When you visit a jewelry store, it is easy to see a lot of security – cameras, electronic access cards for employees, sturdy, locked cabinets that display the jewels behind solid plastic. There is no doubt there is even more security that is not visible, especially at night. Much of this security is at the insistence of insurance companies, who understand that a little prevention is much cheaper that efforts to recover what is lost.

But many businesses have assets more valuable than such baubles, which the businesses treat as if the assets were apples on a cart. The assets are often in plain sight and available to everyone working there without accountability, or disposed of in a way that begs dumpster divers to practice their craft. Is your company one of these businesses?

Jewels of a Company – Trade Secrets. In an age where an idea can be worth far more than the largest diamond, a company’s most valuable assets are not their physical assets, but their intangible assets. Patents, trademarks, and copyrights are protected as a government-granted monopolies, and require interaction with the government in order to obtain their particular advantages. However, trade secrets are also a form of a government-granted monopoly, which are by definition not disclosed to anyone – even the government.

Step One: Finding the Diamonds. Too many businesses fail to recognize their trade secrets until someone has already taken them. Every business should conduct a periodic audit of the information that, in the hands of a competitor, would do the company great damage.

The first question is: what information, process, formula, recipe, method, etc. brings the company an economic advantage by not being generally known in the industry? A special, unpatented method of making a product is an obvious example of a trade secret; so too is the secret recipe for cookies that has people lining up all the way out the store. However, many trade secrets are not so obvious. Lists of regular customers can be gold – would you like a list of everyone who bought your product from your fiercest competitor? Even non-customer lists count – competitor breathe easier if she knows the 97% of the eligible population that would not buy your product, that you found by paying for thousands of expensive cold calls. Focusing on the 3% that do use your product can be a huge economic advantage.

But other trade secrets may not be so obvious. Does your inventory system provide you with an advantage? For Walmart, its ability to track every item from initial order to checkout allows its to take advantage of economies of scale, and to move quickly when unusual events happen. Other trade secrets can be:

• supplier lists,
• the way an order is taken, or information taken during the order
• information on an intranet,
• employee pay rates (valuable when someone is hiring your employees away), or even
• employee identities.

If a competitor can use it to your disadvantage, and its not generally known in the industry, then it is likely to be a trade secret.

Step Two: Reasonable Efforts to Keep It Secret. The second requirement to qualify for trade secret protection is to use reasonable efforts to keep the information secret. This will depend upon the nature of the secret.

If you have a secret recipe, be sure the cook and his assistants have promised in writing to protect the secrecy before giving them the recipe. Anyone not directly involved in the production of the actual product should not have access to the secret.

Some secrets, however, need to be used more broadly. A customer list may not have much value if only one marketing or sales person has access to it – customer information also has to be shared with billing and shipping, too. In that instance, all employees should sign a confidentiality agreement. The best way to do this is to try to be as specific as possible in a confidentiality agreement that before the employee starts. If the prospective employee does not want to sign, then you do not want to hire them. The same is true for independent contractors, either hired directly or through a temporary agency.

Some company owners defend their lack of measures by saying that they trust their employees. If that were true, do all employees have keys to the supply room, or the front door? Would you trust them to guard your company’s most valuable assets, especially when such assets can be copied and given to competitors with a minimum of effort?

Current Employees. What should you do if a current employee has been exposed to a trade secret without any written agreement as to protecting the company’s trade secrets? This can be tricky. It would be best if the employee signs an acknowledgment that they have been orally warned about the need to protect the trade secret, but alert employees may figure out that the barn door is not closed from the attempt to close it. Consulting counsel experienced in this area, and well-versed in the practicalities of business, is invaluable.

Covenants Not to Compete? One solution common elsewhere is generally not available in California. Covenants not to compete are void in California except in a few instances. Cal. Bus. & Prof. Code §§ 17200 – 17203. California employees who sign covenants not to compete can ignore them when they leave employment, comfortable that California courts will not enforce them. In fact, legally invalid covenants not to compete can give rise to actions for unfair competition against the company requiring their signature.

