Category Archives: Trade Secret

When It Comes to Non-Competes, Not All California Employees Are Created Equal

Let’s start with a hypothetical.  You are a California resident, you work in California, and your customers are primarily in California.  Your employment contract provides that after you cease working for your employer, you will not work for any competing business of a similar nature to that of your employer for a period of three years.  You would like to quit and join a competitor of your employer in California.  Can you do that without violating your contract? Is this employment contract legal to begin with?

California is generally known as a “right-to-work” state due to its broad policy against restriction on trade, which is codified in the Business and Professions Code section 16600 et seq.  Subject to select exceptions that do not usually come up in the employment context, section 16600 reads: “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  This law gives California its fantastic reputation as a state that espouses lively market competition and a mobile work force available for hire at the drop of a hat.  California courts have long applied section 16600 to invalidate contract clauses seeking to prevent employees from working in their profession post-termination.

Does this mean you can peacefully make a transition to a competitor and ignore the draconian three-year post-termination non-compete clause?  Unfortunately for California employees the answer appears to depend on whether the employer is an out-of-state company and the contract has an out-of-state forum and choice of law selection clause.  Let’s get back to the hypothetical.  It was borrowed from the facts of a case decided in the United States District Court, Northern District of California earlier this year, entitled Meras Engineering, Inc. v CH20, Inc., No. C-11-0389 EMC (N.D. Cal. Jan. 14, 2013.)  In that case, CH20, a Washington corporation, employed several sales individuals in California.  The employees were residents of California, worked for CH20 almost exclusively in California and had no clients in Washington.  In addition to the non-compete provisions, CH20’s contracts contained a forum selection provision requiring that any disputes be litigated exclusively in Washington, applying Washington law.  In contrast to California, Washington allows non-competes as long as they are reasonable.

The employees resigned from CH20 and joined Meras Engineering, a California corporation and a competitor of CH20.  The employees continued to live and work in California.  Meras and the employees sued in a California federal court to invalidate the non-compete clauses in the contracts with CH20 under California law.  CH20 sued in Washington seeking to enforce the non-compete clauses against the employees.  Washington federal court ruled that Washington law must apply to the dispute.  California federal court dismissed the California lawsuit, ruling that the forum selection clause determined that Washington is the jurisdiction in which the lawsuit must be resolved.  The court warned that a “forum selection clause cannot be conflated with choice-of-law analysis,” stating also that as “a general matter, the selection of a forum does not always dictate the choice of law.”1 The court appeared unimpressed that the suit in Washington was going to proceed under Washington law stating that “[w]hile Washington law does not categorically prohibit non-compete clauses as does California law, it does subject such clauses to a reasonableness test.”2, 3

Right or wrong, where does this leave California employees working for out-of-state companies?  When interviewing for a job with a company based elsewhere, read your employment agreements carefully.  Be wary of clauses that dictate that disagreements must be litigated elsewhere and limit where you may or may not work after you leave employment.   If you are interviewing with or thinking of leaving a foreign (non-California) employer, get legal advice before you act to prevent professional and legal hurdles down the line.

  1. 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 18: 3, 8-9
  2. 3:11-cv-00389-EMC Document 87 Filed 01/14/13 Page 19: 28, Page 20: 1-2
  3. This finding echoes an earlier decision by a California federal court in Swenson v T-Mobile USA, Inc., 415 F. Supp. 2d 1101 (S.D. Cal. 2006) where the court found that enforcement of the forum selection clause (also in Washington) does not contravene a strong public policy of California against non-competes.

Veronika Short is an Employee Mobility Attorney and the owner of the Law Office of Veronika Short.

No Patent? No Problem!

The United States District Court, Northern District of California, recently issued a decision, which makes pleading trade secret protection for patent applications easier.  It also underscores the risk of liability to third parties receiving or using such information.

In Wang v Palo Alto Networks, Inc. (2013 WL 415615 (N.D.Cal.)), plaintiff Wang alleged the following in his complaint:  Wang invented a certain computer firewall technology and applied for a patent.  Wang entered into a joint venture with defendant Gong to commercialize his inventions.  Gong developed a thorough knowledge of the technology, understood that the information was confidential and agreed to maintain it in confidence.  Wang and Gong met with defendant Zuk and discussed potentially joining forces with Zuk’s company, defendant Palo Alto Networks, Inc. (PAN).  Wang and Gong told Zuk that Wang had a pending patent on his firewall technology.  Wang decided not to work with PAN.  Unbeknownst to Wang and without his consent, Gong disclosed Wang’s technology to Zuk.  Gong and Zuk replicated Wang’s ideas and patented them without naming Wang.  Wang alleged that Gong and Zuk misappropriated his trade secrets under the California Uniform Trade Secret Act (CUTSA).

Applying CUTSA’s definition of a trade secret, the Court rejected Zuk’s and PAN’s 12(b) motion challenging the sufficiency of Wang’s pleading of a trade secret infringement claim. The Court stated that “[b]ecause patent applications are usually confidential until published, it is reasonable to infer that Zuk should have known … Gong had acquired trade secrets in the context of a business relationship with Wang …”  Id at 3.

