Trade Secret Misappropriation Law Definition Elements Defense Litigation Attorney
Definition
In 1984, the California Legislature “adopted without significant change” the Uniform Trade Secrets Act (UTSA) (Cal. Civ. Code, § 3426 et seq.; (Altavion, Inc. v. Konica Minolta Sys. Lab’y, Inc. (2014) 226 Cal. App. 4th 26, 41; Cadence Design Systems, Inc. v. Avant! Corp. (2002) 29 Cal.4th 215, 221.) Nearly all states have adopted the UTSA; although there are some variations, case law applying UTSA enactments in other states is generally relevant in applying California’s UTSA. (K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. (2009) 171 Cal.App.4th 939, 955.)
Trade Secret Law Statute
California Civil Code §3426.1 defines trade secret misappropriation as:
“(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(2) Disclosure or use of a trade secret of another without express or implied consent by a person who:
(A) Used improper means to acquire knowledge of the trade secret; or
(B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:
(i) Derived from or through a person who had utilized improper means to acquire it;
(ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(ii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.” (Cal. Civ. Code, § 3426.1.)
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A prima facie claim for misappropriation of trade secrets requires the plaintiff to demonstrate: (1) the plaintiff owned a trade secret; (2) the defendant acquired, disclosed, or used the plaintiff’s trade secret through improper means; and (3) the defendant’s actions damaged the plaintiff. (Cal. Civ. Code, § 3426.1; Sargent Fletcher, Inc. v. Able Corp. (2003) 110 Cal.App.4th 1658, 1665.) Click here for federal trade secret policy and proprietary information.
Element 1: Trade Secret
California Civil Code section 3426.1(d) defines a trade secret as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(1) Derives independent 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. (Cal. Civ. Code, § 3426.1, subd. (d).)
“[B]y definition, a trade secret is something which has not been placed in the public domain.” (Sinclair v. Aquarius Electronics, Inc. (1974) 42 Cal.App.3d 216.)
Information’ has a broad meaning under the UTSA. (Altavion, Inc. v. Konica Minolta Sys. Lab’y, Inc. (2014) 226 Cal.App.4th 26, 53.) “The definition of trade secret is … unlimited as to any particular class or kind of matter and may be contrasted with matter eligible for patent or copyright protection, which must fall into statutorily defined categories.” (1 Milgrim on Trade Secrets (2013) Definitional Aspects, § 1.01, p. 1–4.) “[A] trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device or list of customers.” (Altavion, Inc. v. Konica Minolta Sys. Lab’y, Inc. (2014) 226 Cal.App.4th 26, 53, quoting Sinclair v. Aquarius Electronics, Inc. (1974) 42 Cal.App.3d 216, 221.)
Ideas are protectable as trade secrets. (Altavion, Inc. v. Konica Minolta Sys. Lab’y, Inc. (2014) 226 Cal.App.4th 26, 53.)
Element 2: Wrongful Acquisition, Disclosure or Use
The trade secret must have been either:
- Acquired through “improper means” (Cal. Civ. Code §3426.1(b)(1), (b)(2)(A), and (b)(2)(B(I));
- Acquired or disclosed where there was a “duty to maintain its secrecy or limit its use” (Cal. Civ. Code §3426.1(b)(2)(B)(ii) and (iii)); or
- Acquired by accident or mistake (Cal. Civ. Code 3426.1(b)(2)(B)(ii) and (iii)).
Acquisition by “Improper Means”:
Acquisition of another’s trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means, is misappropriation. (Cal. Civ. Code, § 3426.1(b)(1).)
The disclosure or use of another’s trade secret by a person who used improper means to acquire the trade secret is misappropriation. (Cal. Civ. Code, § 3426.1(b)(2)(A).)
The disclosure or use of another’s trade secret by a person who, at the time of the disclosure or use, knew or had reason to know that the trade secret was derived from or through a person who had utilized improper means to acquire it, is misappropriation. (Cal. Civ. Code, § 3426.1(b)(2)(B(i).)
A trade secret owner is protected from wrongful acquisition of its secret, even if the secret could have been acquired through permissible means, such as thought, labor and ingenuity. (By-Buk Co. v. Printed Cellophane Tape Co. (1958) 163 Cal.App.2d 157.)
Independent invention, accidental disclosure, and reverse engineering are all fair and honest means of acquiring a trade secret. (Chicago Lock Co. v. Fanberg, 676 F. 2d 400, 404 (9th Cir. 1982); see also Imax Corp. v. Cinema Technologies, Inc., 152 F. 3d 1161, 1169 (9th Cir. 1998); Sinclair v. Aquarius Electronics, Inc. (1974) 42 Cal. App. 3d 216.)
Reverse engineering key codes for locks is not improper acquisition. (Chicago Lock Co. v. Fanberg, 676 F.2d 400, 404 (9th Cir. 1982).)
It is not improper to discover a trade secret through accidental disclosure. (Chicago Lock Co. v. Fanberg, 676 F.2d 400, 404 (9th Cir. 1982).)
Use of a trade secret by a joint owner of that secret may constitute the misappropriation of the trade secret of “another.” (Morton v. Rank America, Inc. et al., 812 F. Supp. 1062, 1074 (C.D. Cal. 1993).)
