In sum, Yield Dynamics suggests that information lacking value to anyone except its holder that cannot be exploited to gain a competitive advantage by others cannot qualify for trade secret protection despite its secrecy.