The Secrecy Requirement

November 08, 2007 | By: Thomas F. Zuber, Esq.

In 1984, California adopted the Uniform Trade Secrets Act (adopted substantially by 43 states) which offers individuals and entities protection for their trade secrets by making it illegal to “misappropriate” such secrets. The act defines trade secret generally as valuable and secret “information, including a formula, pattern, compilation, program, device, method, technique, or process.” California Civil Code Section 3426.1(d). In general, the information may be tangible and intangible (Ed Nowogroski Ins., Inc. v. Rucker, 137 Wash. 2d 427), and covers customer information (lists, databases, and needs), financial information (costs, price data, marketing concessions, and figures), and information about manufacturing processes, designs, and the composition of products (e.g., formulas). Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751; See also, Whyte v. Schlage Lock Co. (App. 4 Dist. 2002) 125 Cal.Rptr.2d 277 (holding that strategic marketing plans for multiple consumers, process technologies, and financial data qualified as trade secrets). Computer software can also be eligible for trade secret protection in California.  MAI Systems Corp. v. Peak Computer, Inc., C.A.9 (Cal.)1993, 991 F.2d 511.

Actual or threatened misappropriation, or more simply “unfair use,” of a trade secret commonly leads to an award for damages, an injunction prohibiting future use, or in some cases, payment of royalties. In order to prevail on a claim of misappropriation of a trade secret, the plaintiff must prove that: “(1) the misappropriated information constitutes a trade secret; (2) the defendant ‘used’ the trade secret; and (3) the plaintiff was actually damaged by the misappropriation or the defendant was unjustly enriched by such misappropriation and use.” Therapeutic Research Faculty v. NBTY, Inc., E.D.Cal.2007, 488 F.Supp.2d 991.

The first element, the status of the information, is a question of fact for the jury decide, not the judge.  Thompson v. Impaxx, Inc. (App. 2 Dist. 2003) 7 Cal.Rptr.3d 427. In order to qualify for legal protection as a trade secret, the plaintiff must demonstrate that the information derives “independent economic value, actual or potential, from not being generally known to the public...” and that the information is the subject of “efforts that are reasonable under the circumstances to maintain its secrecy.” Cal Civ Code Section 3426.1(d) (emphasis added). Simply stated, the information must be (1) valuable and (2) secret. It is this second requirement that is the subject of this article.

In order to better understand the secrecy requirement, we could divide it into three necessary conditions that must be met to secure legal protection:

1.  The information is not already public knowledge.
2.  The information does not become public knowledge through an uncontrolled disclosure (e.g., a disclosure without a confidentiality agreement).
3.  The business owner has taken affirmative, reasonable steps to ensure secrecy, such as concealing the information or using confidentiality agreement to control disclosed information.

The information is not already public knowledge

The first requirement is that that the information not be generally known to the public. Although matters of general knowledge are not protected, novel combinations of that knowledge are eligible for protection. Comment, Softright: A Legislative Solution to the Problem of Users’ and Producers’ Rights in Computer Software, 44 Louisiana Law Review 1413 (May 1984). What is generally known within an industry cannot be considered secret, (See Uniform of Torts Trade Secrets Act Section 1 comment, 14 U.L.A. at 439) but secrecy is preserved when a second party discovers the information independently and keeps the information secret. Restatement Section 757 cmt. B (1939) (See Thompson v. California Brewing Co., 150 Cal.App.2d 469 (endorsing the Restatement)). In some cases, the mere availability of the information deems that information public knowledge. In Metro Traffic Control v. Shadow Traffic Network, 22 C.A.4th 853, the court held that information imparted to a contractor by a radio station could not be considered secret when it was available to anyone contracting with the radio station.

The information does not become public knowledge through an uncontrolled disclosure

When information is disclosed or published publicly without a confidentiality agreement or understanding, the owner bears the risk that information becomes public knowledge. Accordingly, widespread internet publication of information that makes that information available to competitors or individuals who can benefit from such information vitiates trade secret protection unless the publication is sufficiently obscure, transient, or otherwise limited. DVD Copy Control Ass’n Inc. v. Bunner (App. 6 Dist. 2004) 10 Cal.Rptr.3d 185. This is even if the case if the publisher gained access to the information by improper means. Religious Technology Center v. Netcom On-Line Communication Services, Inc., N.D.Cal.1995, 923 F.Supp. 1231. Once published, the information cannot be recalled. Id. If a product discloses a trade secret, that information is no longer protected. Futurecraft Corp. v. Clary Corp. (1962) 205 Cal.App.2d 279, 289, 23 Cal.Rptr. 198 (plaintiff’s valve design is not a trade secret once the product is on the market).

