Since December, the Labor Commissioner has twice revised its new form, most recently effective April 12, 2012. A Word version of the form can be found here. In addition, the Department revised its Frequently Asked Questions regarding the new law and the form, which can be found here.
…little attention so far has been given what is perhaps the most important question for California employers: What is required, practically, to comply with the mandate that an employer “… relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.”
A California Court of Appeal has written another chapter in the unfinished epic struggle between the federal and California courts over the enforceability of employment arbitration agreements. And it reads against enforceability. The decision, Mayers v. Volt Management Corp., is of practical value, and provides guidance on drafting and implementing an employment arbitration agreement…
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).
California law prohibits anyone driving on public roadways from using a wireless telephone unless the phone is configured for hands-free listening and talking and used in that manner while driving. Carl Nelson is one person who would not willingly accept the ticket he received for his phone while stopped at a stop-light.
by Andrew Holland
In California, one of the most hotly contested issues in trade secret litigation is whether a plaintiff has identified the alleged trade secrets with the specificity required by California’s civil discovery statutes. Code of Civil Procedure section 2019.210 requires that a plaintiff alleging misappropriation of trade secrets identify the trade secrets with “reasonable particularity” prior to commencing discovery. Section 2019.210 (former § 2019, subd. (d)), was intended to protect a defendant from potentially costly discovery until a complainant has described “the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.” (Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 251, 253.)
Unfortunately, because of the lack of uniformity in published cases and the lack of guidance on the degree of detail necessary to meet the standard, the ambiguity of the phrase “reasonable particularity” often results in discovery disputes.
Plaintiffs will frequently contend that a list of general categories and concepts is sufficient to identify their alleged trade secrets, supported by cases consistent with their position. In Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, for example, general descriptions such as pricing of products sold to customers, profit margins and market research data were found sufficient.
Defendants, on the other hand, will typically argue that plaintiff’s list of general categories and concepts are too generic and insufficient to meet the “reasonable particularity” standard of Section 2019.210. They find support in cases such as Myrio Corp., 2001 U.S. Dist. LEXIS 10461, where the court required that plaintiff serve an Amended Identification of Trade Secrets, and it ordered that the alleged trade secrets be concisely described in narrative form.
A recent decision by the California Court of Appeal, Second Appellate District, provides guidance on this conflict, and attempts to strike a balance. In Brescia v. Angelin (2009) 172 Cal. App.4th 133, the Court of Appeal concluded 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. Rather, 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.” (Id. at 139.)
In Brescia, a dispute arose after respondent refused to provide discovery to claimant on the basis that he had not identified his trade secrets with “reasonable particularity”. The claimant named two alleged trade secrets: his pudding formula and his manufacturing process. He claimed that his formula produced a unique high-protein, low carbohydrate pudding unlike any other healthy alternative pudding on the market, and he listed the fifteen ingredients by common name and the percentage of the total pudding. Claimant also listed the same fifteen ingredients by their supplier and brand name, and he described each step in the mixing, testing, and code marking of the pudding. While this level of specificity seems adequate to alert respondent what formula and process comprise the alleged trade secrets, respondent argued that the description did not meet the “reasonable particularity” standard because it did not permit respondent to ascertain whether and in what way the information is distinguished from matters already known, and to permit the court to fashion appropriate discovery. The Court disagreed and concluded that claimant’s showing was adequate to permit respondents to prepare a defense.
Brescia is significant because it balances the important policy considerations behind Section 2019.210. On the one hand, the statute attempts to ensure that defendants understand the specific claims against them so that they can prepare an adequate defense. At the same time, Brescia limits a defendant’s ability to try to exploit Section 2019.210 in order to prevent a plaintiff from commencing discovery. Finally, in its analysis the Court emphasized the flexibility that courts have in determining the degree of particularity that is reasonable in each case. When more sophisticated technologies, for example, are at issue, courts will almost certainly require a plaintiff to be more specific when identifying their alleged trade secrets. Similarly, if the technology at issue is not complex, general categories and concepts may satisfy the “reasonable particularity” standard of Section 2019.210.
1 In Advanced Modular Sputtering v. Superior Court (2005) 132 Cal.App.4th 826, the Court of Appeal noted that the phrase “reasonable particularity” is deliberately vague so that the trial court has sufficient flexibility to achieve a just result based on the unique facts of each individual case. (Id. at 835.)
