Trade secret theft is everywhere. Competitors are always trying to get (unfair) advantage over the competition. Here’s how it happens.
A few months ago, I utilized a service that is part of the sharing economy. You know, a service where you order something from an app, then a driver brings it to you. And in my usual fashion, when my driver arrived, I started to ask about the business he works for. How does it work? What are the benefits? Do you like the company? Questions like that.
In the sharing economy, people tend to have multiple gigs. This driver was no different. He worked for a sharing company that we will politely label “Owner-Share.” My driver also worked for Owner-Share’s biggest competitor that we will call “Competi-Share.” These names will be helpful later when we get into owners of trade secrets and their competitors.
My driver described how he broadcast his availability on the apps for both companies, and whichever offered him a gig in that particular moment, he took. Well, it turns out a lot of people perform gigs for both companies, just like my guy. They sign up through both apps, and are off to the races.
During our conversation, I learned that apps like these offer a sneaky opportunity for corporate spying. Here’s how it went down: When my driver logged into Competi-Share’s app, he was prompted with an offer. The offer was a pop-up promising $25 in exchange for information about Owner-Share. The pop-up contained a link to a third party survey site, where the driver was directed to answer a questionnaire, upload copies of his pay statements, and Owner-Share’s price lists.
What became obvious is that Competi-Share knew that many of its drivers had valuable, inside information about Owner-Share. Competi-Share then modified its app to become a tool for corporate espionage. As we will see below, Competi-Share’s methods likely violated multiple laws, and exposed it to some serious legal penalties.
Trade Secret Law
Since I am explaining the law here, I need to make a few disclaimers. You know, dear reader, that I am not your attorney, right? Although I can be, right now I’m not. Also, for brevity I have ignored many nuances and exceptions that could make or break a case. So please do your own research and contact an attorney to more fully analyze your particular circumstances.
In California, where I’m located, the Uniform Trade Secrets Act (“CUTSA”) creates a statutory cause of action for trade secret “misappropriation.” Civil Code § 3426 et seq. Under California law, misappropriation of trade secrets is an intentional tort. PMC, Inc. v. Kadisha (2000) 78 Cal.App.4th 1368. And penalties are significant.
The Federal Defend Trade Secrets Act (“DTSA”) also contains powerful remedies for combatting trade secret theft. 18 U.S.C. § 1831 et seq. The DTSA covers any misappropriation anywhere in the world if the offender is a U.S. person or entity, or if any step of the “misappropriation” occurred in the United States. 18 U.S.C. § 1837.
Was Owner-Share’s Information A “Trade Secret”?
To summarize, a trade secret must be economically valuable information, that Owner-Share made reasonable efforts to keep from public disclosure. 18 U.S.C. § 1839(3); Civ. Code § 3426.1(d).
This starts with some set of “information.” The scope of protectable “information” is intentionally broad, and is not limited by patentability or other classification. Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc. (2014) 226 Cal.App.4th 26, 27. California law lists examples including “a formula, pattern, compilation, program, device, method, technique or process.” Civ. Code § 3426(d). Federal law includes “all forms and types of financial, business, scientific, technical, economic, or engineering information” in any form. 18 U.S.C. § 1839(3). In other words, pretty much everything encompassing an idea can be the subject of a trade secret.
The “information” must derive actual or potential, independent economic value. And that value must arise because the information is not generally known to the public or competitors. The information can be readily discoverable, as long as it has not been actually discovered by others. ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App3d 1.
Finally, we come to the “secret” part. The information is not a trade “secret” unless Owner-Share made reasonable efforts to keep the information from disclosure. All these elements are necessary for Owner-Share to qualify for trade secret protection.
Recall that Competi-Share was soliciting Owner-Share drivers’ pay statements, and Owner-Share’s price lists. This is clearly valuable information. But did Owner-Share make reasonable efforts to keep this information secret? Of course, I have no idea. But reasonable efforts might include non-disclosure, non-compete agreements, and best practices for employee record keeping.
Did Competi-Share “Misappropriate” Trade Secrets?
In defining what constitutes misappropriation of a trade secret, both CUTSA and DTSA are fairly comprehensive. See 18 U.S.C. § 1839(5)-(6); Civ. Code § 3426.1(b). Competi-Share can’t use “improper means” to acquire a trade secret, or get it from someone else who themselves used improper means. In other words, businesses can’t be sneaky, underhanded or deceitful to get a competitor’s information.
To summarize what constitutes “improper means,” Competi-Share can’t acquire a trade secret through theft or spying, lying to get it, or bribing someone to give it to them. And they can’t acquire it by breaching some obligation like a non-compete agreement or employment contract, or inducing someone else to violate their duties under similar contracts or laws.
I don’t know how it looks from your perspective, but Competi-Share may have utilized improper means to get Owner-Share’s information.
And Competi-Share cannot merely hide behind “we didn’t know.” The law imposes liability if a reasonable person would have known the trade secret was obtained by improper means such as theft, or from someone with an obligation to keep it secret like a former employee.
