Selected Developments in Business Law — Trade Secrets Practice in California

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the November 2021 update of Trade Secrets Practice in California.  References are to the book’s section numbers. The most significant legal developments since the last update include developments in such important topic areas as covenants not to compete, trade secret ownership issues in bankruptcy, breach of confidence claims, so-called Desny claims, attorney fees, and fair use.  

November 2021 Update

In Hooked Media Group, Inc. v Apple Inc. (2020) 55 CA5th 323, 332, the court held that an action for trade secret misappropriation against a former employee for using the employee’s own knowledge to benefit the new employer was not permitted, because it would be equivalent to retroactively imposing a covenant not to compete on the employee. See §§2.10, 11.102.

Who becomes the owner of a trade secret when the most recent owner declares, or is forced into, bankruptcy? The answer may depend on whether the trade secret can be identified clearly enough to be an “intellectual property” suitable to qualify under §541 of the Bankruptcy Code (11 USC §541). It may also depend on the chapter of the Bankruptcy Code under which the most recent owner is in bankruptcy court. Under chapters 7 and 13, a bankruptcy trustee becomes the legal owner of the debtor’s property. However, under chapter 11 (11 USC §§1101–1195), the debtor remains in possession of the estate and the United States Trustee monitors compliance. The ownership question became an issue in Advanced BioTech, LLC v BioWorld USA, Inc. (ED Cal, Sept. 28, 2020, No. 1:19-cv-01215-NONE-SKO) 2020 US Dist Lexis 179665. In that case, the defendant filed a motion to dismiss the complaint because the plaintiffs were in bankruptcy and had therefore relinquished ownership of the trade secret to the trustee. The issue was not resolved, because the court found it to be an improper ground for dismissing the complaint under Fed R Civ P 12(b)(6) and was better suited to be presented in a motion for summary judgment. See §2.21E.

An example of what can go wrong when the trade secret originator did not obtain a written contract is shown in the unfortunate case of PHL Associates v Superior Court  (July 16, 2020, No. C088437) 2020 Cal App Unpub Lexis 4490. Even though the trade secret originator, Dr. Wallis, was an employee when she originated the trade secret, she and her employer had orally agreed that she was the owner. Dr. Wallis demanded that the board of directors make her a shareholder or she would go elsewhere with her trade secret. The employer agreed but later fired her after they sold the trade secret to another company. The court struggled through considerations of equitable remedies, fraud, conversion, conspiracy, unjust enrichment, constructive fraud, constructive trust, the California Uniform Trade Secrets Act, and misappropriation of trade secrets, but found no writing that linked her shareholder status as consideration for assigning the trade secret to the company. Ultimately, the court ruled in favor of her employer. The case is very convoluted, but all of the issues could have been avoided with a written contract. See §2.25.

In Intellicad Tech. Consortium v Suzhou Gstarsoft Co. (D. Or., Dec. 21, 2020, No. 3:19-cv-1963-SI) 2020 US Dist Lexis 239710, multiple code writers contributed to valuable source code, thus raising the issue of multiple co-ownership of the source code, which constituted a trade secret. In the preliminary injunction proceeding, the court found that money damages would not be a sufficient remedy for trade secret misappropriation and issued an injunction based on irreparable harm should trade secret protection for the source code be lost. See also Genesis 1 Oil Servs. LLC v Wismann Grp, LLC (C.D.Cal. Mar. 23, 2021, No. 8:20-cv-02114-JLS-ADS) 2021 US Dist Lexis 54940 (granting preliminary injunction). See §2.34.

A discussion of so-called Desny claims (Desny v Wilder (1956) 46 C2d 715) has been added to chapter 3. California law recognizes a limited implied-in-fact contract claim known as a Desny claim that provides protection when ideas are shared with the expectation of remuneration. Perhaps unsurprisingly, Desny claims have their origin in disputes over ideas submitted to Hollywood movie studios. A Desny claim lies when the idea holder “has clearly conditioned his offer to convey the idea upon an obligation to pay for it if it is used by the offeree and the offeree, knowing the condition before he knows the idea, voluntarily accepts the disclosure (necessarily on the specified basis) and finds it valuable and uses it.” 46 C2d at 739. Courts still apply these claim elements today. The Ninth Circuit recently reaffirmed them in the context of screenplays (Jordan-Benel v Universal City Studios, Inc. (9th Cir 2017) 859 F3d 1184, 1191). See §3.3B.

A discussion of the tort of breach of confidence has been added to chapter 3. The law may imply a confidential relationship between the submitter and the recipient of an idea. California courts have expressly recognized the tort of breach of confidence. Berkla v Corel Corp. (9th Cir 2002) 302 F3d 909, 917; Faris v Enberg (1979) 97 CA3d 309. The tort is based on the concept of an implied obligation or contract between the parties that confidential information will not be disclosed. Entertainment Research Group, Inc. v Genesis Creative Group, Inc. (9th Cir 1997) 122 F3d 1211, 1226. As stated by the court in Entertainment Research Group, 122 F3d at 1227: “To prevail on a claim for breach of confidence under California law, a plaintiff must demonstrate that: (1) the plaintiff conveyed ‘confidential and novel’ information to the defendant; (2) the defendant had knowledge that the information was being disclosed in confidence; (3) there was an understanding between the defendant and the plaintiff that the confidence be maintained; and (4) there was a disclosure or use in violation of the understanding.” See §3.3C.

