how & why california is different when it comes to trade ... · how & why california is...

66
How & Why California is Different When it Comes to Trade Secrets and Non- Competes Presented By: Robert Milligan, James McNairy & Joshua Salinas (June 23, 2015) “Seyfarth Shaw” refers to Seyfarth Shaw LLP (an Illinois limited liability partnership). ©2015 Seyfarth Shaw LLP. All rights reserved.

Upload: others

Post on 24-Jun-2020

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

How & Why California isDifferent When it Comes toTrade Secrets and Non-Competes

Presented By:

Robert Milligan, James McNairy & Joshua Salinas

(June 23, 2015)

“Seyfarth Shaw” refers to Seyfarth Shaw LLP (an Illinois limited liability partnership).©2015 Seyfarth Shaw LLP. All rights reserved.

Page 2: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What We Will Cover

• Defining and Understanding Trade Secrets inCalifornia—Ideas and Contacts in the Spotlight

• Threatened Misappropriation vs. Inevitable Disclosure

• Trade Secret Designations/Identification

• Practical Impact of Preemption on Protecting TradeSecrets and Litigating Misappropriation Cases

• Claims Brought or Maintained in “Bad Faith”

• Non-Competes—General Prohibition; Increased Role ofForum Selection; Role in Business Deals; SettlementAgreements

©2015 Seyfarth Shaw LLP2 |

Page 3: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What is a Trade Secret in California?

• Statutory Creation – California Uniform TradeSecrets Act (“CUTSA”).

• California Civil Code § 3426.1(d) defines a tradesecret as:

• [I]nformation, 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 publicor to other persons who can obtain economic value fromits disclosure or use; and

(2) Is the subject of efforts that are reasonable under thecircumstances to maintain its secrecy.

3 | ©2015 Seyfarth Shaw LLP

Page 4: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Examples of Information

• Formulas

• Ideas

• Manufacturing processes – “know-how”

• Blueprints and engineering drawings

• Software and databases

• Business and marketing plans

• Detailed customer lists/customer information

4 | ©2015 Seyfarth Shaw LLP

Page 5: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Derives Value”

• Independent

• Economic

• Actual or potential

5 | ©2015 Seyfarth Shaw LLP

Page 6: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Not Generally Known”

• To public or otherpersons (includingthose knowledgeablein the subject matter)

• Who can obtaineconomic value fromdisclosure or use

6 | ©2015 Seyfarth Shaw LLP

Page 7: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Protection for Ideas

• Altavion, Inc. v. Konica Minolta Sys. Laboratory, Inc., 226 Cal. App.4th 26 (1st Dist. 2014):

• “In conclusion, it is clear that if a patentable idea is kept secret, theidea itself can constitute information protectable by trade secret law. Inthat situation, trade secret law protects the inventor's ‘right to control thedissemination of information’ [citation omitted]—the information being theidea itself—rather than the subsequent use of the novel technology,which is protected by patent law (Cadence Design Systems, Inc. v.Avant! Corp., supra, 29 Cal. 4th at p. 222, 127 Cal.Rptr.2d 169, 57 P.3d647). In other words, trade secret law may be used to sanction themisappropriation of an idea the plaintiff kept secret.” (Emphasisadded.)

7 | ©2015 Seyfarth Shaw LLP

Page 8: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Customer Lists/LinkedIn Contacts asTrade Secrets?

• Customer lists long regarded as potential trade secrets. See, e.g.,: Reevesv. Hanlon, 33 Cal. 4th 1140, 1155-56 (2004); Morlife, Inc. v. Perry, 56 Cal.App. 4th 1514 (1997)

• Cellular Accessories For Less, Inc. v. Trinitas LLC, Case No. CV 12–06736D, DP (SHx), 2014 WL 4627090 (C.D.Cal. September 16, 2014):

• “The chief factual issue in determining whether a customer list is a tradesecret is the amount of effort involved in compiling it. If the methodsused to compile the information are ‘sophisticated,’ ‘difficult,’ or‘particularly time consuming,’ that tends to show that it is a trade secret.”

• LinkedIn contacts may be trade secret—court found triable issues of factas to whether such contacts were “made public”

8 | ©2015 Seyfarth Shaw LLP

Page 9: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What are Reasonable Efforts to MaintainSecrecy?

