In the wake of its ultimately successful efforts to obtain an injunction against former executive Mark Papermaster following Papermaster’s move to Apple, IBM recently sought to enjoin David Johnson from joining Dell. Johnson, who was IBM’s Vice President of Corporate Development, recently joined Dell as its Senior Vice President of Strategy.  After conducting a preliminary injunction hearing, Judge Stephen Robinson of the U.S. District Court for the Southern District of New York denied IBM’s motion for preliminary injunction. 

Judge Robinson issued his ruling on June 26, 2009, 22 days after Judge Karas of the Southern District issued an order authorizing expedited discovery and permitting Johnson to work for Dell, subject to a restriction that he could not advise it regarding Dell or IBM strategy. Judge Karas had also required Johnson to supply his counsel with a daily log of his activities at Dell with “reasonable specificity,” including the amount of time spent on the activities and the persons involved. The log was to be made available to IBM’s counsel on request, if ordered by the Court.

Judge Robinson’s primary reason for denying IBM’s motion was a rather basic one: he found it unlikely that IBM could show that Johnson agreed to the non-compete provision upon which IBM based its claim. Johnson worked for IBM for 27 years, the last nine of which he directed IBM’s mergers, acquisitions, and divestitures strategy. In 2005, IBM asked Johnson to sign a non-competition agreement as part of a company-wide effort to have senior executives do so. Johnson was reluctant to sign the agreement without researching his future with the company, so he took the creative step of signing the agreement on the signature line for IBM. When IBM learned of Johnson’s tactic, it sent him a blank agreement to execute. IBM’s human resources department followed up with a number of calls and e-mails to ask Johnson to sign the agreement on the employee line. IBM did not execute the version of the agreement that Johnson signed on the IBM line, nor did it retain an original copy of the agreement. IBM also provided Johnson with annual equity award for 2005-08, despite the fact that entitlement to such awards in 2005 and 2006 was dependent on executing the non-compete agreement.

The Court found that IBM faced a “daunting, if not insurmountable, task” in establishing that Johnson signed his non-compete agreement. It stated that Johnson’s conduct in not agreeing to the non-compete document by signing on IBM’s signature line was ambiguous, thus exposing him to the risk that IBM would misunderstand his intent not to assent. However, when IBM asked Johnson to re-sign the agreement and he refused to do so, his statement of his intentions became unambiguous. IBM’s subsequent efforts to induce Johnson to sign, as well as its general counsel’s raised eyebrows when Johnson disclosed the HR department’s efforts indicated that IBM did not believe that Johnson had executed the agreement. The Court further found that IBM’s 2005 and 2006 equity awards to Johnson were not concurrent with his “signing” of his non-compete agreement. Finally, the Court rejected IBM’s argument that Johnson had intended to mislead it, concluding that Johnson instead intended to buy himself more time to clarify his position at IBM. Of no small import was the Court’s conclusion that Jonson was “an extremely credible and reasonable witness.”

The Court also addressed IBM’s claims regarding the hardship that it would suffer without injunctive relief. In that section, the Court shifted its focus from whether Johnson signed his non-compete agreement to whether Johnson possessed (and presumably would inevitably disclose) IBM trade secrets. The Court addressed IBM v. Papermaster directly. It cited the technical knowledge that Papermaster possessed regarding IBM microprocessors and concluded that Johnson’s business knowledge was, in comparison, not clearly proprietary to IBM. Ultimately, the Court concluded that the balance of equities tipped away from IBM because Johnson’s skill-set would erode if he were enjoined from working in the industry, as would his relationships with a “large personal network” of investment bankers, consulting groups, and chief information officers. Thus, Judge Robinson denied IBM’s motion for preliminary injunction and vacated Judge Karas’s June 4, 2009 order.

IBM appealed Judge Robinson’s decision immediately. On June 29, 2009, the Second Circuit Court of Appeals reinstated Judge Karas’s order placing restrictions on Johnson’s work for Dell and establishing reporting requirements. The Court of Appeals intends to hear IBM’s appeal on an expedited basis.

In the back and forth battle between companies and former employees regarding the confidential nature of customer information, the United States District Court for the District of Nebraska has just issued a decision of note in Softchoice Corp. v. MacKenzie, 08-cv-00249. By the decision, the Court dismissed the action as against the defendant, finding that despite plaintiff’s treatment of the information as secret, had plaintiff truly wished to protect the information it should have had defendant enter into a properly tailored covenant not to compete instead of only having him sign a nondisclosure agreement.

