California Trade Secret Law

By Rich Stim

Trade secrets often comprise customer lists, sensitive marketing information, unpatended inventions, software, formulas and recipes, techniques, processes, and other business information that provides a company with a business edge.

Information is more likely to be considered a trade secret if it is:

not known outside of the particular business entity
known only by employees and others involved in the business
subject to reasonable measures to guard the secrecy of the information
valuable, and
difficult for others to properly acquire or independently duplicate

Trade secrets are typically protected by nondisclosure agreements (NDAs).

California is one of the many states that have adopted the Uniform Trade Secrets Act. California’s trade secret law can be found at Cal. Civil Code §§ 3426-3426.11.

Misappropriation in California

California’s version of the Uniform Trade Secrets Act refers to the theft of trade secrets as misappropriation. Under California law, "misappropriation " refers to the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means -- theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy. It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret – for example, an ex-employee who spills company secrets to a rival.

Reason to Know

California prohibits use of trade secrets by a company that has “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge (versus actual knowledge). In other words, even if a California company was unaware it possessed purloined trade secrets, it can still be prosecuted under California law if it should have known.

Penalties for Misappropriation

Under California law, a trade secret thief can be prevented from disclosure by court order – an injunction. This is true for both actual or threatened misappropriation. The injunction may be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate any commercial advantage that otherwise would be derived from the misappropriation. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances can a theft that is so bad that the court order would be meaningless.

A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. In egregious situations, a California court can award punitive damages up to twice the amount of any award. Attorney fees will also be awarded in egregious (willful and malicious) situations or if a claim is brought in bad faith.

Statute Of Limitations

An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

California Law Establishes Trade Secret Ownership

California is unique in that its laws expressly establish that the employer owns trade secrets created by an employee. (Cal. Labor Code Sec. 2860). However, an employer in California would not own trade secrets created on an employee's own time without the use of employee materials. Although the law does not require a contract, it's a good idea to buttress your position in California by the use of a written agreement.

Federal Law

In addition to California’s rules regarding trade secrets, certain federal rules also apply in California. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen. The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.