Trade secret cases are considerably different from other legal disputes, and not being properly prepared could prove costly.
“A trade secrets complaint is not like other complaints that can be fixed later if there’s something missing,” says Christian E. Picone, a partner at Berliner Cohen. “Later” comes fast in trade secrets litigation. “A seasoned trade secrets defense attorney will take action right away, essentially freezing discovery until they get an articulated definition of the trade secret.”
That can be done because of a special statutory requirement under California law that mandates the plaintiff identify the trade secret prior to the discovery process. “That statutory provision can be useful as a shield or a sword, depending on which side you are on,” says Picone.
Smart Business spoke with Picone and Kathleen F. Sherman, an associate at Berliner Cohen, about how to address that provision and other issues to consider in trade secret litigation.
What’s the best way to handle the trade secret definition?
A plaintiff should spend some time with its attorney preparing the case before the complaint is drafted and filed. In particular, the plaintiff should be ready to articulate its trade secret as soon as the case is filed because the defense could immediately serve a special interrogatory demanding identification of the trade secret, and the plaintiff would have only 30 days to respond. If the plaintiff is not prepared, the defense could seize control of the case at that point.
The trade secrets identification requirement is perceived differently by plaintiffs and defendants. Typically, a plaintiff will want to keep the trade secret definition as broad as possible to keep options open as the case progresses, while the defense will challenge the plaintiff to narrow the definition. On the other hand, a plaintiff can show the strength of its case early on — and perhaps force a settlement — by clearly and confidently articulating its trade secret.
What makes something a trade secret?
A trade secret is information that:
- Derives independent economic value by virtue of not being known by the general public or persons who could obtain economic value from its disclosure or use, and
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
A plaintiff must establish both prongs in order to establish a trade secrets claim.
Taking the example of a trade secret within software, the entire piece of software would not be a trade secret because common functions, such as a print function, are well known in the industry. The trade secret is the particular aspect of the software that is unique and not known to others in the industry.
Even if a plaintiff establishes the first prong, it also must establish that, prior to litigation, it took steps to prevent competitors from knowing the trade secret, such as limiting access to source code to those with a need to know, using passwords, and marking code with the appropriate designations.
Cases involving customer lists can be particularly tricky. Not only must the trade secret have been properly protected, the customer information can’t be something that can be discovered by independent means, from public information such as directories, for example. In addition, a trade secrets claim based only on the identities of customers can be extremely difficult to prove. The fact that a former employee is doing business with the plaintiff’s customers does not, by itself, establish a violation of law. Noncompete clauses are invalid in California. An employer can require an employee to sign a nonsolicitation agreement, but the law is clear that an employee may make an announcement that he or she is leaving and supply new contact information to customers; such an announcement does not constitute solicitation.
Is proper protection of trade secrets a standard practice?
Most companies try to take steps to protect their trade secrets, but not all are properly advised or do not take the time to think about the potential consequences down the road of inadequate trade secrets protection, especially in the heat of trying to get a start-up company off the ground or a new product to market.
Best practices include having every new employee sign a confidentiality agreement including a provision that they understand their obligation not to disseminate the company’s confidential, proprietary information, which includes trade secrets.
We have had clients that didn’t properly protect trade secrets. Then their challenge was to determine whether confidential information used by others to compete with their clients could be the basis of an intentional interference with contract claim or another tort claim.
Trade secret claims are often preferred by plaintiffs because trade secrets law allows a plaintiff to request attorneys’ fees if it prevails, an option that isn’t available for tort claims. However, the attorneys’ fees provision cuts both ways. If a plaintiff files a trade secrets claim without a reasonable basis for doing so, the judge could order the plaintiff to pay defense attorney fees. That’s why it’s so important to vet trade secrets cases carefully prior to filing. ●
Insights Legal Affairs is brought to you by Berliner Cohen