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Customer Information. What do Courts Require Before Information About Customers is Given Trade Secret Status Under California’s Uniform Trade Secret Act?

By Trade Secrets - News & Publications

by Andrew Holland

With employee mobility on the rise due to a poor economy and entrepreneur-driven technology industries, employers increasingly have to deal with problems associated with former employees exploiting the knowledge and contacts they developed during their employment to set up competing enterprises. In many situations, there is little that an employer can legally do to prohibit their former employees from using information the former employee was paid to develop to compete against them. California courts have long found that public policy favors employee mobility, innovation and robust competition over employers’ desire to prevent their former employees from gaining a competitive advantage at their former employers’ expense.
In many states, non-competition provisions may be enforceable if they are “reasonable” in terms of length of time and geographic area of restriction. In California, however, non-competition agreements are invalid under California Business and Professions Code Section 16600, even if narrowly drawn, unless they fall within an express statutory exception. (See Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.)
Trade secret litigation, especially in the Silicon Valley, can be very complex depending on the information, technology, formula or process at issue. In many cases the alleged trade secrets consist of non-technical business information, which can still have significant commercial value, such as unique information about customers. Although not scientifically complex, trade secret cases involving customer lists have been frequently litigated. However, the identities of customers alone is often not considered a trade secret because it takes little time and effort to independently cultivate this information. The former employee will typically argue that the identities of customers claimed to be a trade secret can be located in public records such as telephone directories and industry publications, so these are not a protectable trade secret.
In American Paper & Packaging Prods., Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, 1326, for example, the court refused to recognize customer names as a trade secret because “customer names were generally known to the public, and the compilation process used by plaintiff was “neither sophisticated nor difficult, nor particularly time consuming.” Similarly, in Scott v. Snelling & Snelling, 732 F. Supp. 1034, 1044 (N.D. Cal. 1990), the court found that a customer list was not protectable as a trade secret because “[T]he typical customers of a [temporary personnel service] are large and small companies of all sorts, easily discoverable through public sources.”
While the identity of customers is generally not protectable, information about them may be as long as the information has an “independent economic value” by not being known to the general public and “reasonable steps” have been taken to protect its secrecy.
In San Jose Construction, Inc. v. S.B.C.C., (2007) 155 Cal.App.4th 1528, the Court of Appeal rejected the former employee’s argument that a collection of project documents was not a trade secret within the meaning of California trade secrets law. San Jose Construction involved an employer’s suit against a former employee and his new employer for misappropriation of trade secrets. The employers were local competitors in commercial construction, and the former employee had taken project documents from his former employer shortly before he left to join the competitor and immediately compete for the same projects.
The documents in question consisted of “subcontractor proposals, correspondence to and from subcontractors, correspondence to and from project owners and various proposals and draft budgets to owners. The diskettes were, according to defendants, “miscellaneous forms (change order logs, RFI logs, meeting minutes, etc.)” that the former employee had created while employed by plaintiff. ( Id. at 1537.) Defendants unsuccessfully argued that such information could not be trade secrets because it was created by, or had been disclosed to, third parties. In the court’s words, “South Bay misses the forest for the trees.” It was not merely the contact information for subcontractors or their prices that defendants were alleged to have wrongfully acquired. What plaintiff sought to protect was the overall compilation of the correspondence involving architects, SJC, and project owners; descriptions of the proposed scope of each project, measurements for each project building, and detailed cost estimates. (Id. at 1539) “We can readily infer, therefore, that the information contained in SJC’s project binders, viewed as a whole, derived economic value from being kept secret from competitors such as South Bay. As SJC describes it, “only SJC had the completed puzzle for each project, contained in the Project Binders. … No third party had it. The subcontractors each had a piece, and the owners had a piece, but no one except SJC had it all.” (Id. at 1539.)
Similarly, in Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal. App.3d 1278, the court issued an order prohibiting former employees from using customer information in starting their own temporary employee placement business where the customer information included key customer contacts, profit margins, specialized requirements, and was of irrefutable commercial value and not readily ascertainable to other competitors. In reaching its decision, the court relied on the employer’s well-documented and substantial efforts made to compile the confidential customer information.
While courts analyze customer list trade secret allegations on a case-by-case basis using CUTSA’s requirements of value and secrecy, the reality is that without more, the mere identities of customers will not constitute a trade secret in most cases. Recent decisions make it clear, however, that a compilation of information about customers that requires significant time and effort to cultivate, as long as reasonable steps are taken to protect its secrecy, may be trade secrets.

Is Identifying Trade Secrets with “Reasonable Particularity” Whatever the Court Decides?

