Introduction

Company information that is valuable and not generally known to the public can be protected as a trade secret. Such confidential information often is what makes a business unique and provides advantages over competitors.  Because of this, competitors might be interested in gaining access to that information, which may give rise to a potential claim for trade secret misappropriation as well as other related claims. This article focuses on what you need to allege to state a claim for trade secret misappropriation in California as well as other potential claims and available remedies, with a particular emphasis on recent cases.  Given the concentration of technology companies in California, it is not surprising that California courts handle the highest number of trade secret lawsuits in the country, and thus, the standards and case law are well-developed as discussed below.

Potential Claims

In California, trade secret owners can file trade secret misappropriation lawsuits under the Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA). The DTSA, passed in 2016, provides a cause of action (or claim) under federal law. The CUTSA, which adopted the Uniform Trade Secrets Act in 1984, provides a cause of action under state law. 

Cases in California district courts (federal courts) can be filed under both the DTSA and CUTSA. To prevail on a trade secret misappropriation claim under either one, a plaintiff must prove that: (1) the plaintiff owned a trade secret; (2) the defendant misappropriated the trade secret; and (3) the defendant's actions damaged the plaintiff.  The elements of CUTSA and DTSA are very similar and courts often consider them together.  This article discusses claims under both statutes.

Elements of Trade Secret Misappropriation

What qualifies as a trade secret?

DTSA definition: “the term ‘trade secret’ means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” 18 U.S.C § 1839(3).

CUTSA definition: “(d) ‘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 can 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.”  CA CIVIL § 3426.1.

The definition of trade secret is broad.  A trade secret can be any information that is valuable because it is not generally known and which the owner has taken reasonable measures to keep secret.  The breadth of information that can be protected is illustrated via examples from cases filed in California federal district courts in 2022, where alleged trade secrets included:

• proportions and quantities of ingredients contained in pre-prepared meal;
• processes used to make gummy products and wine;
• the formulation of dietary supplements and sugar-free gelatin;
• marketing strategies, business plans, sales process, sales projections and targets for specific customers;
• client lists, customer pricing and pricing information;
• detailed information regarding ongoing collaboration projects;
• technical manuals, manufacturing methods, design documents and operations manuals;
• computer scripts, schematics and specifications;
• chip designs, hardware designs, hardware functions and hardware operation;
• driving platform and EV skateboard designs; and 
• clinical trial information, clinical and non-clinical studies, pharmacology studies, and drug studies.

Unlike other forms of intellectual property, such as patents, trade secrets have no examination delays, no application costs and no expiration date.  Instead, they must simply meet the definition of a trade secret and trade secret owners must take “reasonable measures” to keep them secret. 

What are reasonable measures?

Whether a company has made reasonable efforts to protect secrecy is a fact-specific inquiry. 

Courts have found efforts to be sufficient when companies, for example, required signing confidentiality and non-disclosure agreements, used passwords to protect computers and networks, only disclosed trade secret information on a need-to-know basis, and included confidentiality provisions in the employee handbook. See eg, ChargePoint, Inc. v Claborne et al, Case No. 5:21-cv-08050, 2022 WL 14812642 at *5 (N.D. Cal. 2022); Universal Building Maintenance LLC v Calcote, No. SACV 22-1125, 2022 WL 18397628 at *3 (C.D. Cal. 2022).

On the other hand, courts have found efforts to protect secrecy to be insufficient when disclosure was made to parties not bound by NDA, or when documents were shared that included no indicia of confidentiality.  See Wagner Aeronautical, Inc. v Dotzenroth, No. 21CV0994, 2022 WL 6837701 at *5-6 (S.D. Cal. Oct. 7, 2022).

What is misappropriation?

DTSA definition: “the term ‘misappropriation’ means (A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent.” 18 U.S.C § 1839(5).

CUTSA definition: “‘Misappropriation’ means: (1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (2) Disclosure or use of a trade secret of another without express or implied consent.” Cal. Civ. Code § 3426.1(b). 

