Stop Thief! Go Recruiter! How To Stop Competitors From Stealing Your Trade Secrets And Employees, And What You Can Lawfully Poach In California November 2006 Los Angeles/Orange County Andrew L. Satenberg, Esq. Alison G. Sultan, Esq. Palo Alto John C. Fox, Esq. Jay J. Wang, Esq. 2006 phelps phillips
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. 1
What is a Trade Secret? - Common Sense Approach "Would I care if this were disclosed to my main competitor?" "Would my main competitor care if this were disclosed to me?" 2
What is a Trade Secret? UTSA Information Economic value Not generally known Not readily ascertainable (by proper means) Treated as secret 3
Technical Information Formulas Plans, Designs or Patterns Processes Methods and Techniques Negative Information Software 4
Business Information Financial Information Cost and Pricing Internal Market Analyses or Forecasts Customer Lists Unannounced Business Relationships Business Opportunities - Acquisitions Marketing or Advertising Plans 5
Personnel Information Key Personnel Compensation Plans Receptivity to Solicitation 6
How Can You Get Into Trouble With Trade Secrets? Acquisition Use Disclosure 7
Wrongful Acquisition of a Trade Secret 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? 8
Wrongful Use of a Trade Secret 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 9
Wrongful Disclosure of a Trade Secret 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. 10
Protection of Trade Secrets Trade Secrets Are Fragile and Easily Lost Confidential Information Not Automatically a Trade Secret 11
Major Sources Of Risk Mobility of Labor Force Physical Security R&D "Cowboys" Publishing Information - Journals and Conferences Personal Computers E-mail Company Trash 12
The Covenant Not to Compete Problem 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." 13
Statutory Exceptions to B&P 16600 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. 14
The Downside to Overreaching Covenants Not to Compete 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 15
What Can You Lawfully Covenant in California Consistent With 16600 (And Not As An Exemption To It)? Competing views: Nothing Everything that involves use of trade secret Targeted customer list? Customer list? Customers former employees pitched? Customers of former company? Former employees? This is what we fight about in the courts 16
What Can You Lawfully Covenant in California Consistent With 16600 (And Not An Exemption To It)? (Cont d.) Areas of seeming Agreement in the California courts Can send announcement letter to former clients (just announcing exit from company; maybe (some courts) allow address as well) Employees may use what is in their heads since most California courts are doubtful about the ability of former employees to compartmentalize and restrict use of information in daily work 17
The Race to the Courthouse 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. 18
Is There Still a Race to the Courthouse? Advanced Bionics v. Medtronic, 29 Cal.4th 697 (2002) Dueling Injunctions: California first (former employer enjoined) Minnesota second (former employee enjoined) California court may not enjoin the Minnesota action What is a well intentioned California employer to do? Race to the courthouse: First to final judgment may then be used as res judicata in other action 19
Is There Still a Race to the Courthouse? (Cont d.) [p. ] A race to the courthouse often ensues: So, the race is on. Issues: Do you want double litigations? Who pays for new hire s Declaratory Judgment lawsuit? What if the other side moves to transfer and consolidate? How long does it take in each court system to run the court track to final conclusion? 20
Protecting Your Company's Trade Secrets On Terminating Employees: Exit Interviews and Audits Reaffirmation of Confidentiality Agreements Demand Letters Searching Departing Employee's Files, Computer, E-mail Box "Inevitable Disclosure" 21
Protecting Your Company From Trade Secret Liability Have a written policy against possession or use of others' trade secrets Enforce it 22
When Interviewing Potential Employee Resist the impulse to pump for information Explain your trade secret policy Ask about confidentiality and non-competition agreements with prior employers 23
Upon Hiring A New Employee 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 24
Once The New Employee Is On Board 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 25
When You Find Another Company's Secrets Among Yours 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? 26
Remedies for Trade Secret Misappropriation Civil Injunctive Relief Enjoin use of the secrets Compel return of materials and information Damages Compensatory Punitive Attorneys' Fees and Costs Criminal Prosecution? 27
Civil Litigation 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 28
Criminal Prosecution 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 29
The Blue Penciling Issue Issue: Whether courts will strike down offending language to enforce appropriate covenants California: Will blue pencil Will not write an agreement not made Will not enforce an agreement putrid with unenforceable covenants 30