What you need to know about California Trade Secret Law.
One of the most common types of business disputes involves solicitation of a company's customers by a competing business. In California many companies require their employees to sign a "non-compete" and a "customer non-solicitation" agreement as a condition precedent to the employee's employment. Often times an employee of Company "X" will resign and gain employment with Company "Y" -- a direct competitor of Company "X". In other situations, an employee of Company "X" will start his or her own business and solicit current or former customers of Company "X". In these situations, employers will seek court assistance in an effort to compel their former employees to honor "non-compete" and "customer non-solicitation" agreements.
Generally, these types of agreements are unenforceable because they violate California Business and Profession Code section 16600 which states: "Except as provided in this Chapter, every contract by which anyone is restrained from engaging in lawful profession, trade, or business of any kind is to that extent void." Therefore, the enforceability of these types of agreements depends on the nature of the information that the employer is trying to protect. If the employer is able to establish that the information is a legitimate trade secret of the company, the court will likely grant an injunction preventing the former employee and his or her new employer from misappropriating the trade secrets.
California courts have held that not all information, including a customer list, generated during the course of a business enterprise is entitled to protection. This is because former employees cannot be required to "wipe clean the slate of their memories" to erase customer's names and addresses that are easily obtainable through normal resources such as the telephone directory. Furthermore, labeling information as a trade secret does not conclusively establish that the information fits this description. And a contract between the parties is not decisive in establishing whether or not something is a trade secret because a contract cannot make a trade secret where none exists under the law. This is why courts look at customer list trade secret allegations on a case-by-case basis. To assist courts in making this determination, the Legislature enacted Civil Code § 3426.1 which states, in pertinent parts:
"Trade Secret means information, including a formula, pattern, compilation, program, device, method, technique, or process that:
- (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use; and
- (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."
Specifically, the first prong of the trade secret statute that the information at issue must have "independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use." The term "independent economic value" means that the secrecy of the information provides a substantial business advantage. In addition to a defense of "general knowledge," if the information at issue is readily ascertainable by proper means -- even if not generally known-- it does not have any independent value.
In addition to the foregoing, California state courts have found that: (1) a list identifying buyers of products that are inherently difficult to sell merits protection; (2) a list containing specialized information on each customer such as discounts offered and purchase history is more likely to be protected as trade secret; and (3) a list is more likely to be deemed trade secret if the customer's purchase decisions are influenced primarily by its special needs or susceptibilities, as opposed to factors such as price, quality, reliable delivery and efficient service. Hence, the employer bears the burden of establishing that the information constitutes a legitimate trade secret of the company.
If you are involved in a business dispute concerning trade secrets it is vital to have the experienced business litigation attorneys of Fisher & Talwar on your side. Attorneys at Fisher & Talwar are skilled in litigating misappropriation of trade secret claims. Contact Los Angeles trade secret attorneys at Fisher & Talwar at 213-891-0777 or contact@fishertalwar.com for immediate assistance.
