A California federal district court recently granted a TRO and preliminary injunction against a general manager who allegedly misappropriated customer information from his previous employer in violation of the California Uniform Trade Secrets Act (CUTSA), Defend Trade Secrets Act (DTSA), and his employment agreement.  Sun Distributing Company v. Corbett, No. 18-cv-2231, 2018 WL 4951966 (S.D. Cal. Oct. 12, 2018).

Background

Sun Distributing is a distribution company that works with major national logistics companies to provide last-mile distribution to residences and businesses in California. Paul Corbett worked as a general manager at Sun Distributing. While employed, Corbett signed an employment agreement in which he agreed to a confidentiality provision stating that he would not use Sun Distributing’s trade secrets, including customer lists, needs, and pricing structures, in order to compete with Sun Distributing after he left the company. Corbett later resigned from Sun Distributing to work for Pacblue, a company that distributes free newspapers and other print media for publishers in California. Continue Reading California Federal District Court Grants TRO and Preliminary Injunction to Protect Trade Secret Customer Lists

Robert B. Milligan, Partner and Co-Chair of Seyfarth’s National Trade Secret, Computer Fraud, and Non-Compete practice group, just finished co-editing and co-authoring a prominent new California trade secret treatise.

This Supplement to the Third Edition practice guide addresses the Defend Trade Secrets Act (DTSA ), which was enacted in 2016.  This Supplement includes additional practical tips and strategies related to the DTSA. This is one of the first books on the new law.

This supplement addresses:

  • A general overview of the DTSA, including its history and impact.
  • The DTSA’s scope and remedies afforded by it.
  • Analysis of recent case law discussing the DTSA’s whistleblower immunity provision and employer compliance with the DTSA’s whistleblower immunity notice provision.
  • A comparison of the DTSA to the California Uniform Trade Secrets Act (CUTSA or the CUTSA), the Economic Espionage Act (EEA), the Computer Fraud and Abuse Act (CFAA), and Section 337 of the Federal Tariff Act of 1930 (Section 337).

The treatise can be purchased by State Bar IP Section Members for $25 and by Non-Members for $30.

For more information, click here.

The California Uniform Trade Secrets Act (“CUTSA”) allows for an award of attorney’s fees to the prevailing party on a trade secret misappropriation claim. The statute permits award of attorney’s fees to a plaintiff for a defendant’s “willful and malicious” misappropriation and to a defendant when a plaintiff makes a claim in “bad faith”:

“If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party.…”

Civil Code section 3426.4.

Since there are relatively few published decisions addressing attorney’s fees awards to defendants under the statute, a review of the recent unpublished decision in All American Semiconductor, LLC v. APX Technology Corp., No. G 046605, 2013 Cal. App. Unpub. LEXIS 5718, (Cal. App. 4 Dist. Aug 18, 2013) may serve as a good opportunity to remind prospective plaintiffs of the need to ensure they have a good faith basis for any misappropriation claim before filing suit.

The plaintiff in All American Semiconductor had purchased all the assets of a bankrupt company, and, based on statements in the bankruptcy bid solicitation materials, erroneously believed it had purchased the rights to certain proprietary memory module designs. When the plaintiff was unable to locate any design plans for the memory modules among the bankrupt company’s assets, and no paper files whatsoever, the plaintiff grew suspicious. Upon finding empty directories on the bankrupt company’s computers, the plaintiff concluded that those empty directories must have contained data related to the designs and someone must have erased the data. Based on these mistaken beliefs, the plaintiff filed a nine-count complaint against Richard McCauley, the bankrupt company’s former general manager and vice president, his new company, and APX Technology Corporation — the company that actually designed the memory modules. Among other things, the complaint alleged misappropriation of trade secrets based on the defendants’ supposed misappropriation of the memory module designs.