A new California law (AB 1396) requires that all employment relationships that involve payment of commissions “shall be in writing and shall set forth the method by which the commissions shall be computed and paid.”
by Andrew Holland
A recent decision by the California Court of Appeal clarifies the impact of California’s Uniform Trade Secret Act on other related common law claims. In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., et. al. (2009) 171 Cal.App.4th 939, the Court of Appeal upheld the trial court’s dismissal of plaintiff’s causes of action for breach of confidence, tortious interference with contract and statutory unfair competition. The court held that California’s Uniform Trade Secret Act (“CUTSA”) preempts common law claims and provides the exclusive remedy for any claims based on the same nucleus of facts as a misappropriation of trade secrets claim under CUTSA.
In K.C. Multimedia, Inc., a dispute arose after plaintiff supplied defendant Bank of America Technology & Operations, Inc. with technology services. Plaintiff claimed that during the business relationship, the bank misappropriated plaintiff’s trade secrets, which consisted of prototypes for two banking applications that were designed to simplify customers’ access to on-line banking information. The trial court dismissed plaintiff’s common law claims after it determined that these claims were based on the same nucleus of facts as plaintiff’s claim for misappropriation of trade secrets. After defendant subsequently defeated plaintiff’s claim under CUTSA at trial, plaintiff unsuccessfully appealed the trial court’s dismissal of plaintiff’s other common law claims.
K.C. Multimedia, Inc. is consistent with previous federal decisions interpreting California case law. For example, in First Advantage Background Services Corp. v. PrivateEyes, Inc. (N.D. Cal. 2008) 569 F. Supp.2d 929, the court found that CUTSA preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets.
Why is K.C. Multimedia, Inc. Significant?
By clarifying the preemption effect of CUTSA, K.C. Multimedia, Inc. should help narrow the scope of discovery and disputed issues in trade secret litigation. Until recently, California state law was unclear as to whether there was a legal distinction between a misappropriation of trade secret claim under CUTSA and claims for the misuse of confidential information that did not meet the legal definition of a trade secret. Many plaintiffs alleging a claim for misappropriation under CUTSA would often capitalize on California’s lack of uniformity in published cases and lack of guidance on the issue by alleging a host of related causes of action in their complaint such as breach of confidence, breach of the duty of loyalty, unfair competition and interference with contract. Instead of having a single statute of limitations, potentially numerous statute of limitations could apply to different claims based on the same nucleus of facts. Moreover, in the event that a defendant successfully demonstrated that the information at issue did not meet the legal definition of a trade secret1, plaintiffs could rely on a second line of attack to argue that the use of this “confidential information” was still actionable, although attorney’s fees and treble damages otherwise available under CUTSA may not be recoverable.
K.C. Multimedia, Inc. makes it clear that plaintiffs alleging a claim for the misuse of “confidential information” face the same legal standards required for proving a misappropriation of trade secret claim under CUTSA. Moreover, they can not plead around this legal standard or seek relief under an alternative theory by alleging various other common law or statutory causes of action based on the same nucleus of facts.
1 CUTSA defines “trade secret” as “information, including a …compilation…that: (1) derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (Civ. Code, §3426.1(d.))
by Andrew Holland
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) is a clear warning to plaintiffs who pursue an action for misappropriation of trade secrets for the primary goal of stifling legitimate competition or without having any evidence to support the claim. The court examined all of the varied positions taken by the plaintiff, FLIR Systems, and found them all to be without merit, bad faith tactics and wholly lacking in evidentiary support. FLIR Systems paid the price for this: not only did the company lose the case it filed, the Court of Appeal affirmed the trial court’s order that because of its bad faith, FLIR Systems must pay the defendants more than $1.6 million in attorney fees and costs.
The defendants were shareholders and officers of Indigo, which manufactured and sold microbolometers, a device used in connection with infrared cameras, night vision, and thermal imaging. FLIR Systems purchased Indigo in 2004. The defendants had created a significant portion of Indigo’s technology. After the sale of the company, defendants continued working at Indigo.
In 2005, defendants decided to start a new company called Thermicon to mass produce bolometers. Before leaving Indigo, defendants approached FLIR Systems and offered it a non-controlling interest in Thermicon. FLIR Systems rejected the offer and wished defendants success in their new endeavor.
In early 2006, defendants entered into negotiations with another company, Raytheon, to acquire licensing, technology, and manufacturing facilities for Thermicon. Fearful that Thermicon would pose a competitive threat, FLIR Systems sued defendants, claiming that defendants could not mass produce low-cost microbolometers based on the Thermicon time line without misappropriating FLIR Systems’ trade secrets. Upon learning of the lawsuit, Raytheon terminated its negotiations with defendants, and defendants decided not to go forward with Thermicon.
