FENWICK & WEST LLP

ICC ICC 21st Annual Seminar21st Annual Seminar

March 15, 2002March 15, 2002

John C. FoxJohn C. Fox

Trade Secret Protection Trade Secret Protection Collides With California's Collides With California's

Right of MobilityRight of Mobility

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The Conundrum

(1) California employees enjoy free mobility of employment.

(2) Employees sometimes take and use their former employer's trade secrets and are often perceived to be doing so (whether correctly or not).

(3) Covenants not to compete are largely illegal in California, thus often permitting a departing employee to position himself/herself with a direct market competitor.

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What is a Trade Secret? -Common Sense Approach [1]

"Would I care if this were disclosed to my main competitor?"

"Would my main competitor care if this were disclosed to me?"

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What is a Trade Secret?UTSA [1-2]

Information Economic value Not generally known Not readily ascertainable

(by proper means) Treated as secret

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Technical Information [2-3]

Formulas Plans, Designs or Patterns Processes Methods and Techniques Negative Information Software

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Business Information [3-4]

Financial Information Cost and Pricing Internal Market Analyses or

Forecasts Customer Lists Unannounced Business

Relationships Business Opportunities - Acquisitions Marketing or Advertising Plans

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Personnel Information [3-4]

Key Personnel Compensation Plans Receptivity to Solicitation

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How Can You Get Into Trouble With Trade Secrets? [13-16]

Acquisition Use Disclosure

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Wrongful Acquisition of a Trade Secret [14]

The Key Questions to Ask: How Did I Get the Information? From Whom Did I Get It? How Did He/She Get It? Does the Person Offering the

Information To Me Have the Right to Give It To Me?

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Wrongful Use of a Trade Secret [14-15]

Use Without Consent of the Owner; and Obtained using improper means; or Obtained in violation of obligation not to disclose; or Obtained by you under agreement or obligation not

to use the way you are using; or Obtained by you knowing it was disclosed by

accident

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Wrongful Disclosureof a Trade Secret [15-16]

Disclosure Without Consent of the Owner; and Obtained using improper means and/or; Obtained in violation of obligation not to disclose

and/or; Obtained by you under agreement or obligation not

to use the way you are using and/or; Obtained by you knowing it was

disclosed by accident.

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Protection of Trade Secrets [18]

Trade Secrets Are Fragileand Easily Lost

Confidential Information Not Automatically a Trade Secret

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Major Sources Of Risk [19-20]

Mobility of Labor Force Physical Security R&D "Cowboys" Publishing Information - Journals

and Conferences Personal Computers E-mail Company Trash

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The Covenant Not to Compete Problem [29]

California Business and Professions Code §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."

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Statutory Exceptions to B&P §16600 [29]

Covenants not to compete are lawful when entered into as part of: The sale of the goodwill of a business; The sale by a shareholder of all his or her shares in a

corporation, or a sale by the corporation of all or substantially all of its assets, together with the goodwill; or

The dissolution of a partnership, dissociation of a partner from a partnership, or sale or other disposition of a partner’s interest in a partnership.*

* See Cal. Bus. & Prof. Code § 16601 and 16602.

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The Downside to OverreachingCovenants Not to Compete [32-33]

Walia v. Aetna, Inc., 93 Cal.App.4th 1213 (11/12/01) (Rev. granted in Cal. Sup. Ct. 2/27/02)

$180,000 Compensatory Damage Award $1,080,000 Punitive Damages (SF) Jury Award

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The Race to the Courthouse [30-31]

The Application Group, Inc. v. The Hunter Group, Inc.61 Cal.App.4th 881 (1998), review denied, 1998 Cal.LEXIS 2968 (1998)

Valid Non-Competition Agreement between Maryland employer and its employee.

Employee joins California company – does §16600 trump the Maryland Non-Competition Agreement?

Comity Analysis: Policies behind §16600 outweigh Maryland employer’s right to enforce contractual agreement not to compete.

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Is There Still a Race to the Courthouse? [31]

Advanced Bionics v. Medtronic, 87 Cal.App.4th 1235 (2001), review granted, 2001 Cal.LEXIS 3764 (2001)

Dueling Injunctions: California first (former employer enjoined) Minnesota second (former employee enjoined)

What is a well intentioned California employer to do?

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Protecting Your Company's Trade Secrets [35-36]

On Terminating Employees: Exit Interviews and Audits Reaffirmation of Confidentiality

Agreements Demand Letters Searching Departing Employee's

Files, Computer, E-mail Box "Inevitable Disclosure"

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Protecting Your Company From Trade Secret Liability [51-58]

Have a written policy against possession or use of others'trade secrets

Enforce it

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When Interviewing Potential Employees [51-52]

Resist the impulse to pump for information

Explain your trade secret policy Ask about confidentiality and

non-competition agreements with prior employers

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Upon Hiring A New Employee [52-54]

Risk analysis "Woodshed" him/her about bringing nothing

from former employers Have signed agreement that new employee

has brought nothing Counsel new employee, as necessary, on

conduct in leaving former employer Provide assurances to former employer in

some cases

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Once The New EmployeeIs On Board [55-57]

A second "woodshedding"may be necessary

If you "raid" competitor's employees, are you sure you are not relying on human resources trade secrets to do so?

"Clean room" may be

advisable, in some cases

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When You Find Another Company's Secrets Among Yours [57]

Isolate and contain it Investigate

Source of information Extent of contamination

Remedial Steps to Consider Discipline or termination of offending employees? Isolate and keep; destroy; or return information? Confession and negotiation with trade secret

owner?

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Remedies for Trade Secret Misappropriation [58-62]

Civil Injunctive Relief Enjoin use of the secrets Compel return of materials and information

Damages Compensatory Punitive Attorneys' Fees and Costs

Criminal Prosecution

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Civil Litigation [60-62]

Reasons to consider Need to protect Send a message Stop others Swift strong action may lead to a

negotiated settlement Reasons for caution

Cost Generally cannot prevent someone

from working for a competitor Risks of cross-complaint

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Criminal Prosecution [62-66]

Scope of criminal statute is narrower Impact on civil action where civil action also

brought Protecting your confidential information is more

difficult Victim cannot control scope,

timing or conduct of prosecution