Brobeck, Phleger & Harrison LLP 

Trade Secret Developments In California

By Jeannine Y. Sano   Bio   email 
Brobeck, Phleger & Harrison LLP 

            The Uniform Trade Secrets Act, adopted in over 40 states including California, permits injunctive relief for both actual and threatened misappropriation.  See, e.g., Cal. Civ. Code § 3426.2(a).  Where such threatened misappropriation has been determined to be “inevitable,” some courts have allowed injunctive relief even in the absence of actual use or disclosure, most notably in the 1995 Seventh Circuit case, PepsiCo. Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

The doctrine of inevitable disclosure has been the subject of much controversy, particularly in California which has neither embraced nor firmly rejected the inevitable disclosure doctrine.  Cf. Earthweb, Inc. v. Schlack, 71 F. Supp. 2d 299, 309 (S.D.N.Y. 1999) (“It is possible to establish irreparable harm based on the inevitable disclosure of trade secrets”); Delphine Software Int’l v. Electronic Arts, Inc., 1999 WL 627413, at *3 (S.D.N.Y. Aug. 18, 1999) (“It is true that the case law suggests that a person in possession of trade secrets, when working on a similar project, may ‘inevitably disclose’ the proprietary information and techniques of which he is in possession.”); Government Tech. Servs., Inc. v. Intellisys Tech. Corp., 1999 WL 1499548, at *1 (Va. Cir. Ct. Oct. 20, 1999) (granting demurrer on grounds that “Virginia does not recognize the inevitable disclosure doctrine.”)

Section 16600 of the California Business and Professions Code provides that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  The strong public policy in favor of employee movement and enterprise reflected in Cal. Bus. & Prof. Code § 16600, however, has been conditioned upon the rights of a California employer to protect itself from unfair competition.  See, e.g., Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 860-61 (1994) (“Business and Professions Code section 16600 prohibits the enforcement of Metro’s noncompete clause except as necessary to protect trade secrets.”).  To what extent employers may take measures “necessary to protect trade secrets,” however, is far from clear.[1]

            A recent opinion from the Second District Court of Appeal, Electro Optical Indus., Inc. v. White, 76 Cal. App. 4th 653 (1999), in which the court stated in dicta, “Although no California court has yet adopted it, the inevitable disclosure rule is rooted in common sense and calls for a fact specific inquiry,” id., was depublished by the California Supreme Court in April of 2000.  In Electro Optical, the plaintiff had sought a preliminary injunction to prevent its former sales manager from taking on the same position with a competitor, based on trade secret misappropriation and inevitable disclosure.  Electro Optical argued that the former sales manager, Stephen White, had acquired technical information about the design and manufacture of plaintiff’s existing and future products as well as nontechnical trade secrets about its customers, customer requirements, production costs, sales prices and volume, and marketing plans during his 15 years of employment with the plaintiff.  The appellate court affirmed the trial court’s denial of preliminary injunctive relief.   

            Approximately one month before Electro Optical was decided, Judge Alsup in the Northern District of California had proclaimed:  “The theory of ‘inevitable disclosure’ is not the law in California and, at trial, plaintiff will have to demonstrate actual use or disclosure, or actual threat thereof,” in denying preliminary injunctive relief.  Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 2d 1111 (N.D. Cal. 1999).  Judge Alsup, however, seems to suggest that this principle may be limited to the preliminary relief context: "For the purposes of a preliminary injunction, under California law, the theory of inevitable disclosure does not supply the proof needed to establish a probability of success on the merits nor does it suffice to raise serious questions about actual use or threat."  Id.

The sentiment in Bayer was echoed in an opinion issued a few months earlier from the Central District of California, Computer Sciences Corp. v. Computer Assocs. Int’l, Inc., 1999 WL 675446, at *16 (C.D. Cal. Aug. 12, 1999), granting summary judgment on a claim of trade secret misappropriation:

Even if PepsiCo were the law of California or the Ninth Circuit, and even if it were properly applied to claims other than those for injunctive relief, CSC still could not survive summary judgment absent some other evidence of misappropriation.  Unlike IBP, where the employee who possessed the confidential information could not rule out his disclosure or use of that information in his new employment, Urfirer and other Bear Stearns employees who had contact with CA have expressly denied using or disclosing CSC’s alleged trade secrets in their representation of CA….  In light of the Bear Stearns witnesses’ unequivocal denials, the overwhelming evidence that Bear Stearns used only publicly available information in connection with CA’s tender offer, and the complete absence of direct or circumstantial evidence that Bear Stearns used or disclosed CSC’s alleged trade secrets, CSC cannot avoid summary judgment by invoking the doctrine of inevitable disclosure.  Id. (emphasis added).

Older case law, however, suggests that the inevitable disclosure doctrine has been applied in California, see Riess v. Sanford, 47 Cal. App. 2d 244, 246-47 (1941) (“The disclosure by an employee of trade secrets and other confidential information obtained by him in the course of his employment is a breach of trust, and it is well settled that a court of equity will restrain any threatened disclosure or use thereof ….  If there is any disadvantage in the fact that the [defendant] knew the plaintiffs’ secrets, he must take the burden with the good.”).  Riess involved the application of Cal. Labor Code § 2860, which states:  “Everything which an employee acquires by virtue of his employment, except the compensation which is due him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.”

            To further complicate matters, the Ninth Circuit has held that “[u]nder California law a plaintiff can maintain a common law unfair competition claim regardless of whether it demonstrates a legally protectable trade secret … based upon the two separate traditional tort causes of action, breach of confidential relationship and common law misappropriation.”  Imax Corp. v. Cinema Tech., Inc., 152 F.3d 1161, 1169 (1998); Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462 (1990) (complaint stated claim for unfair competition based on breach of confidential relationship and common law misappropriation even though court determined there were no trade secrets to misappropriate); United States Golf Ass’n v. Arroyo Software Corp., 99 Cal. Rptr. 2d 708, 714 (Cal. Ct. App. 1999) (“Common law misappropriation is one of a number of doctrines subsumed under the umbrella of unfair competition.  It is normally invoked in an effort to protect something of value not otherwise covered by patent or copyright law, trade secret law, breach of confidential relationship, or some other form of unfair competition.”).

            As noted by the Southern District of New York, “the inevitable disclosure doctrine treads an exceedingly narrow path through judicially disfavored territory….While the inevitable disclosure doctrine may serve the salutary purpose of protecting a company’s investment in its trade secrets, its application is fraught with hazards.”  Earthweb, 71 F. Supp. 2d at 310.  Based on the foregoing, it appears that fact-specific analyses and equity considerations continue to be the overriding principles to reconcile the competing concerns between unfair competition law, the “Uniform” Trade Secrets Act, and California public policy as reflected in Business and Professions Code section 16600.   

[1]     The Ninth Circuit recently held that a noncompete agreement requiring a former employee to disgorge profits from stock options previously granted upon going to work for a competitor to be valid and enforceable.  See International Business Machs. Corp. v. Bajorek, 191 F.3d 1033, 1040 (9th Cir. 1999) (“section 16600 ‘did not make all restrictions unenforceable.’ … Thus a contract is valid, despite a restriction on competition, if the promissor is ‘barred from pursuing only a small or limited part of the business, trade or profession …’”).

JurisNotes.Com - The Law in Brief
Copyright ©  JurisNotes.Com