• Confidentiality agreements = leading indicator

• Information security

• Password Protection

• E-mail and Electronic Data Policies

• Confidentiality Reminders on Screens

• Limit access

• Must take action against breaches

9 | ©2015 Seyfarth Shaw LLP

Page 10: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What are Reasonable Efforts to MaintainSecrecy? (Cont.)

• Regular training on policies

• Exit interviews and documentation

• Limit information made available to vendors,customers and subcontractors

10 | ©2015 Seyfarth Shaw LLP

Page 11: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

11 |

What are Reasonable Efforts toMaintain Secrecy? (Cont.)

©2015 Seyfarth Shaw LLP

Page 12: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What are Reasonable Efforts to MaintainSecrecy? (Cont.)

12 | ©2015 Seyfarth Shaw LLP

Page 13: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What are Reasonable Efforts to MaintainSecrecy? (Cont.)

• Absolute secrecy not required

• Not necessary to do everything possible tosafeguard information

• Only what is reasonable under thecircumstances

• Passwords alone are not likely to be enough,but rather one part of a coordinated approach

13 | ©2015 Seyfarth Shaw LLP

Page 14: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What are Reasonable Efforts to MaintainSecrecy? (Cont.)

• Recent example is Direct Tech., LLC v. Electronic Arts,Inc., Case No. CV 10-1336 AG (August 4, 2014)(summary judgment on claim of misappropriation oftrade secrets)• Court rejected Plaintiff’s evidence that it had taken reasonable

efforts to maintain secrecy, which included:

• Substantial communication with defendant about a non-disclosureagreement

• Third party developer “knew it would be inappropriate to send adesigner’s ideas to a competitor”

• Defendant told its employees to keep thing confidential

• Defendant asked third developer to have Plaintiff sign a confidentialityagreement

14 | ©2015 Seyfarth Shaw LLP

Page 15: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Conducting Trade Secret Investigations

• Identify trade secrets at issue

• Evaluate circumstances regarding misappropriation

• Gather and (forensically) preserve relevant evidenceimmediately• Employment records

• Organizational charts

• Electronic devices, network shares, and communications

• Consider contacting/confronting employee and/orprospective employer

• Retain outside counsel

• Refer matter to state or federal prosecutor

15 | ©2015 Seyfarth Shaw LLP

Page 16: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Sealing Court Records

• Overstock.com, Inc. v.Goldman Sachs Group,Inc., 231 Cal.App.4th 471(2014)

• “The trial courts can, andshould, view overlyinclusive sealing effortswith a jaundiced eye, andimpose sanctions asappropriate.”

16 | ©2015 Seyfarth Shaw LLP

Page 17: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Misappropriation”

Defined by Cal. Civ. Code § 3426.1(b) as:

(1) Acquisition of a trade secret of another by a person who knowsor has reason to know that the trade secret was acquired byimproper means.

(2) Disclosure or use of a trade secret of another without express orimplied consent by a person who:

(A) Used improper means to acquire knowledge of the trade secret;

(B) At the time of disclosure or use, knew or had reason to know thathis or her knowledge of the trade secret was: (i) Derived from orthrough a person who had utilized improper means to acquire it; (ii)Acquired under circumstances giving rise to a duty to maintain itssecrecy or limit its use; or (iii) Derived from or through a person whoowed a duty to the person seeking relief to maintain its secrecy orlimit its use;

(C) Before a material change of his or her position, knew or had reasonto know that it was a trade secret and that knowledge of it had beenacquired by accident or mistake.

17 | ©2015 Seyfarth Shaw LLP

Page 18: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Threatened Misappropriation”

• Civil Code § 3426.2 — actual and threatened may beenjoined.

• Threatened misappropriation may be shown wheredefendant:• (i) “has misused or disclosed some of those trade secrets in the

past”;

• (ii) “intends to improperly use or disclose some of those tradesecrets”; or

• (iii) “wrongfully refuses to return the trade secrets after a demandfor their return has been made.”

• Also potential improper acquisition argument when threat isimminent.

18 | ©2015 Seyfarth Shaw LLP

Page 19: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Improper Means”

• Non-exclusive definition, “includes theft, bribery,misrepresentation, breach or inducement of abreach of a duty to maintain secrecy, orespionage through electronic or other means.”

• However, use of the word “includes” does not limitwhat may constitute “improper means” to those itemslisted in the definition at Civil Code Section 3426.1(a).

• “Reverse engineering or independent derivationalone shall not be considered improper means.”Civil Code § 3426.1(a).