But there’s another way a trade secret can be misappropriated, by accident or mistake. There are situations where a person divulges a trade secret by accident, for example inadvertently sending product plans to the wrong email address. Perhaps they left some documents containing trade secrets on the morning train. The person receiving these documents has misappropriated the trade secret if circumstances suggest it is a trade secret, and that its disclosure was not intended. The wrong-email and morning train examples suggest an accident or mistake by the person disclosing. And markings on the documents such as “confidential,” or even the sensitive nature of the information contained, could all indicate they are trade secrets.
But once a product is in the open market, a competitor is permitted to reverse engineer the trade secret, or independently derive the same information. 18 U.S.C. § 1839(6)(b); Civ. Code § 3426.1(a).
What Remedies Are Available For Misappropriation of Trade Secrets?
First of all, misappropriation of trade secrets is a serious crime: theft. And if it involves “foreign agents,” it is espionage. Under DTSA, theft or even attempted theft of a trade secret can lead to ten years imprisonment for individuals and/or millions of dollars in fines. 18 U.S.C. § 1832. Economic espionage carries even larger penalties. Id., § 1831. That’s all I can say because I’m not a criminal lawyer.
But in a civil lawsuit, the remedies overlap under California and Federal law. Even so, there are special advantages to the DTSA that will be discussed below.
Injunctions and Seizures
Under both California and Federal law, Owner-Share may obtain an injunction halting actual or threatened misappropriation. Civ. Code § 3426.2; 18 U.S.C. § 1836(b)(3). This allows Owner-Share to stop Competi-Share in their tracks, which could include requirements that Competi-Share take affirmative steps to prevent further harm. Under the DTSA, the court can also issue confidentiality or “gag” orders to help preserve the confidentiality of trade secrets. 18 U.S.C. § 1835. However, when it comes to former employees, the DTSA requires evidence of actual misappropriation, and courts cannot put restrictions on an employee simply because they know the trade secret. 18 U.S.C. § 1836(b)(3)(A)(i)(I)-(II).
One of the biggest benefits of the DTSA is the trade secret owner’s ability to get court ordered seizure of property necessary to prevent dissemination. 18 U.S.C. § 1836(b)(2). Of course, this is only authorized in “extraordinary circumstances” where there is really no other way to protect the owner’s interests through the usual litigation process. Extraordinary circumstances may exist if Owner-Share could demonstrate that Competi-Share could quickly undercut its business and improperly gain marketshare that would be difficult to get back.
But “extraordinary circumstances” come with significant hurdles that Owner-Share must overcome to convince a court that seizure is appropriate. Owner-Share basically has to prove its case from the start, so a lot of evidence will be required. And Owner-Share must post a bond to compensate Competi-Share if the seizure later turns out to be wrongful. Id., § 1836(b)(2)(B)(vi).
If the court issues a seizure order, law enforcement officials are dispatched to seize items containing the trade secret and a hearing is set before the judge within seven days. 18 U.S.C. § 1836(b)(2)(B)(iv)-(v). At the hearing, Owner-Share must again provide proof that supports the charge of misappropriation.
But seeking a seizure order comes with risks. If the seizure turns out to have been wrongful, Competi-Share can sue for damages, interest, attorneys fees, and even punitive damages if the seizure was sought in bad faith. § 1836(b)(2)(G). Ouch! But that doesn’t seem to be the case in our example.
Money Damages and Attorney Fees
Owner-Share can also get damages arising from past misappropriation and use. 18 U.S.C. § 1836(b)(3)(B); Civ. Code § 3426.3. Under CUTSA and the DTSA, Owner-Share is entitled to damages for both its loss and Competi-Share’s gain. In practice however, recovery is limited to lost profits or Competi-Share’s profits net of costs, whichever is greater.
If Owner-Share cannot prove either of these, the court can award a “reasonable royalty.” This “reasonable royalty” is not the same as granting Competi-Share a license to use the trade secret. It is merely a paid-up royalty for past use. O2 Micro Int’l Ltd. v. Monolithic Power Sys., Inc., 399 F.Supp.2d 1064 (N.D. Cal. 2005).
If Competi-Share’s misappropriation was “willful and malicious,” and that appears to be the case, the court can award Owner-Share punitive damages. Total damages including punitives can be up to 300% of Owner-Share’s actual damages. That’s a lot.
CUTSA and the DTSA both provide attorney fees to the prevailing party, but only where misappropriation was malicious or a misappropriation claim was brought in bad faith. Civ. Code §§ 3288 and 3426.4; 18 U.S.C. § 1836(b)(3)(D). CUTSA also allows recovery of litigation costs. These are powerful remedies to dissuade trade secret theft and compensate owners.
Let’s just say Competi-Share is lucky that Owner-Share hasn’t retained me. But it still can! The statute of limitations under both CUTSA and the DTSA is three years. But the clock is ticking…
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