The action was brought by Softchoice against MacKenzie, a former employee, alleging the usual panoply of claims: breach of confidentiality, misappropriation of trade secrets and confidential business information, unfair competition and tortious interference with business relations. The confidential information was alleged to be customer contact information and pricing. MacKenzie had not signed a non-compete covenant, but had signed a nondisclosure agreement.

In dismissing the action, Judge Joseph F. Batailon found that:

“The plaintiff cannot succeed on its claims for breach of contract, misappropriation of trade secrets or unfair competition without a showing that the information he allegedly misappropriated was a trade secret … MacKenzie has [] shown that he obtained the only information that could arguably be categorized as ‘secret,’ that is, pricing information, from the potential customers themselves, who freely shared the information with him in hopes of obtaining a lower price. MacKenzie has also shown that his suppliers shared this sort of information …”

This segued into the Court’s interpretation of the extent nondisclosure agreements will protect customer information:

“Softchoice, or its predecessor, could have limited MacKenzie’s contact with his former customers, and consequently protected its pricing information, through a narrowly drawn, valid and enforceable covenant not to compete, but id did not do so. Softchoice cannot achieve by way of a nondisclosure agreement what it could not have obtained via a non-solicitation agreement …”

It will be interesting to watch if any other courts pick up on Judge Batailon’s interpretation of nondisclosure agreements.

 By Robert Milligan and summer associate Andrew Larratt-Smith

In a decision that encourages cost efficient corporate mergers in Nevada, the Nevada Supreme Court in HD Supply Facilities Maintenance v. Bymoan, 2009 WL 1635924 (June 11, 2009) recently ruled in an en banc decision that restrictive employment agreements acquired through corporate mergers do not require a showing that the agreements’ assignment provisions were negotiated at arm’s length or are supported by separate consideration. 

The court clarified its previous decision in Traffic Control Servs. v. United Rentals, 120 Nev. 168, 172 (2004), which held that employee noncompetition agreements are nonassignable when acquired through an asset purchase transaction, absent an explicit assignment clause negotiated at arm’s length supported by separate consideration. The Traffic Control decision was based on the notion of “honoring an obligor’s choice to contract with only the original obligee, thereby ensuring that the obligor is not compelled to perform more than his or her original obligation.” Further, the decision supports the general proposition that personal services contract are not assignable absent consent. In its Traffic Control  ruling, the Nevada Supreme Court used broad language, leading some to believe that the nonassignability of employee noncompetition agreements extended to agreements acquired as the result of mergers as well as to those acquired through asset purchase transactions. 

But in HD Supply the Nevada Court distinguished employment restrictive covenants found in mergers from asset purchase transactions. The court emphasized the contractual nature of an asset purchase transaction, whereas a merger is a creation of statute. The court stated that in a merger “two corporations unite in a single corporate existence” whereas “the acquiring corporation in an asset purchase transaction becomes… a wholly new employer.” Consequently, the court reasoned that Traffic Control’s general rule of non-assignability did not apply to covenants of noncompetition, nonsolicitation, or confidentiality as a result of a merger. 

The court found that when a relevant merger statute exists, the issue of a covenant’s assignability is not controversial, stating “[a]s the majority of courts have concluded when considering this issue, in a merger, the right to enforce the restrictive covenants of a merged corporation normally vests in the surviving entity.” Further, in support of its decision, the court noted that although Nevada courts have not addressed this exact issue before, the court had previously acknowledged a hard and fast distinction between the implications of a merger, which is a statutory creature, and an asset purchase, which is not.

Despite ruling that restrictive employment agreements acquired through mergers do not need to comply with the strict rule of assignability found in Traffic Control, under Nevada Revised Statute 613.200(4) and applicable case law, such covenants must still be reasonable in scope and duration. The HD Supply decision is significant because it removes a significant obstacle for businesses who obtain employment restrictive covenant agreements as a result of merger and thereby reduces additional costs arising out mergers in Nevada. 

 

The California Court of Appeal’s recent decision in FLIR Systems, Inc. v. Parrish, 2d Civil No. B209964, 2009 WL 1653103 (Cal. App. 2d Dist. June 15, 2009), affirming a $1.6 million attorney fee award to defendants upon a finding that the action was brought in bad faith, provides a useful and interesting discussion of various factors that may lead a court to conclude that a misappropriation case has been brought in bad faith. The decision highlights the importance of considering carefully whether to bring a misappropriation claim against former employees, particularly where there is little or no evidence of actual damage, or of actual misappropriation or threatened misappropriation.