19 | ©2015 Seyfarth Shaw LLP

Page 20: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Improper Means” (Cont.)

• Plaintiff has burden of proof, including negating independentdevelopment and reverse engineering.• “Reverse engineering or independent derivation alone

shall not be considered improper means.” Cal. Civ. Code§ 3426.1(a).

• Sargent Fletcher, Inc. v Able Corp., 110 Cal. App. 4th1658, 1669 (2003).

• Not an issue for patent protection.• Independent or reverse engineered derivation of thing

covered by valid patent may still constitute patentinfringement.

• In the digital age there are many tools/available to badactors…

20 | ©2015 Seyfarth Shaw LLP

Page 21: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

©2014 Seyfarth Shaw LLP21 |

Page 22: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

California Court Extends Protections To“Silent Whistleblowers”

• Diego v. Pilgrim United Church of Christ, 231Cal.App.4th 913 (2014):

• A prime California public policy is that employers cannot retaliateagainst whistleblowers—individuals who have reported suspectedunlawful employer conduct.

• Employee claimed she was retaliated against and terminated becauseemployer mistakenly believed she complained to the Dept. of SocialServices

• Court of Appeal clarified that Section 1102.5, even in its pre-amendedversion, forbids employers to terminate “perceived whistleblowers,”even if that belief is mistaken

• Case reinforces the point that employers should documentperformance issues and disciplinary decisions to help support laterdecisions to discipline an employee.

22 | ©2015 Seyfarth Shaw LLP

Page 23: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

California Has Rejected the Doctrine ofInevitable Disclosure

• Pepsico, Inc. v. Redmond, 54F.3d 1262 (7th Cir. 1995)(“defendant's new employmentwill inevitably lead him to rely onthe plaintiff's trade secrets”)

• Whyte v. Schlage Lock Co., 101Cal. App. 4th 1443 (2002)(“[O]ur rejection of the inevitabledisclosure doctrine iscomplete.”)

23 | ©2015 Seyfarth Shaw LLP

Page 24: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Imputed, Vicarious and Joint Liability forMisappropriation

• “Corporate shareholders,officers, and directors canbe held personally liablefor misappropriation whenthey knew or had reasonto know about but failedto put a stop to tortiousconduct.” PMC, Inc. v.Kadisha, 78 Cal. App. 4th1368, 1387 (2000)

24 | ©2015 Seyfarth Shaw LLP

Page 25: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Ownership

California has no “current ownership rule”

• One who has sold a trade secret may maintain alawsuit for pre-sale misappropriation.

• Reaffirms trade secrets as tangible property rights.

• Jasmine Networks, Inc. v. Superior Court (MarvellSemiconductor, Inc.), 180 Cal. App. 4th 980 (2009) (suggestinglawsuit by purchaser seeking indemnity may satisfy damagesrequirement).

25 | ©2015 Seyfarth Shaw LLP

Page 26: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Identification

26 |

The “Reasonable Particularity”Requirement Under Civ. Proc.Code § 2019.210

©2015 Seyfarth Shaw LLP

Page 27: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Identification

• Plaintiff’s complaint must put defendant(s) onnotice of the subject matter of the trade secret.

• Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244 (1968).(Leading authority.)

• Plaintiff “should describe the subject matter of the tradesecret with sufficient particularity to separate it from mattersof general knowledge in the trade or of special knowledge ofthose persons who are skilled in the trade.”

• The plaintiff must provide the defendant “reasonable noticeof the issues which must be met at the time of trial” and“reasonable guidance in ascertaining the scope ofappropriate discovery.”

27 | ©2015 Seyfarth Shaw LLP

Page 28: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Identification (Cont.)

• Unlike other jurisdictions, California trade secretplaintiffs must identify allegedly misappropriatedtrade secret(s) with reasonable particularity prior tocommencing discovery.

• CCP § 2019.210, which extends the Diodesidentification requirement to discovery, provides:

• Pending compliance with CCP § 2019.210, discoverystayed on each cause of action that “hinges upon”trade secret misappropriation. Advanced ModularSputtering, 132 Cal. App. 4th 826, 836 (2005).

28 | ©2015 Seyfarth Shaw LLP

Page 29: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Identification (Cont.)

• Four Primary Purposes of § 2019.210:

• Promotes well-investigated claims and dissuades the filingof trade secret complaints that have no merit;

• It prevents plaintiffs from conducting “fishing expeditions” indiscovery as a means to obtain defendant’s trade secrets;

• It assists the court in framing the appropriate scope ofdiscovery; and

• It enables defendants to form complete and well-reasoneddefenses and ensures that defendants need not wait untilthe eve of trial to effectively defend against trade secretclaims.

• Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp.2d 980, 985 (S.D. Cal. 1990).

29 | ©2015 Seyfarth Shaw LLP

Page 30: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Trade Secret Identification (Cont.)

Satisfying the “reasonable particularity” requirement:

• Plaintiff “must make some showing that is reasonable, i.e.,fair, proper, just and rational . . . to identify its alleged tradesecret in a manner that will allow the trial court to control thescope of subsequent discovery, protect all parties‘ proprietaryinformation, and allow them a fair opportunity to prepare andpresent their best case or defense at a trial on the merits.”Brescia v. Angelin, 172 Cal. App. 4th 133, 145 (2009).

• Must be sufficient to permit defendant to discern boundariesof the trade secret. Perlan Therapeutics, Inc. v. SuperiorCourt, 178 Cal. App. 4th 1333, 1343 (2009).

30 | ©2015 Seyfarth Shaw LLP

Page 31: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Remedies – Injunctive

• Temporary Restraining Order

• Preliminary Injunction

• Permanent Injunction (disfavored)

31 | ©2015 Seyfarth Shaw LLP

Page 32: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Remedies – Monetary

Civil Code § 3426.3:

• Actual damages

• A complainant may recover damages for the actual losscaused by misappropriation.

• Unjust enrichment

• A complainant also may recover for the unjustenrichment caused by misappropriation that is not takeninto account in computing damages for actual loss.

• Reasonable royalty

• If neither damages nor unjust enrichment caused bymisappropriation are provable, the court may orderpayment of a reasonable royalty for no longer than theperiod of time the use could have been prohibited.

32 | ©2015 Seyfarth Shaw LLP

Page 33: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption

• What is the affect of CUTSA on other claimsrelating to trade secret misappropriation?

• Civil Code § 3426.7 provides:

• (a) Except as otherwise expressly provided, thistitle does not supersede any statute relating tomisappropriation of a trade secret, or any statuteotherwise regulating trade secrets.

• (b) This title does not affect:

• (1) contractual remedies, whether or not basedupon misappropriation of a trade secret,

33 | ©2015 Seyfarth Shaw LLP

Page 34: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption (Cont.)

• (2) other civil remedies that are not based uponmisappropriation of a trade secret, or

• (3) criminal remedies, whether or not basedupon misappropriation of a trade secret.

• However, CUTSA does preempt “common lawclaims” “based upon the same nucleus of factsas the misappropriation of trade secrets claimfor relief.” K.C. Multimedia v. Bank of AmericaTech., 171 Cal. App. 4th 939, 958 (2009).

34 | ©2015 Seyfarth Shaw LLP

Page 35: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption (Cont.)

• Silvaco Data Systems v. Intel Corp., 184 Cal. App.4th 210, 224 (2010) (affirming preemptive affect ofCUTSA.

• Split between California state and federal courtsover when a plaintiff must choose to pursueeither a claim under CUTSA or a common lawtheory; jurisdictions vary as to the applicationand breadth of preemption.

35 | ©2015 Seyfarth Shaw LLP

Page 36: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

• Current hot issue in this area is whether CUTSApreemption extends to misappropriation ofconfidential information that is not trade secret.• Sunpower Corporation v. Solarcity Corporation, Case

No. 12-CV-00694-LHK (N.D. Cal. December 11,2012):

• Surveying CUTSA preemption decisions and concludingCUTSA preempts claims based on the misappropriationof information that is confidential but does not rise to thelevel of trade secret.

• Relies heavily on Silvaco to disregard otherwisecontrolling 9th Circuit authority.

Preemption – Does It Apply toConfidential Information?

©2015 Seyfarth Shaw LLP

Page 37: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption – Does It Apply toConfidential Information? (Cont.)

• Concludes non-trade secret claims will bepreempted unless plaintiff can show that:

• (1) non-trade secret proprietary information was“made property by some provision of positive law”or

• (2) the non-trade secret claims allege “wrongdoingthat is materiall[y] distinct [] [from] the wrongdoingalleged in a [C]UTSA claim.”

37 | ©2015 Seyfarth Shaw LLP

Page 38: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption – Does It Apply toConfidential Information? (Cont.)