Even disclosures made to smaller audiences can forfeit protection. In In re Providian Credit Card Cases, 116 Cal. Rptr. 2d 833 (1st Dist. 2002), the plaintiff?s failure to stamp certain documents as “Confidential” or “Do not copy or distribute” as was customary helped the court conclude that no trade secret existed. Similarly, disclosing information in a business plan without confidentiality restrictions has been considered a forfeiture of trade secret status. Pixion, Inc. v. PlaceWare, Inc., N.D.Cal.2005, 421 F.Supp.2d 1233. The disclosure of information to customers without confidentiality agreements was a factor in determining that secrecy was not properly maintained. Whyte v. Schlage Lock Co. (App. 4 Dist. 2002) 125 Cal.Rptr.2d 277.

A business owner is, however, permitted to make certain disclosures and still maintain legal protection provided that the disclosure is somehow controlled in such a way that the listener is forbidden from further disclosing that information to the public. For example, the holder of a secret does not sacrifice secrecy when he reveals the trade secret to another, such as an employee, “in confidence, and under an implied obligation not to use or disclose it.” Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (citation omitted). A business owner would nonetheless be prudent in using written confidentiality agreements. (See MAI Systems Corp. v. Peak Computer, Inc., C.A.9 (Cal.)1993, 991 F.2d 511 (cert. dismissed) (employer took reasonable steps to ensure secrecy by requiring employees to sign confidentiality agreements). It has also been held that the disclosure of fragments of documents in the popular press did not destroy trade secret protection when the value of the document depended on the availability of the entire document. 923 F.Supp. 1231. Although copyright registration may forfeit trade secret status, registration in masked form does not. Id.

Affirmative steps to ensure secrecy

The holder of the secret is required to act reasonably to preserve the secrecy of the information. Secrecy is treated as a relative concept, i.e., relative to the value of the secret, and requires a fact-intensive analysis. DVD Copy Control Ass’n Inc. v. Bunner (App. 6 Dist. 2004) 10 Cal.Rptr.3d 185. Thus while a court may consider simply labeling a file folder “confidential” and storing in a locked cabinet a reasonable act for a local bakery?s secret cake recipe, the same measures may not be considered reasonable for a fast-food giant?s multibillion dollar secret recipe. For this reason, courts have been reluctant to announce what measures will always qualify as reasonable. Instead, what emerges is a tapestry of decisions that help guide owners.

In assessing reasonableness, courts may consider a wide range of factors, including: restricting access and physical segregation of the information, such as password-protected computers; confidentiality agreements with employees; marking documents with warnings or reminders of confidentiality, and the general custom of the business in protecting information. 116 Cal. Rptr. 2d 833. Locked cabinets and safes, logs identifying materials, limited availability of information, electronic sensors attached to documents, locked briefcases for transporting works, alarms, photo identifications, and security personnel are all factors that support a claim of reasonable effort. Religious Technology Center v. Netcom On-Line Communication Services, Inc., N.D.Cal.1995, 923 F.Supp. 1231. Merely labeling information as “confidential” or “trade secret” may not sufficient in and of itself to demonstrate reasonable effort, but such measures may aid a court in its determination. Morlife, Inc. v. Perry, (App. 1 Dist. 1997) 66 Cal.Rptr.2d 731.Conversely, the failure to incorporate confidentiality restrictions during disclosures, whether in sharing business plans (421 F.Supp.2d 1233) or sharing information with customers (125 Cal.Rptr.2d 277), is often viewed as an indication that the owner did not exercise reasonable efforts to preserve secrecy.

The use of confidentiality agreements is especially critical in maintaining secrecy not only because it demonstrates effort to preserve secrecy, but because absent an agreement, the information can be considered public knowledge and ineligible for protection. For this reason, the court in In re Providian held that an individual who discloses a trade secret to others who are under no obligation to protect the confidentiality of that secret forfeits legal protection. 116 Cal. Rptr. 2d 833.

In sum, business owners should be cautious when revealing sensitive information to anyone. Confidentiality agreements should be in place whenever such disclosures take place, whether to employees, customers, or anyone else. Owners should also be sure to take affirmative, visible steps to preserve the secrecy of their information, proportional to the value of the information. Such steps should be sufficient to signal to an observer that the information is not available to the general public, only to those who need to know. Restricting access to information (whether physically or digitally), and monitoring access to information by keep records are steps in the right direction.

* The author, Thomas F. Zuber, Esq., is a partner of Zuber & Taillieu LLP, specializing in intellectual property transactions.

** This article is for informational purposes only.  This article does not constitute legal advice and, in the absence of a fully executed retainer agreement, no attorney-client relationship exists between its reader and Zuber & Taillieu LLP or any of its attorneys.  For more information, please read our disclaimer.

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