In 2004, FLIR acquired the assets of Indigo, of which defendants Parrish and Fitzgibbons were officers. Indigo manufactures and sells microbolometers, devices used in connection with infrared cameras, night vision, and thermal imaging. After the sale, defendants continued to work for Indigo. About a year later, defendants decided to start a new company to mass produce bolometers. The new company was based on a business plan developed by Fitzgibbons several years before FLIR acquired Indigo. Before leaving Indigo, defendants advised FLIR and Indigo of their business plan and invited FLIR and Indigo to participate. FLIR rejected the offer. 

In 2006, defendants began negotiations with Raytheon Company in accord with their business plan. Defendants assured FLIR and Indigo that they would not misappropriate Indigo’s trade secrets and that they would use an intellectual property filter similar to the one used at Indigo to prevent the misuse of trade secrets. In June 2006, FLIR and Indigo sued defendants on the theory that defendants could not mass produce low-cost microbolometers without misappropriating trade secrets. Upon learning of the lawsuit, Raytheon terminated business discussions with defendants, and one month after the suit was filed, defendants advised FLIR and Indigo that they would not go forward with their new business.

FLIR and Indigo, before trial, dismissed their damages claims and tried only the misappropriation of trade secrets and California Unfair Competition Act claims. On December 6-17, 2007, the case was tried. In a statement of decision issued in June 2008, the trial court found no misappropriation or threatened misappropriation of trade secrets. It was undisputed that defendants received no funding for their business plan, never started their new business, had no employees or customers, did not lease any facility or develop technology, and did not design, develop or sell any infrared products. The trial court ultimately denied permanent injunctive relief and awarded defendants $1,641,216.78 in attorney fees.

The California Uniform Trade Secrets Act allows for an award of reasonably attorney fees to the prevailing party where the claim was brought in bad faith. Civ. Code § 3426.4. The court ultimately held that FLIR and Indigo had essentially brought the action based on the doctrine of “inevitable disclosure,” as there was no evidence of misappropriation or threatened misappropriation, and the FLIR and Indigo witnesses were unaware of such evidence though they maintained suspicions that misappropriation would occur. Given that the “inevitable disclosure” doctrine has been definitively rejected in California, the Court found FLIR and Indigo to have brought and maintained the action in bad faith. The items the Court considered significant: 

•           The absence of any economic harm.

•           The absence of any evidence of misappropriation or threatened misappropriation of trade secrets. Notably, there was evidence at trial that one of the defendants, Parrish, had downloaded technological data onto a hard drive before leaving Indigo, and that he destroyed the hard drive a few months before the lawsuit was filed. Although evidence that an employee has downloaded confidential information shortly before leaving his employer is typically significant to support a misappropriation claim, here, the evidence was discounted because defendants first learned of the download after the complaint was filed, so it was not a consideration for bringing suit, and the download was not a threatened misappropriation because there was no evidence that the contents of the hard drive, “if such contents existed, were improperly accessed, used, or copied before the drive was destroyed.”

•           Evidence that FLIR and Indigo had an anticompetitive motive in filing the lawsuit.  On this point, the court found significant the testimony of FLIR’s CEO, who testified that “we can’t tolerate a direct competitive threat by [Parrish] and [Fitzgibbons],” inferring that the CEO had no evidence of wrongdoing but was bothered that defendants planned to compete with FLIR in the future. The Court also found significant the fact that another FLIR officer had voted to file the lawsuit but had no personal knowledge that defendants had committed a wrongful act.

•           Failure by FLIR and Indigo to identify what trade secrets would be subject to the permanent injunction. The Court found as “strong evidence of bad faith” FLIR and Indigo’s proposed injunction, which barred defendants from developing certain products for a 12-month period even if they did not use FLIR and Indigo’s technology or trade secrets.

•           Imposition of unnecessary settlement conditions. When defendants notified FLIR and Indigo of their business plan, FLIR and Indigo responded with a demand for $75,000, a non-competition agreement, and agreement that defendants would not hire FLIR and Indigo’s employees, and agreement that they would not challenge Indigo’s patent applications. The Court found these restrictions to be unlawful restraints on trade.

•           FLIR and Indigo’s experts at trial admitted there was no scientific methodology to predict trade secret misuse and agreed that no trade secrets were misappropriated.