The Costs of Nonprotection. Most companies do not realize the value of their secrets until they are already stolen, and by then it is too late. Inadequate measures to protect the secrets may give a company the chance to prove its case in court, but that is a risky and very expensive course. A few hours devoted to protecting the company’s trade secrets are far cheaper than to use the courts later on.

Just as no jewelry store would leave its valuables in unlocked cases, no company should leave their most valuable possessions unprotected. It is one of the most cost-efficient projects a company can take.

BY ANDREW K. JACOBSON

In the swirl of allegations and facts, courts often ignore legal protections for trade secret defendants.

A new client calls just after lunch. She and her new company have just been served with a summons and complaint by her former employer, and a notice for a temporary restraining order hearing tomorrow morning. She only has one hour in the afternoon to provide you with the paperwork and to give you her side of the story. You listen, review the paperwork, get your retainer and fee agreement, then appear at the hearing the next morning. By the end of the hearing, you realize that you are days behind plaintiff’s counsel, your client has a draconian TRO lodged against her and her new company, clients and case are slipping down the drain before you even had a firm grasp of the facts. This article provides a head start to reduce the chance of this happening to you.

The need for speed is vital. Most trade secret cases resolve themselves within a few months. Once a defendant gets behind, catching up can be hard. Meanwhile, trade secret plaintiffs know that fixing the scarlet letter on trade secret defendants will freeze business prospects, often fatally so. Defendants in such cases, usually shocked to find themselves the subject of such suits, cannot afford to jail behind so quickly.

Restraining Orders and Injunctions. Trade secret defendants regularly find themselves in a temporary restraining order hearing just hours after receiving notice of the suit. In the swirl of allegations and facts, courts often ignore legal protections for trade secret defendants. Judges want to keep someone from stealing the secrets of another, but this often perversely results in the destruction of an innocent new competitor in the industry. An attorney defending a trade secret action needs to do several things at that initial hearing to maintain the competitive balance that is the goal of trade secret legislation.

Narrow TROs. Judges, knowing that the first hearing is not the time to find out about all the facts, want to minimize damage, not listen to hurried protestations of innocence, and tend to impose a temporary restraining order. However, any restraining order should be crafted as narrowly as possible. A plaintiff’s proposed remedy will be apocalyptic – defendants cannot produce any products, contact any of plaintiff’s customers, or announce defendants’ own existence, no matter whether any trade secrets are involved. In one case several years ago, the complaining party in a multi level marketing scheme (without proper notice of the hearing) prevented my client from contacting any of his sales leads, even though those leads included his wife, child, and father, the existence of whom were not a trade secret. While the overbroad TRO eventually damaged the complaining party’s credibility, it caused great heartache to my client, whose father was facing surgery.

A good defense at a restraining order hearing is often a good offense: offer an alternate restraining order and recite the relevant definitions of “misappropriation,” ‘improper means,”2 and “trade secrets”3 found in California Civil Code Section 3426.1. Defendants suffer no real loss by doing so:  the Uniform Trade Secrets Act already forbids violating these prohibitions. It also casts the defense in a different light doing something besides the usual denials. Further, most judges are savvy enough to challenge a protesting plaintiff about why an order following the definitions under the Uni form Trade Secrets Act would he insufficient. This can create an early credibility problem for plaintiff, while increasing defendants’ own credibility. However, make sure your client understands the parameters of your proposed order judges don’t give the benefit of the doubt to the party that proposed the language they are accused of violating.