• No California Supreme Court decision has clearlyruled upon whether CUTSA’s claims preemptionapplies if the information does not qualify fortrade secret protection.

• Including where the confidential information is aprotectable interest other than a trade secret.

• However:• Breach of non-disclosure of confidential information

claim should be viable.

38 | ©2015 Seyfarth Shaw LLP

Page 39: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Preemption – Does It Apply toConfidential Information? (Cont.)

• Tort theory of recovery for misuse of confidentialinformation may be limited if the “confidentialinformation” at issue is the same as the trade secretsand a trade secret misappropriation claim is alleged.

• Continue to use confidential information NDAs despiteapparent ambiguity in law, but tailor them to protectnon-public and valuable information, but beware ofCal. Business & Professions Code § 16600arguments.

39 | ©2015 Seyfarth Shaw LLP

Page 40: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Other States’ Approaches to Preemption

• The breadth and scope of trade secret preemptionvaries from state to state.

• Majority approach: UTSA displaces alternative statelaw tort claims that seek to hold the defendantliable for misusing the plaintiff's information.

• Minority approach: permit state tort claims basedon information that fails to qualify as a UTSA tradesecret (e.g. Wisconsin).

• Still other states do not apply preemption (e.g.Iowa).

40 | ©2015 Seyfarth Shaw LLP

Page 41: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

“Bad Faith” Claims of Misappropriation

41 | ©2015 Seyfarth Shaw LLP

Page 42: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Bad Faith Claims

• California allows for recovery of attorney’s feesand costs (including expert fees) where:

• Claim of misappropriation is made in bad faith;

• Motion to terminate injunction is made/resisted in badfaith; or

• Willful and malicious misappropriation exits.

• California Civil Code § 3426.4.

• Flir Systems, Inc. v. Parrish, 174 Cal .App. 4th 1270(2009) (awarding $1.6 million in fees and costs).

• While UTSA allows for bad faith claims, whatconstitutes bad faith varies by jurisdiction

42 | ©2015 Seyfarth Shaw LLP

Page 43: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Bad Faith Claims (Con’t)

• Claims brought or maintained in bad faith subjectplaintiff to liability

• Standard is objective speciousness (i.e. lack ofevidence) and subjective bad faith (i.e. improperpurpose)

• Indicators• Alleged to have pleaded inevitable disclosure theory

• Information publically available

• Alleging conduct that it is lawful

• Alleged to have brought suit for anti-competitive purpose

• Lack of damages

• Onerous settlement positions

• Ignoring court rulings

• Placing too much stock in court rulings

43 | ©2015 Seyfarth Shaw LLP

Page 44: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Court Upholds Fee Award DespitePlaintiff Dismissing Trade Secret Suit

• Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc.,236 Cal.App.4th 243 (2015)

44 | ©2015 Seyfarth Shaw LLP

Page 45: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Non-Competition Agreements/Restrictive Covenants

45 | ©2015 Seyfarth Shaw LLP

Page 46: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

What is a Non-Competition Agreement?

• Agreement that:

• Prohibits/limits competition;

• Provides for forfeiture or penalty for competition(e.g., loss of benefit or bonus); and

• Prohibits solicitation of customers; and perhaps

• Prohibits solicitation of employees (may also beinvalid improper assignment of IP rights)?

46 | ©2015 Seyfarth Shaw LLP

Page 47: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Ninth Circuit Jeopardizes Broad “No Re-Hire Clauses in California

• Golden v. CaliforniaEmergency PhysiciansMedical Group (9th Cir. April8, 2015)

• Divided Ninth Circuit panel heldthat a “no re-hire” provision in asettlement agreement could,under certain circumstances,constitute an unlawful restraintof trade under California law.

• Court suggested entiresettlement agreement may bevoid due to no re-hire provision

47 | ©2015 Seyfarth Shaw LLP

Page 48: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Non-Competition Agreements/Restrictive Covenants – California

• California has a strong public policy againstnon-competition agreements and othercovenants that impair employee mobility andcompetition.

• Such agreements are presumptively void.

• Business & Professions Code § 16600 et seq.

• Section 16600 provides:

• “Except as provided in this chapter, every contractby which anyone is restrained from engaging in alawful profession, trade, or business of any kind isto that extent void.”

48 | ©2015 Seyfarth Shaw LLP

Page 49: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Non-Competition Agreements/Restrictive Covenants – California (Cont.)