The FLIR decision is a reminder to employers to be cautious when determining to bring a lawsuit against former employees for trade secret misappropriation. California courts may not tolerate the filing of misappropriation claims where it appears the employer is merely fearful or suspicious of wrongdoing. In such cases, the employer plaintiff risks not only a dismissal of its claims but the possibility of being sanctioned for bringing the action. 

In Atlanta Bread Co. Int’l, Inc. v. Lupton-Smith, S08G1815, 2009 WL 1834215 (Ga. Jun. 29, 2009), the Georgia Supreme Court today confirmed that in-term restrictive covenants are subject to the same strict scrutiny standard applied to post-term covenants and the same reasonableness standards of time, territory, and scope. 

The question presented in Atlanta Bread Company was whether the in-term non-compete covenant in a franchise agreement between Atlanta Bread Company and Sean Lupton-Smith is enforceable under Georgia law. The covenant at issue states as follows:

During the term of this Agreement, neither [Lupton-Smith] nor any Principal Shareholder, for so long as such Principal Shareholder owns an Interest in [Lupton-Smith], may, without prior written consent of Franchisor, directly or indirectly engage in, or acquire any financial or beneficial interest in (including any interest in corporations, partnerships, trusts, unincorporated associations or joint ventures), advise, help, guarantee loans or make loans to, any bakery/deli business whose method of operation is similar to that employed by store units within the System.

During the term of the franchise agreements, Lupton-Smith opened and began operating a P.J.’s Coffee & Lounge in Atlanta, Georgia. Atlanta Bread Company sent a notice terminating the franchise agreement and litigation ensued. The trial court and Court of Appeals both found that the in-term non-compete provision was unenforceable under Georgia law because it failed to “meet[] the reasonableness standards promulgated in Georgia.” 

The Supreme Court rejected Atlanta Bread Company’s argument that the provision is a loyalty provision rather than a non-compete provision, noting that

[a] plain reading of the clause shows that it prohibits the franchisee from engaging in a certain type of business during the term of the parties’ agreement and, thus, it is a partial restraint of trade designed to lessen competition. Such restraints, no matter the nomenclature assigned to them, are disfavored in this state as a matter of public policy.

The Court rejected any contention that a franchise relationship should be treated differently, confirming that the court has held time and again” that franchise agreements and employment agreements are subject to the same strict scrutiny (meaning, among other things, that it cannot be blue-penciled). This analysis removes any doubt that the Court’s analysis in Atlanta Bread Company also will apply to in-term restrictive covenants in an employment agreement. 

 

In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., No. C 07-05248 JW, 2009 WL 1481147 (N.D. Cal. May 20, 2009), the Northern District of California held that Applied Materials’ use of inventions agreements constituted unfair business practices under California law. Applied Materials, a California-based semiconductor company, brought claims for trade secret misappropriation and unfair competition against Advanced Micro-Fabrication Equipment, a start-up competitor. In the action, Applied Materials asserted that a number of its former employees had moved to AMEC and conceived inventions that belonged to Applied Materials pursuant to assignment clauses in the former employees’ employment agreements. The clauses stated as follows:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

AMEC brought counterclaims for declaratory judgment and unfair competition, arguing that the assignment clauses are unenforceable non-compete agreements under California Business & Professions Code § 16600. AMEC then moved for summary judgment on its counterclaims. 

The Northern District of California granted AMEC’s motion for summary judgment. Applied Materials argued that the assignment clauses merely created a rebuttable presumption that it owns its former employees inventions conceived in the first year after the end of their employment. The District Court rejected this interpretation, holding that the clauses plainly state that all such inventions “will be assigned” to Applied Materials. The district court further noted that the clauses state neither that an employee can rebut the presumption nor how an employee would do so.

The District Court went on to hold that the assignment clauses were unenforceable under California law for two reasons. First, the clauses are not limited to inventions using Applied Materials’ confidential information. Second, the clauses were not limited to inventions conceived by former Applied Materials employees while they were employed at Applied Materials, but instead extended to inventions conceived up to a full year after the end of employment. 

Once the Court found that the assignment clauses were unenforceable, it therefore followed that it would grant AMEC’s claim for declaratory judgment. It also granted AMEC’s claim for unfair competition. The California Court of Appeal has held that the use of non-compete provisions that violate section 16600 of the Business & Professions Code constitutes an unlawful business practice under section 17200 of the Code. Thus, the Court held that Applied Materials’ use of the assignment clauses were unfair business practices as a matter of California law.