By Trade Secrets - News & Publications

by Andrew Holland

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. 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. An important decision by the California Court of Appeal, Second Appellate District, Brescia v. Angelin (March 2009) 172 Cal. App.4th 133, provides guidance on this conflict by striking a balance between the level of specificity required depending on the complexity of the alleged trade secrets, while at the same time recognizing that plaintiffs should not have to prove that the information at issue meets the legal definition of a trade secret without the benefit of discovery.
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”. In his trade secret disclosure statement, the claimant provided a very concise and succinct description of his pudding formula and manufacturing process. While the level of specificity was clearly detailed enough to alert respondent of what formula and process comprised 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.
The Brescia Court 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.)
A more recent decision by the California Court of Appeal, Fourth Appellate District, Perlan Therapeutics v. Superior Court of San Diego County (November 2009) 178 Cal.App.4th 1333, may promote the lack of uniformity in published cases by highlighting the broad discretion that trial courts have in deciding such disputes. After analyzing the significance of the Brescia decision and an earlier case, Advanced Modular Sputtering, Inc. v. Superior Court, (2005) 132 Cal.App.4th 826, the Perlan Therapeutics Court explained that the Brescia and Advanced Modular courts abused their discretion by applying improper understandings of the legal meaning of “reasonably particular.” Perlan Therapeutics supports the position that plaintiffs must identify their alleged trade secrets with a high level of precision, while it also suggests that plaintiffs may be required to distinguish between information that is confidential as opposed to information that is generally known in a particular industry. Most importantly, Perlan Therapeutics emphasizes that trial courts have broad discretion in determining whether the level of detail in a trade secret disclosure statement is sufficient and that courts of appeal when reviewing such decisions should do so under an “abuse of discretion” standard rather than de novo.
In Perlan Therapeutics, a dispute arose after two of Perlan Therapeutics’ former employees left the company and formed a competing enterprise related to protein based therapeutics for viral infections. At issue in this case was plaintiff’s amended trade secret disclosure statement that the court noted contained highly technical language that was too general in nature and was also publicly available, so it failed to meet the requirements of Section 2019.210. Specifically, plaintiff’s amended trade secret disclosure statement was inadequate because it failed to describe the alleged trade secret with reasonable particularity and failed to demonstrate that the information disclosed was not generally known to the public. In affirming the trial court’s decision, the Perlan Therapeutics Court cited to Brescia recognizing that Section 2019.210 requires an exacting level of specificity, but does not require a trade secret claimant to, in every case, explain how the alleged trade secret differs from information available in the public domain.
The Perlan Therapeutics Court further cited to Advanced Modular Sputtering when explaining its position that trial courts have broad discretion under Section 2019.210 to determine the degree of particularity that is reasonable in each case. In Advance Modular Sputtering, the court observed that “the letter and spirit of section 2019.210 require the plaintiff…to identify or designate the trade secrets at issue with “sufficient particularity” to limit the permissible scope of discovery by distinguishing the trade secrets “from matters of general knowledge in the trade or of special knowledge of those persons..skilled in the trade.”( Id. at 835.)
Perlan Therapeutics does not further clarify what level of specificity is required in a trade secret disclosure statement under Section 2019.210. Instead, it emphasizes the broad discretion that courts have in determining the degree of particularity that is reasonable in each case. The practical effect of Perlan Therapeutics is that to the extent possible, plaintiffs will forum shop for judges who have a history of allowing plaintiffs to commence discovery after serving trade secret disclosure statements with a lower degree of specificity than others, which may result in a wide range of decisions even when the facts of some cases are similar. In some cases, for example, depending on the sophistication of the judge and how he or she perceives the technology at issue, plaintiffs may be forced to distinguish between protected information and information that is publicly available, while other judges may not require the same standards.

Meal Periods and Rest Breaks, Again

By Blog, Employment Law

Another California Court of Appeal has concluded that while employers must provide employees with meal and rest breaks, they do not need to ensure that employees actually take them. In the Lamps Plus Overtime Cases, the court denied class certification and, more importantly for this discussion, ruled against the plaintiffs’ on the merits of their claims.

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Whatever Happened to That New Mold Law?

By Blog, Real Estate Law

In 2001, in the wake of increased concerns over deleterious health impacts of multicellular fungi, or mold, found in indoor environments, the California Legislature enacted a comprehensive protection scheme called the Toxic Mold Protection Act of 2001 (“the Act”)…Looking back now, 10 years later, the Act looks like much ado about nothing. Though the most recent update found on the DPH website is dated July 2008…

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California Law Now Requires Carbon Monoxide Detectors

By Blog, Real Estate Law

Under newly-enacted sections 17926, 17926.1, and 17926.2 of the Health & Safety Code (part of Senate Bill No. 183), owners of all such properties (excepting properties that are, generally-speaking, owned by or leased to the government) must install carbon monoxide alarms by the following deadlines: (1) July 1, 2011, as to single-family dwellings, or (2) January 1, 2013, as to all other dwellings.

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Default Law Requires Commercial Tenants to Pay Bank, Not Landlord

By Blog, Real Estate Law

It’s no secret that, these days, many commercial property owners are having trouble meeting their mortgage payments. If you are a tenant of such an owner in California, you should know about section 2938 of the California Civil Code (“Section 2938”). Section 2938 requires, under certain circumstances, a commercial tenant to pay rent to its landlord’s creditor rather than its landlord.

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Facebook Privacy Privilege Rejected

By Blog, Employment Law, Intellectual Property Law, Litigation

Bill claimed his Facebook and MySpace passwords and user names were confidential and, more importantly, that his communications with friends on Facebook and MySpace were privileged from disclosure, much like a confidential communication between an attorney and his or her client. The court in McMillan v. Hummingbird Speedway, Inc. (Pennsylvania Court of Common Pleas 9/9/10) rejected his contention.

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Letters of Intent, Part IV: Indemnification and More

By Blog, Business Law

I will describe the pros and cons of dealing with indemnification obligations of the seller and, to a lesser extent, the buyer, as well as briefly explaining the risk-reduction benefits that can be achieved by the seller under a well-crafted indemnification term in the LOI. Finally, I will examine the last term in the sample LOI, which addresses the seller’s employees.

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