This observation drawn by the Court affects third parties, such as Zuk and PAN, who receive or use information that is subject to a patent application.  At the pleading stage, the court may infer that the information subject to a patent application is a trade secret.  Furthermore, in the context of discussing information that may be subject to a patent application, business parties are expected to know what a trade secret is and how to treat it.  In the very least, this should result in a heightened level of diligence when entering transactions where such information may be disclosed or used.

Generation Gap in Attitudes toward Confidential Company Files Leaves Young Workers Vulnerable

A 2012 survey conducted by a software company, FileTrek (below), reveals generational gap in employee attitudes toward confidential company documents. A majority (68%) of the Millennial generation (people aged 18-34) believe it is OK to remove confidential files from work, whereas only 50% of people aged 55 plus do. The preferred method? USB stick.

The survey highlights what many will recognize to be a common attitude in the Silicon Valley, namely that “[t]oday’s workforce believes information is an asset to be shared.” (Dale Quayle, CEO of FileTrek) This attitude contributes to the success of Silicon Valley companies. However, in the proprietary information sector, the associated risks may be high for both businesses and employees alike.

For companies, a secure infrastructure and a set of internal policies are extremely important to protect confidential data and to keep income-producing and potentially valuable confidential information under company control. The alternative may mean losing a competitive edge, or losing, period.

For employees, philosophical misunderstandings or “no harm no foul” rationalizations when removing confidential work files may result in termination and exposure to civil liability. At the end of the day, the most secure networks may be compromised if employees do not understand or appreciate the importance of confidential information security and individual consequences. Universities do not prepare young professionals to navigate the pitfalls of a modern workplace when it comes to non-public company information. California occupies a special place in this arena due to the tension between California’s prohibition against restraint on trade (Bus. & Prof. Code §16600, generally known as prohibition against “non-competes”), trade secret law (California Uniform Trade Secret Act, Civ. Code §§3426-3426.11), general contract law and California Labor Code affording employees certain rights, for example §2870 (employee inventions on their own time). Whether they are signing employment agreements for a new job, thinking of transitioning to a competitor or firing up a start-up, stir young people to get advice, understand their responsibilities and rights, and how they fit in the young workers’ worldview.


Why Are Trade Secrets Important When Changing Jobs?

In Silicon Valley, most employment agreements will contain a restriction that employees must keep employer’s trade secret information confidential, even after terminating employment.  This is known as the “trade secret” exception to an otherwise strict mandate by the California legislature against restriction on trade or competition codified in Bus. & Prof. Code §16600 et seq.  In short, subject to several limited exceptions, such as the sale of a business, California employers may not restrict employees from engaging in their profession by having them promise not to work for a competitor after leaving the company as a condition of employment.  However, a former employer may enforce a trade secret clause in the employment contract after employee leaves, for example, to stop the employee from using the former employer’s trade secrets at his new job.  Even though this may appear to restrict the former employee’s ability to practice his profession, the employer does not violate Section 16600 because trade secrets are protected.

Because so much is at stake, disputes arise over what constitutes trade secrets.  Agreements that have overly general language without specifying what should be treated as secret or are not accompanied by a sit-down with the employees to go over the paperwork they are asked to sign, may not give sufficient notice to employees of the types of information they are supposed to treat as trade secret.  Even if the agreements are clear, the information that employer describes may still not be a trade secret under the statutes; it may be not be secret, it may been publicly disseminated, such as on the Internet, it may be generally known in the industry or readily ascertainable by proper means, or it may not derive independent economic value from being secret.  Attorneys evaluate all of these factors and more.

Running afoul of trade secret statutes and employment contracts may expose employees and companies to severe economic consequences in the form of litigation costs, interrupted business opportunities, loss of reputation or timely market advantage, even if the misappropriation occurred unintentionally or through negligent oversight.  Understanding your obligations under the agreements with your employer is an indelible element of a peaceful and economically undisturbed transition to a new job or starting your own business.  For businesses hiring new employees, it is just as important to take reasonable measures to ensure that incoming professionals maintain confidentiality of third party trade secrets and the employer’s.

Contact us if you are facing any of these issues.

Trade Secrets. What Are They?

Generally, trade secrets are any information, process, formula, or technique owned by a business that is secret, is subject to reasonable efforts to keep it secret, and derives its actual or potential economic value from remaining secret. The big difference between a trade secret and a patent, for example, is that patents are publicly registered.  An engineering drawing, a soft drink formula or particular software code may become subject to a patent and the legal protections afforded to patents against infringement. However, until or unless these become patented, their owner will keep them secret or confidential, known only to select employees or customers, to protect their commercial value and guard them against being copied or stolen by persons who can make use of them.  Typically, but by no means exhaustively, trade secret information may also include pricing, employee salaries, valuable vendor relationships, customer contacts, financial information of the company, marketing plans and strategies, customer purchase orders and various internal documents.

Different legal rules apply to trade secrets than to patents or copyrights.  In California, Uniform Trade Secret Act (Cal. Civ. Code §§3426 through 3426.11) provides protection to valuable confidential commercial information.