Discovery, including several depositions, revealed no evidence that the bankrupt company had ever designed any memory modules, let alone had any trade secrets. To the contrary, McCauley testified the bankrupt company did not and could not design the memory modules, as it did not have the software or electrical engineers to do so. Instead, McCauley testified it merely assembled the modules based on designs provided by APX. APX’s president testified that APX owned the designs and provided them to memory module assemblers, including the bankrupt company, on a non-exclusive basis. Finally, an electrical engineer at APX testified he had designed the memory modules using complex computer software.

Based on this evidence, APX moved for summary adjudication on the misappropriation claim. The plaintiff opposed, citing testimony from a former shipping clerk of the bankrupt company stating he believed, without foundation, another employee at the bankrupt company designed memory modules. That employee, however, testified he was not an engineer and did not design the modules. The plaintiff also claimed to have found some evidence on the bankrupt company’s computers of software that could have been used to design memory modules, and offered other speculative testimony suggesting it would have been possible for the bankrupt company to design memory modules if it had the right software and tools, but that he had no knowledge of it ever doing so. Finally, the plaintiff blamed McCauley for its lack of evidence, arguing his new company controlled the bankrupt company’s employees and suggested that they therefore would not provide evidence adverse to their new employer.

Having failed to offer any evidence the bankrupt company ever designed memory modules, the plaintiff submitted a supplemental opposition claiming instead the bankrupt company had purchased the designs from APX citing vague invoices for nonrecurring engineering charges.

The trial court granted summary adjudication in favor of APX and awarded attorney’s fees for the plaintiff’s bad faith prosecution of the misappropriation claim. On appeal, the Court held that the trial court correctly found that the plaintiff failed to provide any evidence it owned a trade secret. Specifically, the plaintiff failed to identify what constituted a trade secret in any alleged memory module design. Instead, the Court held, the plaintiff attempted to show it could have designed memory modules, based on an inference that some scrubbed data could have been software that could be used to design memory modules, and that former engineers could have designed such modules. Missing was any evidence the bankrupt company actually designed the memory modules, or evidence of what part of the design was trade secret and unknown to the public and competitors.

In affirming the attorney’s fee award, the Court explained that the statute does not define “bad faith” and recited case law holding it requires both “objective speciousness” and “subjective bad faith.” “Objective speciousness exists where the action superficially appears to have merit but there is a complete lack of evidence to support the claim.” FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (2009). “Subjective bad faith” will “rarely be susceptible of direct proof; usually the trial court will be required to infer it from circumstantial evidence.’ ” Gemini Aluminum Corp. v. California Custom Shapes, Inc., 96 Cal. App. 4th 1249, 1263 (2002). Further, subjective bad faith “may be inferred where the specific shortcomings of the case are identified by opposing counsel, and the decision is made to go forward despite the inability to respond to the arguments raised.” Id. at 1264. Subjective bad faith exists where a plaintiff intends to cause unnecessary delay, filed the action to harass, or harbored other improper motives. FLIR Systems, 174 Cal. App. 4th at 1278. Finally, “[a] court may find subjective misconduct by relying on direct evidence of [the] plaintiff’s knowledge during certain points in the litigation and may also infer it from the speciousness of [the] plaintiff’s trade secret claim and its conduct during litigation.” Computer Econs., Inc. v. Gartner Group, Inc., No. 98-CV-0312 TW (CGA), 1999 U.S. Dist. LEXIS 22204, at *18-19 (S.D. Cal. Dec. 14, 1999).

In its analysis, the Court found the trial court could reasonably infer objective speciousness from the plaintiff’s lack of evidence of what constituted its alleged trade secret designs and that the designs were not known to the public or others in the industry. In addition, APX repeatedly argued from the outset that the plaintiff could not identify any trade secrets because the bankrupt company never designed memory modules. Further, the trial court could reasonably infer subjective bad faith from the plaintiff’s prosecution of its claims without evidence, and its shifting theories in opposition to summary adjudication. Finally, the Court dismissed the plaintiff’s argument that the trial court erred in not considering self-serving declaratory statements from its president claiming that it filed the lawsuit “in good faith and without improper motive.” Bad faith cannot be avoided simply by claiming “it appeared at the time of the filing of the action some evidence would be obtained in discovery that would support a misappropriation claim.” SASCO v. Rosendin Electric, Inc., 207 Cal. App. 4th 837 (2012).

