American Semiconductor, APX Technologies, attorneys fees, bad faith, reverse engineering, Science of Skincare v. Phytoceuticals, trade secret defense strategies, trade secret litigation, trade secrets
As anyone in engineering (and other technical fields) knows, leaving one company to work for another in the same industry can be a tricky proposition. This is particularly true where the employee(s) leaves to open their own start-up company in the same industry. Separating the ‘old’ company’s alleged trade secrets from the employee’s formerly-acquired knowledge, though, can be factually and technically intensive. Unfortunately, this crucial issue is most often sorted out in litigation, which can be financially devastating for defendants who are smaller start-up companies.
One of my favorite cases was such a case, involving five post-doctoral fellows and a former employer who had hired all five at the same time. The employer and the post-docs had attended the same conferences over the years, and the employer was familiar with their work and expertise.
A few years after the post-docs were hired, though, the company’s financial situation became dire. Soon after, the five former employees left and formed their own start-up. As you might guess, the former employer sued them for trade secret misappropriation. The employees eventually prevailed, but it was touch and go for a while. For one, their snarky emails to each other (all on company accounts) mocking their former employer’s facial features and intelligence, while hilarious, didn’t make the court see them as sympathetic defendants.
Most difficult for the small start-up, though, was the cost of defending itself. And that’s where the pink moped comes in. To help pay the start-up’s legal bills, the CEO sold his car and bought a pink moped to get around town. The story has a happy ending though, and, after a long and hard-fought fight, the former employees prevailed. Hopefully their CEO was able to retire the moped and is currently riding around in a very nice car.
James Hardin and Tyler Woods (both of Newport Trial Group) outline some important strategies for trade secret defendants in their recent article, “Key Defense Strategies in Trade Secret Cases” (published in New Matter, Spring 2014). The most important pointer for litigants, on both sides, is to define the subject matter at the heart of the case early on. Under California law, for example (as set forth in the California Civil Code, section 2019.210), trade secret plaintiffs must identify the alleged trade secret with “reasonable particularity” before starting discovery. The authors explain that this rule (and similar rules under other states’ laws) can be used strategically. For example, in addition to using the rule to control the plaintiff’s discovery, defendants can use the plaintiff’s failure to adequately identify the trade secret to set up a motion for summary judgment or in a motion to exclude evidence regarding unidentified trade secrets at trial.
As the authors note, trade secret plaintiffs also have the burden of showing: 1) a protectable trade secret; 2) causation and 3) damages in order to prevail on a trade secret claim. Trade secret plaintiffs should keep these fundamental elements in mind and defendants should identify those that are lacking from the plaintiff’s case and use the missing links to their advantage.
For example, as obvious as it should be, trade secret claims are sometimes based on information that is not secret. If information is publicly available or, in certain circumstances, if it has been disclosed, it is not a trade secret. The plaintiff also must have taken reasonable steps to maintain secrecy of the information in order to prevail on its claim. For example, if a plaintiff sends out schematics of a potential trade secret to its third-party vendors without appropriately marking the schematics and binding the vendor to protect the information, then the information at issue may have lost its status as a trade secret. Along these same lines, plaintiffs will have difficulty supporting a trade secret claim where the information at issue is too generic or obvious; i.e. unless the information at issue confers (or potentially confers) some economic advantage on the plaintiff, it is not a trade secret. As Hardin and Woods note in their article, courts often require plaintiffs to present specific evidence that the trade secret has value because of its secrecy and a company’s general evidence of money spent on research and development may not be enough.
Another interesting factor that Woods and Hardin discuss is reverse engineering. Figuring out a trade secret by independent means, such as by reverse engineering a product, is generally not considered to be misappropriation (see e.g. California Civil Code Section 3426.1). Along these same lines, merely possessing a trade secret is not considered to be misappropriation. The trade secret generally must be disclosed or used to show that the plaintiff has been damaged (see e.g., Wyatt Tech. Corp. v. Malvern Instruments, Inc., C.D. Cal. July 2009).
Further, as in cases such as Science of Skincare , LLC v. Phytoceuticals, Inc. et. al. (C.D. Cal. July 7, 2009), the plaintiff cannot prevail unless it shows that the defendant’s actions proximately caused legally cognizable damage to the plaintiff. The Science of Skincare case involved an employee who left her company to work for a former supplier-turned-competitor of the company. Before the employee left the company, she allegedly had covertly induced twelve other sales team employees to leave with her to work for the competitor company. The Court carefully considered the plaintiff’s claim that its injury was caused by the sales team’s departure. The Court reasoned that the plaintiff could not show trade secret misappropriation because it could not show that the source of its injury-loss of its sales team- was connected to any alleged trade secret.
The Science of Skincare case, however, also presents a cautionary tale for employees and a potential “plan B” strategy for potential plaintiffs/employers. The Court in Skincare denied the defendant’s motion for summary judgment on all but the trade secret claim, leaving the plaintiff’s claims for breach of fiduciary duty, breach of a disclosure agreement and intentional interference with prospective economic advantage. Thus, although the defendant wasn’t found liable for trade secret misappropriation, she still faced potentially serious claims related to her alleged actions.
The Court in All American Semiconductor (All American Semiconductor v. APX Tech (unpublished)), though, (quoting another case) bluntly reiterated the plaintiff’s most important duty in trade secret cases: the plaintiff “may not leave mysterious exactly which pieces of information are the trade secrets and must do more than just identify a kind of technology and then invite the court to hunt through the details in search of items meeting the statutory definition.” The Court found that All American Semiconductor’s claim was so deficient that it awarded the defendants over $202,000 in attorneys’ fees for bad faith prosecution of its claim. All American’s bad faith was inferred in part because it proceeded with the case even though it was unable to respond to the opposing counsel’s arguments regarding the shortcomings of All American’s case. The Court said that most critical to its analysis of All American’s subjective bad faith was “plaintiff’s failure to identify what trade secrets are at issue.”
The moral of the story? For potential plaintiffs, its the necessity of knowing exactly what is being fought over before the fight is brought to the court. For potential defendants, its having a game plan. First, with a preventative pre-employment phase where technical experience, knowledge and skills are cataloged with supporting documentation; and then, if litigation arises, strategically using the plaintiff’s duty to specifically identify its trade secrets to assess and challenge the plaintiff’s trade secret claims.
Oh, and if you want to send emails to your friends mocking your former employer, make sure you don’t use the company’s account.
This blog is for information purposes only and is not to be considered as legal advice, nor does it create an attorney-client relationship.