Employers Beware

 

California is not known for being employer friendly when it comes to creative works.  For example, you can’t enforce a non-compete in California.  There’s a statute that considers all such non-competes void for public policy reasons, unless there is an exception (the most common one is the exception for a person who sells a business, who can sign a non-compete agreement).  What employers have done to avoid the problem of employers leaving with their “ideas” is to use trade secret law, copyright law and patent law instead.  Thus, most employees in California who work for companies that create things sign three agreements: a non-disclosure for trade secrets; a work for hire agreement for copyrights and an inventions agreement for patents.

 

But, what happens when employees leave who do not take with them any patents or patentable ideas, nor any creative works (copyrights), nor any actual protectable “secrets” under trade secret law?  The answer is that the employee may be able to waltz out and go work for a competitor without any consequences.  This is the very policy in California, which believes that businesses and the economy fare better when the law facilitates free movement of employees, even when many of their ideas were incubated at their former employer.  This policy has actually worked, if we consider the success of the Silicon Valley.  Employees leave every day and go to other companies, or start their own.  This would not be possible but for the policy in California. 

 

One strategy that has backfired on employers is to claim that the “ideas” that former employees have are their “trade secrets.”  In one recent case, employees left a company when the deal they were working on was sidelined by their employer.  The decided to leave and go pursue the same deal on their own.  The employer sued, under the mistaken believe that they could sue for trade secrets violations under a theory known as “inevitable disclosure.”  Inevitable disclosure is a theory supported in some jurisdictions where an employee may not work for a competitor if the role that they take there will require an “inevitable” disclosure of some of the company’s trade secrets.  If you know the secret formula to Coke, you can’t go become the master brewer for Pespi.  Well, California does not recognize this theory of inevitable disclosure, for the very reason that it voids non-competes: they prevent employees from free movement. 

 

In that case, the court awarded $1,641,261.78 in attorney’s fees and costs pursuant to Cal. Civ. Code § 3426.4  (misappropriation of trade secrets claim made in bad faith) the to two former employees . The Court of Appeal affirmed and further awarded respondents the costs and attorney’s fees they incurred in connection with the appeal.  See, FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270 (Cal. App. 2 Dist. 2009).  The court of appeal upheld the trial court's finding that the plaintiff filed and maintained the action in bad faith within the meaning of Section 3426.4 of the California Uniform Trade Secrets Act.

 

In FLIR, the court ensured that California Uniform Trade Secrets Act to would not be used by employers to do an end-run around California Business and Professions Code section 16600 by, for example, bringing a trade secret action against a former employee to prevent them from forming a competing business or joining a competitor unless there is evidence of threatened or actual misappropriation of trade secrets. Filing a trade secret action simply to preserve a competitive advantage in the marketplace is risky and could result in expensive sanctions.  This is the message that is repeated by California courts. 

 

Thus, the only trade secret enforcement that an employer has in California is for actual misappropriation of an actual trade secret.  That trade secret must meet California’s trade secret test (a modified version of the Uniform Trade Secrets Act):

 

"Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.  Reverse engineering or independent derivation alone shall not be considered improper means.

 

"Misappropriation" means:

 

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

Disclosure or use of a trade secret of another without express or implied consent by a person who:

 

Used improper means to acquire knowledge of the trade secret; or

At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:

 

• Derived from or through a person who had utilized improper means to acquire it;
• Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
• Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
• 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.

 

"Person" means a natural person, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.

 

"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

 

• 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

 

• Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.