In Smith Barney, Inc. v. Darling, No. 09-C-540, 2009 WL 1544756 (E.D. Wis. Jun. 3, 2009), the United States District Court for the Eastern District of Wisconsin denied Smith Barney’s request for temporary injunctive relief in aid of arbitration against five departing financial consultants and their new employer. Smith Barney sought an injunction to: (1) require the former employees to return all customer information; and (2) prevent the departing employees from soliciting Smith Barney customers. The former employees countered by arguing that the non-solicitation and non-disclosure covenants relied upon by Smith Barney were unenforceable under Wisconsin law. They also argued that they were entitled to retain client contact information.

The District Court agreed with the departing employees on all fronts. It found that the non-disclosure of confidential information provisions were unenforceable because they did not contain time limitations. (Wisconsin and Georgia are the only two states that we are aware of that have such requirements.) It also found that the non-solicitation of customers provisions found in the former employees’ employment agreements were unenforceable because they covered customers “whose name became known” to the former employees during their time at Smith Barney. The Court reasoned that the provision would cover individuals who came into Smith Barney’s office to ask for directions, as well as individuals whom the former employees met at softball games. In fact, the Court went so far as to point out that the restriction covered customers of the departing employees’ new employer – Robert W. Baird & Co. – about whose existence the departing employees learned during their employment with Smith Barney. The Court went on to conclude that additional non-solicitation covenants in various agreements with the five former employees were unenforceable because they covered customers that did not do business with Smith Barney and/or with whom the departing employees had not had contact in years. Because Wisconsin courts do not blue pencil otherwise unenforceable restrictive covenants, these flaws in the provisions were fatal.

The Court also addressed the impact of the Protocol for Broker Recruiting, to which Smith Barney is a signatory. Even though Baird & Co. is not a signatory to the Protocol, the departing employees argued that Smith Barney could not show entitlement to injunctive relief because it had tacitly conceded that departing employees are not a threat by signing the Protocol. Smith Barney countered by noting that some of the accounts at issue were excluded from the Protocol. The Court concluded that Smith Barney’s argument was “not sufficiently developed” to merit an award of temporary injunctive relief. 

Ultimately, the Court ordered the departing employees to return or destroy client account information, but not client names, addresses, telephone numbers, and email addresses. The Court did not address explicitly in its published decision whether Smith Barney had shown that some or all of this information constituted a trade secret under Wisconsin law, despite the fact that Smith Barney had pled a claim for trade secret misappropriation against the defendants. The Court did state that Smith Barney could have an evidentiary hearing on an expedited basis, if it chose.

Seyfarth’s Michael Elkon recently authored an article on Georgia’s new non-compete law and its potential effects on technology companies.  Using an extended metaphor to relate scenes from the movie Silence of the Lambs to the current legal regime, Michael argues that technology companies in particular should be interested in the statute because restrictive covenants matter so much to them:

Technology companies should be especially interested in HB 173. This is so because restrictive covenants are particularly important in the technology field. “Tech” companies have to be especially vigilant to protect their confidential, company-specific information because so much of their value is bound up in this information, unlike brick-and-mortar assets that dominate the balance sheets of companies in other industries. Instead, tech companies derive much of their worth from information that is, by its nature, portable. Also, because of the novelty of what tech companies often do, they are more likely to have key employees whose move to a competitor could have serious repercussions. The savvy tech company should have tailored agreements for its key employees, and HB 173 will give those companies more latitude in protecting their information and tailoring their agreements.

The article highlights a few of the new rules that Michael expects will be especially important for technology companies, such as the rules on the permissible scope of a non-compete or the requirements for a non-disclosure provision. Overall, Michael argues that the statute will provide greater flexibility for technology companies in protecting their interests, while acknowledging that technology companies may have a harder time poaching employees from their competitors.

Attorneys for Sylvester Stallone and another named cross-defendant recently filed a petition for review with the California Supreme Court challenging a significant published California Court of Appeal decision (Brescia v. Angelin, 172 Cal.App.4th 133 (March 17, 2009)) regarding the sufficiency of a trade secret identification statement.

In 2007, a Los Angeles Superior Court judge entered judgment in favor of Stallone and another cross-defendant on a claim for trade secret misappropriation in a cross-complaint brought against him and others by a manufacturer of high protein, low carbohydrate pudding. 

In March 2009, a Court of Appeal for the Second Appellate District, Division Four reversed the judgment on the grounds, among other things, that cross-complainant’s trade secret identification statement was sufficient. 

The parties have briefed Stallone’s petition for review, with Stallone’s reply filed with the California Supreme Court on May 22, 2009. The Supreme Court has yet to rule on the petition.