Bond. Any restraining order should include a significant bond. Most judges provide a modest bond, if any, even though California Civil Procedures Code Section 529 requires an undertaking sufficient to pay “the party enjoined any damages . . . the party may sustain by reason of the injunction, if the court finally decides that the applicant was not entitled to the injunction.” As a TRO’s effect on defendants’ business can be catastrophic, and attorneys’ fees may be awarded to a successful defendant under California Civil Code Section 3426.4, a reasonable bond could be $100,000 or more.4 While most trade secret cases are resolved within a few months, the fees could easily reach $50,000 a month. If possible, at a restraining order hearing, bring documentation that supports the scope of the impact on defendants’ business. Many plaintiffs lose interest in such a suit when they have to risk significant assets for such a bond.

Disclosure Demand. Other items should be brought to the initial hearing. The first is a California Civil Procedure Code Section 2019.210 demand. This often overlooked section, requires that before any discovery begins in a trade secret case, “the party alleging the misappropriation of trade secrets shall identify the trade secret with reasonable particularity,” subject to a confidentiality order. Note the imperative “shall”: the disclosure must be done before discovery on the trade secrets commences. While a demand is not strictly necessary under the statute, it is a worthwhile reminder, and sets up a legitimate defense later, should plaintiff try to proceed with discovery before the disclosure is made.

Protective Order. Another item to bring to the restraining order hearing is a balanced protective order, to protect the confidentiality of the documents and secrets of all parties to the action. With the judge present, plaintiff’s attorney is less likely to play games.

Every protective order should have at least two levels: one level that both the parties and counsel can view but cannot be publicly disseminated, and a higher level for the documents that only the attorneys and the court can see. Due process demands that a defendant be able to review the secrets which she is accused of misappropriating. Make sure that any protective order has a safe harbor for your client, similar to the following: “The designation of any document as “CONFIDENTIAL” or “CONFIDENTIAL: ATTORNEYS’ EYES ONLY” shall not preclude any party or counsel from showing the document to any person who appears as an author, addressee or recipient on the face of the document, or is accused of misappropriating the contents of the document.”

Discovery. Many trade secret actions culminate by the time of the injunction hearing. That compresses the discovery period into just a few weeks or days. Since most trade secret plaintiff lawyers try take discovery immediately, be prepared to use the discovery hold by plaintiff as provided by the Civil Discovery Act, 6 and if plaintiff wants shortened time, demand shortened time and priority for yourself, as well. Try to be the first to take a deposition.

Deposition. The natural subjects of a deposition in a trade secrets case: what were the secrets? How are the secrets valuable? What were the “reasonable means” to keep them secret Who knew the secrets? How did defendants allegedly misappropriate them? How did the plaintiff discover the misappropriation? A deposition, particularly of a corporate plaintiff, is often the best immediate method, as (1) it is quicker, thus being more useful at an injunction hearing, (2) gives less time tot plaintiff’s counsel to frame the response, and (3) the deponent is usually someone less well versed in the litigation arts, and thus more likely to reveal facts inconvenient to plaintiff – like the supposed trade secrets had actually been revealed to potential customers, for example, or were described in literature commonly found in the industry.

Unlike most litigation, most trade secret cases are sprints, not marathons. A fast start makes a successful finish more likely.

Footnotes:

1. California Civil Code Section 3426.1(b)
2. California Civil Code Section 3426.1(a)
3. California Civil Code Section 3426.1(d)
4. See e.g., ABBA Rubber Co. v. Seaquist, 235 Cal. App. 3d 1,15 16(1991)
5. Practical business warning: be honest with your clients as to how expensive and fast trade secret litigation can be, and try to get as large a retainer as you can up front. Trade secret defendants often founder when a substantial injunction falls on them. You don t want to be their leading unsecured creditor if they wind up losing.
6. See, e.g., Cal. Civ. Proc. Code § 2025(b) (defendants can notice depositions immediately, but plaintiff cannot serve a deposition notice without leave of court until 20 days after service of summons); Cal. Civ. Proc. Code § 2030(b) (defendant may propound interrogatories immediately, but plaintiff cannot propound interrogatories without leave of court for ten days after service of the summons).