Protecting Trade Secrets In California

July 12, 2012

Protecting proprietary information and processes is important to San Diego business owners. Trademarks, Patents and Copyrights provide companies protection for inventions, artistic works, symbols, names, images, and designs which are made public. As the name implies, "trade secret" law provides businesses protection for secret information. A trade secret is a process, formula, practice, design or compilation of information including customer lists which is/are not generally known or reasonably ascertainable and from which a business obtains economic advantage over competitors. Tension between public policies favoring protection of trade secrets and public policies promoting competition have left California businesses in a tenuous position when it comes to protecting their trade secrets. It is often difficult to distinguish between an employee who has stolen a trade secret from one that has merely used his experience and personal knowledge to obtain new employment. In addition to consulting a San Diego business lawyer, there are important steps business owners can take to reduce the risk of theft.

962281_key.jpgCalifornia's Uniform Trade Secrets Act prohibits misappropriation of trade secrets. "Misappropriation" is defined as "(1) 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 (2) Disclosure or use of a trade secret of another without express or implied consent by a person who: (A) Used improper means to acquire knowledge of the trade secret; or (B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was: (i) Derived from or through a person who had utilized improper means to acquire it; (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) 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." "Improper means" is defined to include "theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means".

Significantly, California's trade secret act defines a trade secret as "information, 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 public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." In order for a San Diego business to ensure that its information will be considered a trade secret under California law, it needs to take reasonable steps to keep it secret. Secrecy is critical. First, the information must have some independent economic value, and second, there must be some effort to maintain secrecy. If a San Diego business doesn't consider the information important enough to maintain secrecy, neither will California courts.

There are several relatively simple measures businesses can take to maintain adequate levels of security. Physical security is the most obvious measure. Keeping secret information under lock and key with limited access to employees and marking documents "Confidential" serve as a constant reminder that the information within is intended to be kept secret. Similar physical measures can be taken with electronic information. Computer files should be password protected as well as marked confidential, and the passwords provided only to necessary personnel. The more limited the access, the better.

In addition to physical security, businesses should have systems in place that regularly remind employees that certain information within the company is intended to be kept confidential.  At hiring, employees should be required to sign confidentiality or non-disclosure agreements and non-compete agreements.  Confidentiality agreements should narrowly identify the information intended to be kept confidential.  Doing so reduces the risk that a court might later consider the contract too broad and therefore a restriction on competition.  While non-compete clauses are generally unenforceable in California, including them can affect a departing employee's behavior.  Training, employee policies, regular meetings addressing the topic of confidentiality and procedures reminding departing employees of the company's confidentiality policies will remind employees of their obligations.

The more secure the information, the more likely it will be considered a trade secret.  Keeping a secret formula in a locked vault that only two people have access to and which is only accessed under strict protocols on rare occasions is clearly meant to be secret.  Providing that same formula to all company employees without providing any notice regarding its secrecy is clearly not very secret.  See also Trade Secrets - Protecting Customer Lists.