• Non-competition agreements/restrictivecovenants generally unenforceable inemployment contracts in California.

• California employer contracts.

• Out-of-State employer contracts with California-based employees.

49 | ©2015 Seyfarth Shaw LLP

Page 50: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Non-Competition Agreements InvalidAbsent Statutory Exception

• California Supreme Court held in Edwards v.Arthur Andersen, 44 Cal. 4th 937 (2008):

• “Noncompetition agreements are invalid under section16600 in California even if narrowly drawn, unlessthey fall within the statutory exceptions of section[s]16601,16602, or 16602.5.”

• Rejecting the “Narrow Restraint” exception.

©2015 Seyfarth Shaw LLP

Page 51: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Non-Competition Statutory Exceptions –California

• Section 16601: Sale of goodwill of, or ofcomplete interest, in a business.

• Section 16602: Dissolution of, or withdrawalfrom, partnership.

• Section 16602.5: Dissolution of, or terminationof interest in, LLC.

• Restrictions still must be “reasonable” in termsof geographic, temporal and restrictive scope(i.e., tied to interest released).

51 | ©2015 Seyfarth Shaw LLP

Page 52: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Sale of Business Exception

• Section 16601 – non-competes enforceablewhen executed in connection with the sale of abusiness.• Fillpoint, LLC, v. Maas, 208 Cal. App. 4th 1170 (2012)

• Specialty video game publisher employee signs twoseparate agreements, agrees to stay on for an additional3 years.

1. Stock purchase agreement: 3 year non-compete fromdate of sale.

2. Employment agreement: 1 year after termination/expiration of agreement.

52 | ©2015 Seyfarth Shaw LLP

Page 53: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Sale of Business Exception (Cont.)

• Terms conflicted with/broader than stock purchaseagreement (latent tail).

• Terms not focused on protecting the acquired company’sgoodwill. Employee joins competitor 3 years laterbelieving non-compete obligations satisfied.

• Court holds agreements must be read together.

• Non-compete in employment agreement unenforceableunder Section 16601.

53 | ©2015 Seyfarth Shaw LLP

Page 54: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

The So-Called “Trade Secret Exception”

• Historically California courts have enforced non-competes to the extent necessary to protect tradesecrets.

• The Retirement Group v. Galante, 176 Cal. App. 4th 1226(2009) (“Court may enjoin tortious conduct...banning theformer employee from using trade secret information” notbecause the conduct falls within a statutory exception to16600, but “because it is wrongful independent of anycontractual undertaking.”).

• Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 577(2009) (“[a]lthough we doubt the continued viability of thecommon law trade secret exception to covenants not tocompete, we need not resolve the issue here.”).

54 | ©2015 Seyfarth Shaw LLP

Page 55: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

• Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH (E.D. Cal. March 21, 2012).

• After expressly recognizing the bar against non-competitionagreements set forth in section Cal. Bus. & Prof. Code section16600, the court issued a time-limited preliminary injunction thatallowed lawful competition, but which prohibited use of plaintiff’strade secrets to compete.

• Defendant’s bad acts (alleged surreptitious downloading ofPlaintiff’s information, use of wiping software to cover his tracks,and failure to account for several thumb drives notwithstandingthe court’s order that he do so) helped provide justification forrelief.

The So-Called “Trade Secret Exception”(Cont.)

©2015 Seyfarth Shaw LLP

Page 56: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

• Pyro Spectaculars, Inc. et al. v. Souza, Case No. 12-CV-00299-GGH (E.D. Cal. March 21, 2012) (cont.).

• Trade secrets committed to memory for purpose ofmisappropriation recognized as misappropriationjustifying injunction (defendant’s probablemisappropriation thus far has “[s]o tainted defendant’sbase of knowledge that it would be very difficult, at leastover the next several months, for defendant to separatehis general pyrotechnics information and skills from[Plaintiff’s] legitimate trade secrets when competing with[Plaintiff].”).

The So-Called “Trade Secret Exception”(Cont.)

©2015 Seyfarth Shaw LLP

Page 57: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

The So-Called “Trade Secret Exception”(Cont.)

• Edwards v. Arthur Andersen – CaliforniaSupreme Court expressly declined to reachapplicability of so-called “trade secretexception” to § 16600 because issue not raisedon appeal.

57 | ©2015 Seyfarth Shaw LLP

Page 58: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

58 |©2015 Seyfarth Shaw LLP

Page 59: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Choice of Law/Forum Selection Clauses

• Some non-compete agreements contain a choice of law provisioncalling for the application of the law of a state other than Californiaand/or forum selection clauses.