Assuming a company can prove that its information falls within the definition of a trade secret, misappropriation occurs when another party wrongfully acquires, wrongfully uses or wrongfully discloses those trade secrets.  In terms of properly pleading trade secret misappropriation in a manner that will survive a motion to dismiss in California, an aggrieved party must allege facts demonstrating how improper acquisition, disclosure or use occurred or threatens to occur.  Courts have found that misappropriation was appropriately pleaded in the following circumstances:

• The defendant emailed work emails and documents with client information to his personal email account and then used the emailed information to solicit the client for his new employer. Universal Building Maintenance LLC v Calcote, 2022 WL 18397628 at *4.
• The defendant accessed, exported and downloaded confidential information from the plaintiff’s databases and brought the information to a new employer who used the information.  See Struck v Gao, No. CV 22-02415, 2022 WL 16858015 at *5 (C.D. Cal. Aug. 18, 2022).
• Unique secret keys belonging to the plaintiff were found embedded in the source code of the defendant’s software.  In addition, the defendant produced a comparable website in an implausibly short amount of time.  Moement, Inc. v Groomore, Inc., No. 2:22-cv-02871, 2022 WL 18284405 at *6 (C.D. Cal. Nov. 29, 2022).
• The plaintiff’s confidential information appeared in the defendant’s patent applications, and the defendant refused to destroy the confidential materials after an acquisition of the plaintiff was called off.  XpandOrtho, Inc. v Zimmer Biomet Holdings, Inc., No. 3:21-cv-00105, 2022 WL 801743 at *13 (S.D. Cal. Mar. 15, 2022).

Related Causes of Action

Many trade secret lawsuits involve former company employees, who either left to join a competitor or left to start their own competing business.  Other trade secret disputes involve business partners, collaborators, franchisees and suppliers who are in a contractual relationship.  Because of the existence of previous relationships between plaintiffs and defendants in trade secret lawsuits, other claims often appear alongside trade secret misappropriation claims. 

• Breach of contract – it is often alleged that the defendant violated its confidentiality obligations under contracts, such as confidentiality agreements, non-disclosure agreements, collaboration agreements, employment agreements, employee handbooks, corporate policies, employee codes of conduct and ethics, and non-solicitation agreements. 
• Violation of the federal computer fraud and abuse act (18 U.S.C. §1030) and computer data access and fraud act (Cal. Penal Code § 502) – these statutes forbid knowingly accessing a computer or computer network without permission. Because more and more trade secret misappropriation involves unauthorized access to computers and computer networks, allegations of violations of these statutes are on the rise. 
• Breach of fiduciary duties – when former high-level executives are involved in trade secret misappropriation, breaches of fiduciary duty and loyalty are often asserted as well.
• Tortious (intentional) interference – intentional interference with contractual relations or with prospective economic advantage, which occurs when one person intentionally damages someone else’s contractual or business relationships, is another cause of action that is often asserted alongside trade secret misappropriation. 

These claims can both strengthen and expand the reach of a trade secret claim, and critically, may be viable even if a company cannot ultimately prove trade secret misappropriation to the court’s satisfaction.  Thus, they should be asserted as companion claims if they are available.

Particularity Requirement in California

Particularity requirement: “In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.” Cal. Civ. Proc. Code § 2019.210.

California law requires the trade secrets to be identified with sufficient particularity as a threshold matter before discovery can begin. This requirement applies to CUTSA claims in state court, and has also recently been held to apply to federal cases.InteliClear, LLC v ETC Glob. Holdings, Inc., 978 F.3d 653, 658 n.1 (9th Cir. 2020.

A plaintiff must describe any alleged trade secrets with sufficient particularity to separate them from general knowledge, and to permit the defendant to ascertain the boundaries of each secret. Failure to identify a trade secret can result in dismissal of a case at the pleadings stage, on summary judgment, or even after trial. Here are a few recent examples:

• In Wescott v Block, the court recommended dismissing the DTSA and CUTSA trade secret claims at the pleading stage, because the complaint made only conclusory allegations alluding to “nonpublic information” related to an IPO that was “particularly sensitive,” and failed to plead any protectable trade secrets with reasonable particularity. No. 22-cv-00543, 2022 WL 1136728 at *4 (N.D. Cal. Apr. 18, 2022). 
• In Equate Media, Inc. v Suthar, the court entered judgment as a matter of law for defendants after trial, finding that plaintiffs failed to specifically identify a single trade secret. No. 2:21-cv-00314, 2022 WL 2824973 at *3-5 (C.D. Cal. Jun. 22, 2022). 