According to the Court of Appeal decision, the cross-complainant alleges that Stallone participated with other cross-defendants in misappropriating cross-complainant’s trade secrets, which are described in the cross-complaint as: “a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor.” See id. at 139-140. 

According to the decision, Stallone was the chairman of the board for a company (also a cross-defendant) that allegedly conspired to steal cross-complainant’s ideas for the alleged high protein, low carbohydrate pudding that was allegedly unlike any other pudding on the market. See id. at 139. The company and another allegedly began producing and selling a pudding based on cross-complainant’s formula and business plan. See id. at 139.

At the trial court level, judgment was entered in Stallone’s and another cross-defendant’s favor on the trade secret misappropriation claim, after the court sustained their demurrer to cross-complainant’s third amended cross-complaint, based on the alleged inadequacy of the manufacturer’s trade secret designation statement.

The trial court reasoned that the trade secret designation was defective, because it made “no attempt . . . to identify why certain aspects or all of the aspects of the manufacturing process are anything other than matters generally known to persons skilled in the field,” and “no attempt . . . to indicate why the peculiar product formulation here that is stated with precision is a trade secret, as opposed to the typical ingredients involved in formulating other low-calorie, low-fat puddings.” See id. at 142. 

The trial court commented that cross-complainant’s submission was silent on the question whether the alleged trade secrets were known to skilled persons in the field: “So by its silence it’s doomed to failure, because there’s no attempt even to commence to describe why this formula is unique and not known to others. [] It just is a formula. Likewise, it is a cooking or manufacturing process of many steps. Some of which apparently, according to matters of which I believe I can take judicial notice are actually fairly familiar when you are trying to make a comparable product.” See id.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate underSection 3426.5 of the Civil Code.

Cross-complainant appealed the trial court’s decision. On appeal, the Court of Appeal found that section 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Specifically, the Court held that cross-complainant’s trade secret designation met the reasonable particularity standard of section 2019.210. According to the designation statement, two alleged trade secrets were identified: the pudding formula and the manufacturing process. The statement “particularly described” the details of the pudding formula as of the last quarter of 2003, listing the 15 specific ingredients by common name and the percentage of the total pudding. The statement also listed the same 15 ingredients by their supplier and brand name and particularly described each step in the mixing, testing, and code marking of the pudding. 

The Court concluded that cross-complainant’s statement was adequate because: 1) the statement permitted cross-defendants to investigate possible defenses; 2) there was no deficiency in the trade secret designation that would hamper its ability to protect the parties’ proprietary information or to determine the scope of relevant discovery; and 3) there was no showing that the trial court was unable to understand the nature of the alleged secrets and fashion discovery. 

The Court concluded that the nature of the identification required in any particular case need only be reasonable under the circumstances. The Court further stated the 2019.210 requirement cannot be divorced from the statutory goals which it is intended to serve and “[t]he identification is to be liberally construed, and reasonable doubts concerning its sufficiency are to be resolved in favor of allowing discovery to commence.”

The Court of Appeal decision received some media coverage after its publication. 

The issues presented to the California Supreme Court on the petition for review are:

1)      “Does Code of Civil Procedure section 2019.210 . . . permit plaintiffs to designate purported trade secrets by simply listing all of their product manufacturing specifications, without distinguishing them from matters known in the trade, thereby forcing defendants to guess as to what aspect(s) the plaintiffs will argue at trial constitutes the actual trade secret?

2)      Does this new, diminished designation standard, which conflicts with the designation standard utilized for over a decade (which required plaintiffs to distinguish their purported secret from matters known in the trade) undermine the legislative intent behind Section 2019.210 and Business and Professions Code section 16600 . . .?.

3)      Does this new designation standard create de facto non-compete covenants (unlimited as to time or geography), restraining the mobility of technical employees , and allowing employers to circumvent Edwards v. Arthur Andersen (2008) 44 Cal.4th 937, 946 . . .?

4)      When plaintiffs designate patented information as their trade secret, and cannot distinguish their purported secret from these patents, may trial courts take judicial notice of the designation and patents, and grant demurrer? Or, must trade secret defendants always face costly litigation, no matter how incurably insufficient the information designated as trade secret?”

Pending the California Supreme Court’s decision on the petition review, the Court of Appeal’s decision serves as a significant decision providing additional clarification concerning the disclosure requirements of Section 2019.210.  We will provide an update once the Supreme Court issues a ruling on the petition for review.