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December 2011

Playing by the Rules in Trade Secret Litigation

By Trade Secrets - News & Publications

by Andrew Holland

A recent decision by the California Court of Appeal, Third Appellate District, highlights the ethical standards that attorneys and clients must maintain when dealing with information during discovery that is alleged to have “trade secret” status regardless of whether the information actually meets the definition of a trade secret.
In Wallis v. PHL Associates, Inc., et. al., (2008) 168 Cal.App.4th 882, the Court of Appeal affirmed an award of sanctions against an attorney and her plaintiff clients because they violated a protective order after a confidential declaration, filed by the defendant under seal pursuant to the protective order, appeared in the publicly available court file. The declaration included attachments that contained the alleged trade secrets.
After the plaintiffs’ attorney discovered that the declaration, which was labeled as “confidential”, had been placed in the Court’s public file, instead of being filed under seal as requested by defendant, she notified her clients of its public availability. Under California law, one of the requirements of trade secret status is that the information be kept secret by its owner. So, in order to try to defeat the defendant’s claim that the declaration’s attachments contained trade secrets, the attorney and her clients instructed third parties to view and copy the declaration. The defendant claimed this was bad faith conduct and filed a motion asking that the attorney and plaintiffs be sanctioned.
The plaintiffs’ attorney argued that the declaration no longer contained trade secrets since it was made available to the public, and thus was not subject to the protective order. The Court rejected this argument and sanctioned both the attorney and her clients in the amount of $43,678.42. It also did not find persuasive the attorney’s explanation that she had gone so far as to discuss the issue with the State Bar prior to informing her clients of the existence of the declaration in the public file, and the State Bar informed her that she had a “paramount” duty to inform her clients about the declaration.
In reaching its decision, the Court explained that the attorney and her clients’ actions were frivolous and in bad faith, and that the attorney’s arguments lacked merit. The Court made clear that whether the declaration actually contained trade secrets was immaterial. What was important was that the attorney and her clients had violated the terms of the protective order. The Court also quashed any notion that the ends may have justified the means by finding that the limited, inadvertent disclosure of the declaration did not negate the confidentiality of the declaration since defendant filed the document under seal in compliance with the protective order.
This case is important because it highlights the Court’s disdain for tactics over substance in the context of trade secret litigation. One of the challenges in trade secret disputes is to balance the dissemination of sensitive information through discovery while trying to ensure that the information remains confidential. Protective orders are designed to facilitate the safe exchange of information and attorneys are supposed to act as gate keepers to ensure that the information disclosed by the other side is not made public and in many circumstances not even made available to their own clients. Thus, it is not surprising that the Court upheld an order for sanctions against both the attorney and her clients who took steps to try to circumvent the protective order and negate the trade secret status of information that the owner took reasonable steps to keep secret.

1 California’s version of the Uniform Trade Secrets Act defines misappropriation of trade secrets to include the acquisition, disclosure, or use of trade secrets by a person who knows or has reason to know that the secret had been acquired by improper means or even by accident or mistake. Civ. Code, § 3426.1, subd. (b)(1), (b)(2)(B),(C). (See Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal. App. 4th 575).