Sufficient disclosure does not require every detail of the claimed trade secret. In the following exemplary cases, the identification of trade secrets was found to be sufficient even though it did not specify every detail of the claimed trade secrets:

• The description of the trade secrets as “porous semiconductor technology developed by [Plaintiff],” including the “manufacture and use of porous silicon wafers, III-V materials on silicon-germanium alloys, rare earth material filters, and advanced III-V power devices,” and “diagrams and explanations of [Plaintiff’s] methodology and advantages over the competition” was found to be sufficient. IQE plc v Newport Fab, LLC, No. 22-00867, 2022 WL 6615775 at *2-3 (C.D. Cal. Sep. 28, 2022). 
• The sufficient particularity standard was met when the plaintiff disclosed the alleged trade secrets as “47 pricing and retail strategy trade secrets for North America and 28 market entry and market penetration trade secrets for South America,” and each trade secret description seemed tailored to specific documents. Monster Energy Company v Vital Pharmaceuticals, Inc., 2022 WL 1599712 at *25-26 (C.D. Cal. Apr. 19, 2022).

Injunctive Relief

In addition to monetary damages, plaintiffs can often obtain injunctive relief, such as temporary restraining orders, preliminary injunctions and permanent injunctions. Injunctions are crucial in former-employee situations, as they seek to prevent further use or disclosure of trade secrets.

Through injunctive relief, a court can prohibit a defendant from performing a specific act; it can also order the defendant to perform a specific act. For example, it can order a defendant not to possess, use, make available or disclose any of the plaintiff’s trade secrets, and to not destroy, alter, or transmit any documents that may contain plaintiff’s trade secrets. It can also order the defendant to return all of the plaintiff’s property, and to conduct a forensic inspection of the defendant’s emails and devices. Thus, these are important remedies, and in some cases, the most important remedy where there is still an opportunity to mitigate harm or loss of trade secret protection.

Temporary restraining orders are short-term temporary injunctions that can be obtained very quickly, and can also be obtained ex parte (without notice to the defendant), which can be critically important to preventing a former employee from destroying or further disseminating misappropriated information.  In order to obtain a temporary restraining order, the moving party must establish that (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm in the absence of preliminary relief, (3) the balance of equities tips in its favor, and (4) an injunction is in the public interest. Because temporary restraining orders are only entered for a short amount of time and thus are unlikely to impose great hardship on a defendant, courts tend to be willing to grant them to prevent harm to a plaintiff, especially because it is very difficult, if not impossible, to put the proverbial “genie back in the bottle” once a trade secret becomes public. 

The standard for obtaining a preliminary injunction is substantially identical to that for a temporary restraining order. However, such requests tend to be subject to higher scrutiny because a preliminary injunction will generally last through trial. Preliminary injunction proceedings tend to look like mini-trials with expert declarations, and in some cases, even live testimony.  If the plaintiff prevails in obtaining a preliminary injunction, it is likely that the case will resolve without further action.   

To determine whether a permanent injunction should issue, courts consider whether a prevailing plaintiff has demonstrated: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. 

Courts in California are relatively receptive to granting injunctive relief in trade secret cases. For example, of the California district court cases pending in 2022, courts granted 13 of 32 motions for temporary restraining orders (or 41%), 24 of 49 motions for preliminary injunctions (or 49%), and 3 of 4 requests for permanent injunctions (or 75%). In addition, there were a large number of injunctions granted via consent judgments (6 temporary restraining orders, 10 preliminary injunctions and 24 permanent injunctions), which often happens in instances where a defendant would rather consent to an injunction than engage in costly litigation or risk a trial on the merits.

Monetary Remedies

Damages

Under DTSA and CUTSA, a plaintiff can seek damages for actual loss as well as for the unjust enrichment of the defendant resulting from the misappropriation (to the extent that such damages are not covered by actual loss); or in the alternative a reasonable royalty. Additionally, if the trade secret is willfully and maliciously misappropriated, the plaintiff may also seek “exemplary” (ie, punitive) damages up to twice the amount of compensatory damages. 

Damages under DTSA

“(B) award—(i) (I) damages for actual loss caused by the misappropriation of the trade secret; and (II) damages for any unjust enrichment caused by the misappropriation of the trade secret that is not addressed in computing damages for actual loss; or (ii) in lieu of damages measured by any other methods, the damages caused by the misappropriation measured by imposition of liability for a reasonable royalty for the misappropriator’s unauthorized disclosure or use of the trade secret; 

(C) if the trade secret is willfully and maliciously misappropriated, award exemplary damages in an amount not more than 2 times the amount of the damages awarded under subparagraph (B).”