• Where applying the other state’s law would result in theenforcement of a non-compete clause in contravention ofCalifornia public policy, California courts have refused to applythe choice of law clause.

• The Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th 881 (1998)

• Arkley v. Aon Risk Services Co. Inc., 2012 WL 2674980 at *3(C.D. Cal., 2012).

59 | ©2015 Seyfarth Shaw LLP

Page 60: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Choice of Law/Forum Selection Clauses(Cont.)

• Verdugo v. Alliantgroup, L.P (Cal. Ct. Appeal, May 28,2015)

• Held that if a dispute involves unwaivable claims under California’sLabor Code, the employer seeking to enforce the forum selectionclause bears the burden of showing that litigating the claims in thecontractually designated forum “will not diminish in any way thesubstantive rights afforded … under California law.”

• Class action lawsuit alleging Labor Code violations involving unpaidovertime, meal and rest breaks, wage statements, and timelytermination pay.

• “Alliantgroup could have eliminated any uncertainty on which law aTexas court would apply by stipulating to have a Texas court applyCalifornia law in deciding Verdugo’s claims, but Alliantgroup failed todo so.”

60 | ©2015 Seyfarth Shaw LLP

Page 61: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Choice of Law/Forum Selection Clauses(Cont.)

• Ruiz v. Affinity Logistics Corp., 667 F. 3d 1318 (9th Cir. 2012)(refusing to apply Georgia choice of law provision in connectionwith non-competition agreement).

• Meras Engineering v. CH20, Inc., 2013 WL 146341 at *7 (N.D.Cal., 2013). (Federal courts in California have traditionallyfollowed this approach as well.)

• Federal district courts in California have increasinglyelected to enforce forum selection clauses eventhough it would require a California worker to travel toanother state and be subject to enforcement of thenon-complete agreement. The Atlantic Marinedecision has probably accelerated this trend.

61 | ©2015 Seyfarth Shaw LLP

Page 62: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Forum Selection Workaround to § 16600?

• Atlantic Marine Construction Co., Inc. v. U.S. Dist. Ct. for Western Dist. ofTexas, 134 S.Ct. 568 (December 2013)

• In the absence of the forum selection clause being procured by impropermeans (e.g., duress, coercion etc.), the forum selection clause should bepresumed valid

• The transferee court’s law, not the transferor court’s law, should apply

• The transferor court could still theoretically chose to apply Californiasubstantive law, but as a practical matter this may be unlikely

• Often, this analysis applies in the context of transfer motions wherefederal common law doctrine such as the “first to file” rule is also at playand may affect the courts’ analyses

62 | ©2015 Seyfarth Shaw LLP

Page 63: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Choice of Law/Forum Selection Clauses(Cont.)

• Marcotte v. Micros Sys., Inc., No. C 14–01372 LB, 2014 WL4477349, at *8 (N.D. Cal. Sept. 11, 2014) (“[A] party challengingenforcement of a forum selection clause may not base itschallenge on choice of law analysis.”) (post-Atl. Marine)

• Rowen v. Soundview Commc’ns, Inc., No. 14-CV-05530-WHO,2015 WL 899294 (N.D. Cal. Mar. 2, 2015) (Granting motion totransfer California action based upon Georgia forum selectionlaw clause and rejecting arguments that transfer would violateSection 16600).

• Ryan v. Microsoft Corp., No. 14-CV-04634-LHK, 2015 WL1738352, at *5 (N.D. Cal. Apr. 10, 2015) (“arising out of” acontract are narrower than those covering disputes “arising out ofor relating to” a contract”).

63 | ©2015 Seyfarth Shaw LLP

Page 64: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Questions?

64 | ©2015 Seyfarth Shaw LLP

Page 65: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

Thank you!

65

Stay current on trade secretissues by visiting:

www.tradesecretslaw.com

©2015 Seyfarth Shaw LLP

Page 66: How & Why California is Different When it Comes to Trade ... · How & Why California is Different When it Comes to Trade Secrets and Non-Competes Presented By: Robert Milligan, James

How to Contact Us

• Robert B. Milligan: [email protected]• Los Angeles

• James D. McNairy: [email protected]• Sacramento/San Francisco

• D. Joshua Salinas: [email protected]• Los Angeles

66 | ©2015 Seyfarth Shaw LLP