Tips for Avoiding “Bad Faith” Misappropriation Claims

All American Semiconductor is an unusual case in that the plaintiff was unable to identify its alleged trade secrets because it never actually received the assets it believed it purchased from the bankrupt company. However, there are still lessons prospective plaintiffs can learn from this case to avoid a similar unpleasant fate.

Most trade secret misappropriation claims arise when an employee with access to trade secrets leaves an employer to go to work for a competitor. Fearing the departed employee will use the former employer’s trade secrets to compete, the initial reaction is often to quickly file suit and seek injunctive relief. Before doing so, it is important to recognize that California has rejected the “inevitable disclosure” doctrine. Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443, 1447 (2002). Thus, mere suspicion of misappropriation is not enough. SASCO, 207 Cal. App. 4th at 844. It is therefore essential to do a thorough factual and legal investigation before filing any misappropriation claim. Such investigation should identify any evidence showing: (1) what specific trade secrets are at issue; (2) what reasonable measures were taken to maintain their secrecy; (3) how the departed employee was able to acquire the trade secrets; (4) any threat of misappropriation or damages arising from the misappropriation. If it is suspected the trade secrets were transferred electronically, it is important that a forensic examination of relevant computers and/or other electronic devices be performed by experienced experts. Be mindful that using in-house IT personnel may create potential spoliation issues. Finally, if a defendant identifies alleged problems with a trade secret claim, plaintiffs would be wise to recognize that continuing to pursue the claims without being able to address the identified problems may expose them to bad faith claims if things go south. Gemini Aluminum Corp., 96 Cal. App. 4th at 1264.

The Agreement

Congratulations! You’ve just entered into an agreement to settle your trade secret misappropriation case.

Defendants will pay you money damages, and agree that you may move the court for fees and costs under Civil Code section 3426.4, based upon their alleged willful and malicious misappropriation. Defendants reserve the right to oppose and to tax your costs. Under the agreement, the trial court is to retain jurisdiction over the case to enforce the settlement agreement. You and defendants then dismiss the action, noting “Plaintiff to separately seek recovery of fees and costs, subject to opposition.”

You may now proceed to seek an award of attorney’s fees and costs from the trial court, right?

Agreement? What Agreement?

This was the situation presented in the recent case of Khavarian Enterprises, Inc. v. Commline, Inc., et al. (May 14, 2013) (Case No. B243467). After entering into this agreement, plaintiff moved for attorney’s fees and costs. It also submitted evidence that defendants’ misappropriation was willful and malicious. Defendants filed an opposition and a motion to strike the memorandum of costs.

At the hearing, the trial court refused to consider plaintiff’s motion. The court held that the settlement of the case effectively barred plaintiff from seeking attorney’s fees and costs, thereby nullifying that part of the settlement agreement. The court rejected the notion that, under these circumstances, it could or should review the record to make a finding as to whether defendants’ misappropriation was willful and malicious.

Even with plaintiff’s monetary recovery and the language of the agreement, the court found that plaintiff was not the prevailing party under the provision of California Code of Civil Procedure section 1032(a)(4) defining “prevailing party” as “the party with a net monetary recovery, [or] a defendant in whose favor dismissal is entered.”

Despite having entered into the agreement, defendants argued that the provision was unenforceable because there was no authority or procedure for plaintiff to settle a case under Civil Code section 3426.4, and then ask the court to make a finding of willful and malicious misappropriation.

The court denied plaintiff’s motion for fees and granted defendants’ motion to strike.

Oh, That Agreement . . .

The Second District Court of Appeal reversed.

The Court ruled that the parties’ settlement agreement was legally permissible and required the trial court to exercise its discretion to determine whether plaintiff is the prevailing party and, if so, whether defendants’ acts of misappropriation were willful and malicious, thereby justifying an award of attorney’s fees and costs under Civil Code section 3426.4.