18 U.S.C. § 1836(b)(3)(B) and (C).

Damages under CUTSA

“(a) A complainant may recover damages for the actual loss caused by misappropriation. A complainant also may recover for the unjust enrichment caused by misappropriation that is not taken into account in computing damages for actual loss. 

(b) If neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty for no longer than the period of time the use could have been prohibited. 

(c) If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subdivision (a) or (b).” 

Ca. Civ. Code § 3426.3.

In 2022, in the case of Comet Technologies USA Inc. v XP Power LLC, the jury awarded the plaintiff Comet $40 million total in damages for trade secret misappropriation. No. 20-cv-06408-NC, Dkt. 406 (N.D. Cal. Mar. 23, 2022). That award encompassed $20 million in compensatory damages and $20 million in punitive damages. Id. In that case, the defendant recruited a group of the plaintiff’s senior engineers who had access to the plaintiff’s proprietary information relating to RF generator technologies. 

Attorney’s fees

Both DTSA and CUTSA allow courts to award attorney’s fees to a prevailing party: to a plaintiff if the misappropriation is willful and malicious, and to a defendant if a claim of trade secret misappropriation is made in “bad faith.” 

Under DTSA: “(D) if a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, award reasonable attorney’s fees to the prevailing party.” 18 U.S.C. § 1836(b)(3)(D).

Under CUTSA: “If a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party. Recoverable costs hereunder shall include a reasonable sum to cover the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the prevailing party.” Cal. Civ. Code § 3426.4.

“Bad faith” is not defined by the DTSA or CUTSA. However, courts have developed a two-pronged standard to determine whether a claim for trade secret misappropriation was made in bad faith: (1) objective speciousness of the claim, and (2) subjective bad faith in bringing or maintaining the action, ie, for an improper purpose. 

In Cherokee Chemical Co., Inc. v Frazier, the court found bad faith and awarded attorneys’ fees to the defendant because the plaintiff was not able to identify the alleged trade secrets with reasonable particularity and the plaintiff brought the suit with the intent to suppress a competitor or to retaliate against former employees. No. CV 20-1757, 2022 WL 2036305 at *3-6 (C.D. Cal. Apr. 27, 2022). 

Willful and malicious misappropriation asks whether the defendant acted with an intent to cause injury, and whether the defendant’s conduct was despicable and was done with a willful and knowing disregard for the rights of others. In DiscoverOrg Data, LLC v Bitnine Global, Inc., the defendant used the login credentials of other subscribers, downloaded hundreds of thousands of records, and used those records for its own sales and marketing purposes. No. 19-CV-08098, 2020 WL 6562333 at *10 (N.D. Cal. Nov. 9, 2020). In that case, the court found willful and malicious misappropriation and awarded attorneys’ fees. Id. 

Practice Guidance

To be able to prove your confidential information is entitled to trade secret protection, reasonable steps must be taken to protect the trade secrets.  Such steps should include marking the claimed trade secret information as confidential, limiting access to the information on a need-to-know basis, entering into confidentiality or non-disclosure agreements with employees, suppliers and business partners, password-protecting any system via which the trade secret information can be accessed, restricting physical access to facilities, and having a clear employee handbook, code of conduct and other policies that discuss the importance of confidentiality. 

As the cases show, employees are the biggest source of trade secret misappropriation. Companies should therefore also take steps to detect any misappropriation as soon as it happens.  For example, to timely detect any misappropriation, companies should monitor the activities of employees, especially when they are leaving the company, via readily commercially available monitoring means and alerts. That activity should include monitoring email exchanges, database and other system access, and any downloading, copying and transmitting of documents of electronic files. The products of the former employees’ new employer, the patent publications of the new employer, and publicly available information should also be monitored to see if any of the company’s confidential information is used by the new employer. Solicitation of clients from former employees or their new employers can also be evidence of misappropriation. 

When trade secret owners find out about the unauthorized acquisition, disclosure, or use of their confidential information, they should act quickly to stop the spread and use of the confidential information. This can include immediately filing a motion for a temporary restraining order and a preliminary injunction, along with a complaint that can also seek damages and a permanent injunction. Additionally, in some circumstances, owners of trade secrets can seek the help of law enforcement using the criminal justice system, such as reporting a trade secret theft to the FBI.