Breach of Duty to Maintain Secrecy or Limit Use:
It is misappropriation to disclose or use another’s trade secret, knowing or having reason to know, that at the time of disclosure or use, the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or was derived from or through a person who owed a duty to maintain its secrecy or limit its use. (Cal. Civ. Code, §§ 3426.1(b)(2)(B)(ii) and (iii).)
Every employee is under an implied obligation not to divulge or use confidential information that he acquires by reason of his employment. (By-Buk Co. v. Printed Cellophane Tape Co. (1958) 163 Cal.App.2d 157.)
Generally, the law prohibits former employees from disclosing or misusing an employer’s trade secrets and confidential information, even in the absence of contractual restrictions. (Loral Corp. v. Moyes (1985) 174 Cal. App. 3d 268; but see Heston v. Farmers Insurance Group (1984)160 Cal. App. 3d 402 [former insurance agent not required to return customer files to former employer where terms of written agreement between agent and employer were ambiguous regarding duty to return customer files to company].)
Acquisition By Acccident or Mistake and Use:
Misappropriation is, among other things, the disclosure or use of another’s trade secret without express or implied consent by a person who, before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. (Cal. Civ. Code, § 3426.1(b)(2)(C).)
Two corporate directors were liable to the plaintiff where the directors were aware that their corporation was making unauthorized use of a trade secret improperly transmitted to it by fellow directors. (Components for Research, Inc. v. Isolation Products, Inc. (1966) 241 Cal.App.2d 726.)
To be entitled to damages for the wrongful appropriation of his trade secret, a plaintiff must prove that the defendant has used the plaintiff’s secret to the plaintiff’s detriment. (Droeger v. Welsh Sporting Goods Corp., 541 F.2d 790, 792 (9th Cir. 1976).)
Knowledge:
The defendant must have known or had reason to know that the trade secret was acquired by improper means (Cal. Civ. Code, §3426.1(b)(1)) or was improperly disclosed (Cal. Civ. Code, §3426.1(b)(2)(B)), or that the information was a trade secret and had been acquired by accident or mistake (Cal. Civ. Code, §3426.1(b)(2)(C).)
To be liable for trade secret misappropriation, the defendant must have known or had reason to know that the trade secret was wrongfully acquired or acquired by mistake or accident. (Cal. Civ. Code §§, 3426.1(b)(1) and (2)(B).) “Use of a trade secret without knowledge it was acquired by improper means does not subject a person to liability unless the person receives notice that its use of the information is wrongful.” (PMC, Inc. v. Kadisha (2000) 78 Cal.App.4th 1368, 1383.)
Disclosure of a trade secret to the defendant, followed by the manufacture of a closely similar device by the defendant, shifts to the defendant the burden of going forward with evidence to prove that it arrived at the process by independent invention. (Droeger v. Welsh Sporting Goods Corp., 541 F.2d 790, 793 (9th Cir. 1976).)
Non-Preemption by the Copyright Act:
A California trade secret claim requires the element of secrecy, unlike a copyright infringement claim. The presence of this extra element renders a California trade secret claim different from a copyright claim. Therefore, a California trade secret claim is not preempted by the Copyright Act. (Firoozye v. Earthlink Network, 153 F.Supp.2d 1115, 1131 (N.D.Cal. 2001).)
Element 3: Damages
“The plaintiff fulfills its burden of proving damages by showing the misappropriation, the subsequent commercial use, and introduces evidence by which the jury can value the rights the defendant has obtained.” (Ajaxo, Inc. v. E*Trade Fin. Corp. (2020) 48 Cal.App.5th 129, 185.)
Remedies
The California UTSA authorizes compensatory damages (1) “for the actual loss caused by misappropriation”; (2) “for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss”; and (3) if “neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty.” (Cal. Civ. Code, § 3426.3, subds. (a) & (b); Ajaxo Inc. v. E*Trade Financial Corp. (2010) 187 Cal.App.4th 1295, 1308–1309, 1312–1313.)
Section 3426.3 states:
(a) A complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss.
(b) If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.
(c) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subdivision (a) or (b).
Statute of Limitations
The California UTSA statute of limitations is contained in California Civil Code section 3426.6, which provides: “An action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this section, a continuing misappropriation constitutes a single claim.” (Cal. Civ. Code, § 3426.6; Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal.App.4th 575, 579.)
The statute of limitations on a cause of action for misappropriation of a trade secret by a third party who purchases the trade secret from another misappropriator begins to run when the owner of the secret has any reason to suspect that the third party knows or reasonably should know that it has acquired, used, or disclosed owner’s trade secrets, regardless of the third party’s actual state of mind. (Cal. Civ. Code, § 3426.6; Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal.App.4th 575, 579.)
Affirmative Defenses
Consent
Acquisition, disclosure or use must have been without the trade secret owner’s consent. (Cal. Civ. Code, § 3246.1(b).)
Failure of Trade Secret Owner to Protect Trade Secrets
The failure of the trade secret owner to take prompt action to protect its trade secrets or to alert good-faith acquirers to the existence of its trade secret claims can serve as a defense in the event the trade secret owner eventually decides to pursue a misappropriation claim against the third party. (Cypress Semiconductor Corp. v. Superior Ct. (2008) 163 Cal.App.4th 575, 588.)