The Court observed that in determining which side was the prevailing party, the parties were not bound by the definition relied upon by the trial court. Instead, under Code of Civil Procedure section 1032(c), in crafting a settlement, parties may agree to standards and procedures to which they wish to adhere regarding recovery of attorney fees and costs — which the Court of Appeal pointed out is exactly what the parties in this case did.

The Court added that there is nothing that legally proscribes a plaintiff, who voluntarily dismisses its case after obtaining a net monetary recovery through settlement, from being the prevailing party. Indeed, the Court pointed out that the language in the agreement, authorizing plaintiff to apply to the court for an award of attorney’s fees and costs, after dismissing the action, could only mean that the parties agreed that plaintiff was the sole potential prevailing party.

The Court went on to find that the only reasonable interpretation of this language in the settlement agreement was that the parties had agreed to submit to a procedure by which the court would use its discretion to determine whether plaintiff was the prevailing party, and if so, whether defendants committed willful and malicious misappropriation. It added that this approach is neither unlawful nor procedurally impossible; and a contrary interpretation would render that portion of the agreement “empty” and “ineffectual.”

Thus, under these circumstances, a trial court may be required to act as fact finder on a post-settlement motion for attorney’s fees. Here, because the dismissal was an action in compliance with and required by the stipulated settlement, it did not deprive the court of jurisdiction to consider the fee and cost motions that were specifically contemplated by the settlement agreement. In fact, the language of the agreement obligated it to do so, even if it meant that the trial court would have to engage in considerable fact finding to make such determinations.

Conclusion

This decision is likely to pave the way for more parties to include provisions in settlement agreements calling for post-settlement determinations by courts as to the right of one side to recover attorney’s fees, not just in the trade secret misappropriation context, but in other areas as well.

By Robert B. Milligan, Jessica Mendelson, and Daniel Joshua Salinas

Company information that is sensitive, but may not rise to the level of a trade secret is protectable in California, isn’t it?

Not necessarily. Some recent California decisions have significantly limited an employer’s ability to pursue certain claims and remedies based upon the theft of mere confidential or proprietary information by rogue employees.

Defendants (often individual former employees) who are sued in California for stealing a company’s data are increasingly using the trade secret preemption doctrine to seek dismissal of non-trade secret claims, which are often pleaded alongside trade secret misappropriation claims, that allegedly fall within the scope of the California Uniform Trade Secrets Act (“CUTSA”).

Non-trade secret claims advanced by the employer typically include:

  • conversion
  • interference with contract
  • interference with prospective economic advantage
  • breach of fiduciary duty
  • unjust enrichment
  • fraud
  • statutory claims brought under Bus. & Prof. Code section 17200.

These claims are typically made because they are often easier to prove than the elements of trade secret misappropriation.

While trade secret preemption does not displace breach of contract claims, it can significantly limit the claims and remedies that companies may seek when their confidential or proprietary information is stolen.

Differences Among the States:

Other States: The breadth and scope of trade secret preemption varies from state to state. While some states have held that preemption eliminates alternative causes of action for misuse or theft of confidential, proprietary or trade secret information, other states allow common law claims to be brought for the theft of confidential or proprietary information alone or along with trade secret misappropriation claims.

California state courts: In California, CUTSA generally preempts causes of action that rely on the same “nucleus of facts” as a trade secret misappropriation claim. A recent California Court of Appeal decision reaffirmed that CUTSA provides the exclusive civil remedy for conduct falling within its terms, so as to supersede other civil remedies based upon misappropriation of a trade secret. Accordingly, California state courts typically do not allow both trade secret and non-trade secret claims to be brought for the theft of company information.

 California federal courts: Some California federal courts have been more kind to employers, with some courts not forcing employers to choose until trial which of the claims they will ultimately pursue. A recent California federal court decision, however, refused to permit a plaintiff to proceed on a tort theory for the theft of confidential information at the pleading stages, leaving the pursuit of tort claims for the theft of information not rising to the level of a trade secret unsettled.

