By Scott Schaefers

On February 13, 2012, a federal judge in Los Angeles, California dismissed a remote-access software company’s claim that one of its customers violated the California Trade Secrets Act, Cal. Civ. Code § 3426.1 et seq., by downloading a trial version of plaintiff’s Mac-environment remote-access software and “reverse engineering” its own program. Aqua Connect, Inc. v. Code Rebel LLC, No. 2:11-cv-05764-RSWL-MAN (C.D. Cal. Feb. 15, 2012) (Doc. No. 30). This decision clarifies, to an extent, when competitors may be liable under the Trade Secrets Act for using free trial versions of a commercial product or program as a starting-off point for their own research and development of a competing product.

Aqua Connects allegations were fairly straightforward. Aqua Connect alleged that its “ACTS” software, by which users can remotely access a Mac-based environment, was a trade secret under California’s Trade Secrets Act. Aqua Connect alleged that Code Rebel downloaded a free trial version of ACTS after agreeing to all the terms and conditions of Aqua Connect’s clickwrap End User Licensing Agreement. The Agreement prohibited users from reverse engineering the ACTS software and any subsequent sales of such infringing programs. That is exactly what Code Rebel did, according to Aqua Connect. Code Rebel allegedly used its free trial ACTS package to develop a competing remote-access program Aqua Connects alleged, in relevant part, that such reverse engineering in breach of the Agreement constituted acquisition of trade secret information by “improper means,” and thus “misappropriation,” under the Trade Secrets Act.

Code Rebel, and the federal court, disagreed. The court held that the Act’s definition of “improper means” and the accompanying committee comments made clear that mere reverse engineering of a trade secret, without any further evidence of improper access or acquisition, was not enough to prove misappropriation under the Act. Thus, Aqua Connect’s online offering of free 14-day trials of its ACTS program, even though accompanied by a license agreement not to reverse engineer and subsequently sell such programs, precluded Aqua Connect’s claim of improper acquisition. Essentially, the court focused on Code Rebel’s access, and not use, of the ACTS program, and there was nothing wrong with the access.

The court also rejected Aqua Connect’s alternative argument that Code Rebel is liable under the Act because misappropriation also occurs when someone acquires a secret “under circumstances giving rise to a duty to maintain its secrecy, but nevertheless uses the secret without authorization. That theory of misappropriation, the court held, was reserved for fiduciary or employment relationships where agents or employees owe automatic legal duties to their clients or employers, which circumstances were not present here. And because Aqua Connect had twice tried and failed to allege trade secret misappropriation based on Code Rebel’s misuse of the online trial program, the court dismissed Aqua Connect’s claim with prejudice and without permission to try again.

This decision is noteworthy because it refused to hold liable under the Trade Secrets Act a company which agreed not to reverse engineer a competitor’s product for its own benefit, but then turned around and did just that. One might question why Aqua Connect’s clickwrap Agreement’s express prohibition against reverse engineering was not enough to impose on Code Rebel a duty under the Trade Secrets Act not to misuse the ACTS software. If agents and employees can be held liable under the “circumstances giving rise” theory of trade secrets misappropriation, and agents and employees voluntarily take on their legal duties of loyalty and confidence, then why cannot a customer which voluntarily takes on a contractual duty of secrecy be held to the same standard? After all, holding Code Rebel to the same standard would seemingly not contradict the Act’s provision that reverse engineering alone is insufficient. Code Rebel breached an express promise of secrecy, a promise that Aqua Connect probably insisted on to prevent the very acts of which it accused Code Rebel. But, the logic and fairness of this result are broader topics that are outside the scope of this post.

And in the end, Aqua Connect is not without recourse. Still alive are its claims for breach of agreement, false promise, statutory unfair competition, and unjust enrichment. So Aqua Connect still may be able to recover similar compensatory damages as it would under a trade secret misappropriation claim, and it can potentially recover punitive damages under its false promise claim.  We will continue to follow this case and update you on any significant developments.