In Brown v TGS Mgmt. Co., LLC (2020) 57 CA5th 303, the court invalidated the confidentiality provisions in an employment agreement under Bus & P C §16600 on grounds that they operated as de facto noncompete and were void ab initio and unenforceable. See §§4A.9, 6.21, 10.8, 11.90.

In Thurston v Fairfield Collectibles of Georgia, LLC (2020) 53 CA5th 1231, the court found specific personal jurisdiction over a company that made sufficient online sales and sent substantial number of catalogs to California residents. See §11.13.

In June 2021, in Van Buren v United States (2021), __ US __, 141 S Ct 1648, the U.S. Supreme Court sided with those circuits that favored the narrow interpretation of the “exceeds authorized access” clause of the Computer Fraud and Abuse Act (CFAA) (18 USC §1030) and determined that the CFAA does not cover persons with improper motives for obtaining information that is otherwise available to them. The case involved a sting operation against a police sergeant in Georgia, who had agreed to search the state law enforcement computer database for a license plate to see if an individual was an undercover officer in exchange for money. This search allegedly violated department policy, which prohibited accessing the database for any “improper purpose,” including any personal use. 141 S Ct at 1653. The Eleventh Circuit affirmed his conviction. The Supreme Court reversed and remanded the judgment, concluding that the CFAA did not turn on the intent of the computer user; the statute’s text focused first on whether the individual had the right to access the computer, then on whether the individual had the right to access the specific information. The Court also noted the potentially problematic consequences associated with the government’s view, which could criminalize a significant amount of normal computer use, such as accessing personal files or information on an employer-issued computer in violation of an acceptable use policy. See §§11.18, 12.1, 13.5A, 16.59B.

In Arrow Highway Steel, Inc. v Dubin (2020) 56 CA5th 876, the court held that CCP §351 violates the dormant Commerce Clause by impermissibly burdening interstate commerce when used to toll the statute of limitations against a judgment debtor who moved away from California after judgment was entered. See §11.24.

In Inteliclear, LLC v ETC Global Holdings, Inc. (9th Cir 2020), 978 F3d 653, the court reversed summary judgment for the defendant when there was triable issue of fact as to whether the plaintiff described alleged trade secrets with sufficient particularity. See §§11.48, 11.51, 11.54, 16.28.

In Coast Hematology-Oncology Associates Medical Group, Inc. v Long Beach Memorial Medical Center (2020) 58 CA5th 748, the court affirmed summary judgment dismissing a trade secret claim when the plaintiff failed to identify the alleged trade secret with reasonable particularity and failed to timely move to amend, but reversed summary judgment dismissing another claim when it was error to rule categorically that firm-specific productivity data could not be a trade secret because a well-known method was used to generate that data. See §11.54.

In Quidel Corp. v Superior Court (2020) 57 CA5th 155, the court applied a rule of reason standard to uphold an exclusive dealing agreement between two companies. See §11.90.

In Nationwide Biweekly Administration, Inc. v Superior Court (2020) 9 C5th 279, the California supreme court held that there is no state constitutional right to a jury trial for claims under Bus & P C §17200. See §11.106.

In Ajaxo, Inc. v E*Trade Fin. Corp. (2020) 48 CA5th 129, the court held that the Georgia-Pacific factors used in patent royalty framework (see Georgia-Pacific Corp. v United States Plywood Corp. (SD NY 1970) 318 F Supp 1116, 1120, modified and aff’d sub nom Georgia-Pacific Corp. v U.S. Plywood-Champion Papers, Inc. (2d Cir 1971) 446 F2d 295, cert denied (1971) 404 US 870)) can be used for trade secret damages analysis. See §12.21.

Attorney fees and costs awarded under CC §3426.4 belong to the attorney of the prevailing party to the extent they exceed the fees the litigant already paid, absent an agreement to the contrary. Aerotek, Inc. v Johnson Group Staffing Co., Inc. (2020) 54 CA5th 670. See §12.23.

In Google LLC v Oracle Am., Inc. (2021) ___U.S.___ , 141 S Ct 1183, the defendant Google LLC copied approximately 11,500 lines of declaring code from an application programming interface (API) without permission. The Court assumed without deciding that the declaring code was copyrightable, but held that Google’s copying of the Java SE API, which included only those lines of code that were needed to allow its programmers to put their accrued talents to work in a new and transformative program, was a fair use of that material as a matter of law under 17 USC §107. To determine whether Google’s limited copying of the API constituted fair use, the Court examined the four factors set forth in 17 USC §107, ruling that (1) the nature of the work at issue favored fair use; (2) the copying at issue was transformative because Google intended to create a different task-related system for a different computing environment (smartphones) and to create a new platform (the Android platform) to help achieve and popularize that objective; (3) Google copied only 0.4 percent of the entire API at issue, which consisted of 2.86 million total lines, for a valid and transformative purpose; and (4) Google’s new smartphone platform was not a market substitute for Java SE and Oracle would benefit from the reimplementation of its interface into a different market. See §16.48A.