Thus, variety is the only consistency when it comes to the application and breadth of preemption under CUTSA in California state and federal court. The California Supreme Court has yet to determinatively address the supersessive scope of CUTSA, but may eventually resolve this difference of opinion.

Workplace Solutions:

California employers must be vigilant to ensure that their employees don’t share their valuable information with competitors. Employers should employ well-drafted and well-communicated agreements and policies to best protect themselves should a dispute arise. Best practices for employers include:

  • Identifying trade secrets or confidential information and adding confidentiality designations on the data
  • Creating agreements and policies to protect the secrecy and confidentiality of company trade secret and proprietary information
  • Effective employee education and training on importance of protecting company trade secrets
  • Effective entrance and exit procedures, including employing exit interviews
  • Tailoring non-disclosure of confidential information agreements to protect non-public and valuable information, and specifying examples of genuine confidential information
  • Utilizing contractual agreements–not simply employee handbooks or policies­­– with employees as contractual remedies are not preempted by CUTSA
  • Aggressive enforcement against breaches and prevention of data theft

Please see our recorded webinars on 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law and the Anatomy of a Trade Secret Audit for more details on how to put your company in the best position.

By Carolyn Sieve and summer associate Rina Wang

A California federal court has added to the body of decisional law on preemption under the California Uniform Trade Secrets Act, Cal. Civ. Code §§ 3426, et seq. (“CUTSA”). In Aversan v. Jones, No. 2:09-cv-00132-MCE-KJM, 2009 WL 1810010 (E.D. Cal. June 24, 2009), the Court denied defendants’ motion to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition, finding that plaintiff had sufficiently pled facts supporting these claims without relying on the same nucleus of facts as its CUTSA misappropriation of trade secrets claim.

Civil Code section 3426.7 provides that CUTSA “does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.” (Emphasis added.) This provision has been interpreted to mean that CUTSA preempts common law claims that are based on the same nucleus of facts as the CUTSA claim. Thus, preemption is not triggered where the facts in an independent claim are similar to, but distinct from, those underlying the misappropriation claim.

Defendants Jones and Mellse were employees of plaintiff Aversan, which recruits and trains engineers to perform services for Aversan’s customers and clients of its customers. They later quit to work for one of Aversan’s clients, Ambire, which had retained Aversan to provide engineers to one of Ambire’s clients, CalPERS.  Defendants had been assigned by Aversan to work on the CalPERS project. While assigned to CalPERS, defendants wrote custom software programs using Aversan’s proprietary software script. 

Aversan’s complaint alleged that defendants violated CUTSA by using Aversan’s proprietary and confidential information to continue performing work for Ambire and CalPERS. Defendants also allegedly used Aversan’s confidential information to solicit employees, contractors and recruits. In addition, Aversan sought damages for Jones’ alleged interference with a residential lease agreement, and defendants’ supposed interference with Aversan’s customer relationships.

Defendants moved to dismiss plaintiff’s claims for interference with contractual relations, interference with prospective economic advantage, breach of duty of loyalty, and unfair competition. The district court denied the motion, holding that the facts supporting these tort claims were sufficiently independent of the CUTSA claim. Under these causes of action, Aversan claimed that defendants prevented Aversan from participating in and profiting from its agreements with Ambire by working directly for Ambire and that defendants allegedly interfered by usurping Aversan’s position with CalPERS.  Aversan also claimed that Jones encouraged and convinced an apartment lessor to terminate its lease with Aversan. Aversan had already paid for that month’s rent as an employee benefit to Jones and re-let the same apartment unit to Jones directly. These claims survived dismissal because they did not rely on the same nucleus of facts as Aversan’s CUTSA claim and they sufficiently stated an independent claim for relief.  

Aversan thus provides some guidance as to what allegations will overcome dismissal of tort claims in a case alleging CUTSA violations. If a party in a trade secrets case is faced with a possible preemption argument, it is worth comparing this decision with the recent California Court of Appeal decision in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal.App.4th 939 (2009).