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: The Trade Secrets Vault

California confidential: the same California public policy that disfavors noncompete clauses also restricts the enforcement of confidentiality agreements.

Los Angeles Lawyer June, 2008 James W. Denison [FNa1] Attorneys are often called upon to draft agreements intended to protect a client's proprietary rights. The client may wish to prevent an employee from using information after leaving. Or, the client may want to keep its vendors or potential business partners from disclosing its information to the competition. In these situations, attorneys should consider advising their clients that courts may not recognize the proprietary right a client claims to have. Additionally, attorneys drafting agreements should be aware of the limitations that public policy and other laws place on proprietary information rights. Unfortunately, confidentiality provisions and noncompetition clauses are often so broadly written that a party may believe that it has proprietary rights in virtually anything it chooses to designate as proprietary. A clause may, for example, claim protection for "all information, reports, studies ... flow charts, diagrams and other tangible or intangible material," [FN1] with nothing more specific defining the items protected. Or, perhaps more frequently, the drafter will include a catchall generally prohibiting use or disclosure of "proprietary information or material." [FN2] In Fox Controls, Inc. v. Honeywell, a manufacturer of machine safety products argued that any document on which it stamped its company logo was proprietary and therefore protected. [FN3] This argument, however, was handily rejected by the court hearing the case. As often as not, a recitation in a contract--although important--will not be determinative of the parties' rights. As a leading opinion put it: "In self-serving 'Whereas' clauses, an employer cannot state that he is going to confide something unique and hush-hush, and then merely disclose the A-B-C's or Mother Goose Rhymes ...." [FN4] So how can a party identify and protect proprietary rights that courts will recognize? In case law, possible sources of and limits on proprietary rights include the Uniform Trade Secrets Act (UTSA), statutory provisions barring restraints of trade, federal patent and copyright law, and the common law tort of misappropriation. [FN5] The UTSA is an important reference point *20 for any understanding of what proprietary rights are. Indeed, courts often refer to "proprietary material and information" as essentially interchangeable with trade secrets governed by the act. [FN6] The California Uniform Trade Secrets Act statute (CUTSA) is found in Civil Code Sections 3426 et seq. To qualify as a trade secret under CUTSA, material or information must be the sort that "[d]erives independent economic value, actual or potential, from not being generally known ... and ... [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." [FN7] Not Generally Known The first requirement--that the information is not generally known--may be met by compilations of data such as customer lists or other similar confidential information about customers. [FN8] The misappropriation of customer lists, in particular, has been a frequent subject of trade secret law. As a California court explained in Morlife, Inc. v. Perry: "[I]f an employer has expended time and effort identifying customers with particular needs or characteristics, courts will prohibit former employees from using this information to capture a share of the market. As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret." [FN9] Outside of customer list cases, the first requirement may be an issue when a party seeks to enjoin a competitor or former employee from using information that is already available in the public domain--or, at least, to anyone in the particular trade or business. [FN10] Trade secret law is similar to patent law in that there must be some degree of novelty or nonobviousness to the information claimed to derive its value from not being generally known. For example, in Buffets, Inc. v. Klinke, [FN11] an all-you-can-eat cafeteria chain contended that its recipes and "job manuals" on food preparation had been misappropriated by former employees and others who established a competing restaurant. The Ninth Circuit held that the recipes and manuals were not protected by the UTSA because they concerned "basic American dishes that are served in buffets across the United States." [FN12] If a contract seeks to prevent an employee or others from using information that does not qualify as a secret to those in the industry, the provision will likely be stricken for violating statutory prohibitions on unreasonable restraints of trade. In California, Business and Professions Code Section 16600 provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The point of Section 16600 is that employees' lawful pursuit of their livelihood is generally to be encouraged. Employees setting up shop in competition with their former employer will necessarily be hindered from competing if they cannot use any information they gained during their former employment. As one federal appellate court opinion puts it: [T]he right of an individual to follow and pursue the particular occupation for which he is best trained is a most fundamental right. Our society is extremely mobile and our free economy is based upon competition. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience. These skills are valuable to such employee in the market place for his services. Restraints cannot be lightly placed upon his right to compete in the area of his greatest worth. [FN13] A question that has come up with some frequency in cases outside California concerns whether the information that an employer seeks to prevent a former employee from using merely consists of generalized skill or knowledge of the occupation or is truly a trade secret. FMC Corporation v. Cyprus Foote Mineral Company [FN14] is illustrative. In FMC, there were only two principal competitors in the highly technical field of lithium battery production, FMC and Foote. FMC's onetime employee, Fickling, had been instrumental in FMC's product development. After nearly 10 years at FMC and its predecessor, Fickling decided to jump ship and work for Foote. FMC filed a lawsuit seeking to enjoin Fickling from performing any research and development relating to lithium battery technologies. In denying FMC's motion for a preliminary injunction, the North Carolina federal district court explained: FMC asserts that it has trade secrets that implicate almost every stage in the production of battery-quality lithium metals. But the evidence offered in support of those assertions is very general, and FMC seeks an injunction that effectively precludes Fickling from doing any work in his general area of expertise. Under these circumstances, the Court finds that FMC has not shown that its processes, whatever they are, "derive[] independent actual or potential commercial value from not being generally known or readily ascertainable through independent development." ... Rather, FMC seeks something much broader than the protection of its trade secrets to which it is entitled under North Carolina's Trade Secrets Protection Act and its confidentiality agreement with Fickling. FMC seeks to enjoin Fickling from performing any research and development for Foote in ... areas that he worked in for FMC. [FN15] The line between employee training and protectable trade secrets was also addressed in the California appellate opinion Metro Traffic Control, Inc. v. Shadow Traffic Network. [FN16] In Metro Traffic, a traffic reporting service had a one-year contract with radio station KFWB. In one provision, KFWB acknowledged that Metro's employees agreed in writing "to treat all traffic gathering and reporting procedures as confidential trade secrets of Metro and to not compete with Metro in the traffic reporting business during their employment and for one year following their termination." When the contract year ended, KFWB did not renew with Metro and chose to use Shadow Traffic instead. Shadow immediately began building up its staff by procuring employees from competitors, including traffic reporters who had been under contract with Metro. According to the California Court of Appeal, whether Metro could enforce the ban on its former employees' use of traffic gathering and reporting procedures hinged on whether Metro could show that the procedures amounted to protectable trade secrets, and it failed to do so. Metro Traffic argued that it had developed its procedures to satisfy KFWB's "very strict and particular requirements regarding the quality, sound and personality of the anchors reporting over its airways ...." [FN17] That did not establish the existence of a protectable trade secret, however, according to the Metro Traffic court: No doubt Metro conveyed to its employees KFWB's preferences and requirements regarding word choice and factual reporting but that does not amount to the compilation of an intangible personal property right owned by the employer. Actors, musicians, athletes, and others are frequently trained, tutored, and coached to satisfy the requirements of their sponsors and audiences, but their talents belong to them to contract away as they please. [FN18] Metro Life may be an extreme example, but plaintiffs in trade secrets cases should not expect to convince a court that the "not generally known" requirement is satisfied by general training.

Full post as published by The Trade Secrets Vault on July 18, 2008 (boomark / email).