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Trade Secret Developments in California

Two recent opinions-- one from the Northern District of California and one from the California Court of Appeals, Second District-- offer conflicting viewpoints about the much-debated doctrine of inevitable disclosure, leaving practitioners and courts to continue to wrestle with this doctrine on a case-by-case basis.

The following briefly summarizes the background of trade secret law: The Uniform Trade Secrets Act, adopted in 41 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).

Inevitable Disclosure

The doctrine of inevitable disclosure has been the subject of much controversy, particularly in California. 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 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.").

In Electro Optical Indus., Inc. v. White, 1999 WL 1086467, at *1 (Cal. Ct. App. Nov. 30, 1999), 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 plaintiff. The appellate court affirmed trial court's denial of preliminary injunctive relief but stated as follows: "Although no California court has yet adopted it, the inevitable disclosure rule is rooted in common sense and calls for a fact specific inquiry." Electro, 1999 WL 1086467, at *4.

Older case law interpreting Cal. Labor Code ' 2860 seems to suggest 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 he[defendant] knew the plaintiffs' secrets, he must take the burden with the good."). Cal. Labor Code ' 2860 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."

Differing Opinions

Judge Alsup in the Northern District pronounced the contrary in his recent opinion denying preliminary injunctive relief in a trade secret misappropriation case: "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." Bayer Corp. v. Roche Molecular Sys., Inc., 1999 WL 988256, at *1 (N.D. Cal. Oct. 15, 1999). The opinion suggests, however, 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.

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.

*article courtesy of Brobeck, Phleger & Harrison.

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