FLIR Systems dismissed its claim for damages, apparently because the company had not suffered any damages, but nevertheless proceeded to trial seeking a permanent injunction prohibiting defendants from making use of FLIR Systems’ trade secrets, selling certain microbolometers in commercial markets less than 12 months after defendants entered into a license with any third party to purchase intellectual property, or using a specified FLIR Systems database.
After substantial testimony, the trial court found no misappropriation or threatened misappropriation of trade secrets. Instead, the trial court found that the action was brought in bad faith, based on the theory of “inevitable disclosure1,” a doctrine not recognized by California courts because it contravenes a strong public policy of employee mobility that permits ex-employees to start new entrepreneurial endeavors. (See Continental Car-Na-Var v. Moseley (1944) 24 Cal.2d 104, 110; Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1462.) In addition, FLIR Systems was ordered to pay defendants’ attorney fees and costs in the amount of $1,641.216.78 pursuant to Section 3426.4 of the California Uniform Trade Secrets Act which provides: “If a claim of misappropriation is made in bad faith, … the [trial] court may award reasonable attorney’s fees and costs to the prevailing party”,.
The trial court based its finding on the complete lack of evidence of economic harm, threatened or actual misappropriation of trade secrets, or ongoing wrongdoing, and the overwhelming evidence that FLIR Systems’ motivation for filing suit was for an anticompetitive purpose. It was uncontroverted that defendants received no funding for Thermicon, did not start a new business, had no employees or customers, did not lease a facility or develop technology, and did not design, produce, sell, or offer to sell infrared products.
The trial court further found that FLIR Systems maintained the action in bad faith by imposing unnecessary settlement conditions. In a settlement letter, defendants described their plan to acquire technology from a third party, restated that they would not misappropriate FLIR Systems’ trade secrets, attached copies of their business plan, and agreed to have a third party monitor and review the technology that defendants would develop. In response, FLIR Systems demanded $75,000, a non-competition covenant, and an agreement that defendants would not hire FLIR Systems’ employees or challenge Indigo’s patent applications. Weighing against FLIR Systems was the fact that its Chief .
Intellectual Property Officer testified that the $75,000 demand was “inflamatory”. The trial court found that the other settlement terms were not related to the trade secret action and were made for an anticompetitive purpose2.
In short, the Court of Appeal agreed with the trial court that FLIR Systems’ conduct was objectively specious and subjectively motivated by bad faith, and that it had no evidence whatsoever to support its claim. Even the testimony of the company’s officers and its independent expert witnesses undermined its case, and reinforced the finding that the action was a baseless, bad faith tactic.
FLIR Systems signals a warning to any party contemplating prosecuting a specious trade secret action, and highlights the strength of California’s public policy in favor of employee mobility. In too many instances, employers alleging misappropriation of trade secrets against their former employees do not conduct adequate pre-litigation due diligence prior to filing a claim, or they simply file a claim under the California Uniform Trade Secret Act based on speculation that an employee with intimate knowledge of the company’s business will use that information to unlawfully compete, or worse, for an anticompetitive purpose. This often has a devastating effect on the defendant employee’s ability to subsequently survive or prosper in a competitive industry when potential and actual customers will avoid maintaining a business relationship due to the risks and negative perception associated with litigation. As FLIR Systems demonstrates, a company that believes it may be a prudent business tactic to file a claim under the California Uniform Trade Secret Act, without evidence of a threat of misappropriation or actual misappropriation of trade secrets having already occurred, should reconsider filing suit or risk paying the defendants’ attorney fees and costs. Too often such actions are filed as a legally driven tactic to secure a competitive advantage, rather than as an effective response to actual wrongdoing based on real evidence. FLIR Systems should give pause to any party considering such tactics.
1 The doctrine of inevitable disclosure is not law in California – mere speculation that a potential defendant may misappropriate and use a trade secret without threatened misappropriation or actual misappropriation will not support a claim. (Continental Car-Na-Var v. Moseley, supra, 24 Cal.2d at pp. 107–108 [injunction may not issue based on employer’s speculation]; GlobeSpan, Inc. v. O’Neill (C.D. Cal. 2001) 151 F.Supp.2d 1229, 1235.) “A trade secrets plaintiff must show an actual use or an actual threat.” (Bayer Corp. v. Roche Molecular Systems, Inc. (N.D. Cal. 1999) 72 F.Supp.2d 1111, 1120.)
2 The proposed non-competition clause was an unlawful trade restraint. (Bus. & Prof. Code, § 16600) and the prohibition against hiring FLIR Systems’ employees and challenging Indigo’s patent applications violated public policy.
On July 15, 2011, minor amendments to the Lead Renovation, Repair, and Painting Program (“RRP”) rule became final, making this a good time to revisit that rule, which became effective last year.