PROTECTING COMPANY CONFIDENTIAL DATA IN A FREE EMPLOYEE MOBILITY STATE: WHAT COMPANIES DOING BUSINESS IN CALIFORNIA NEED TO KNOW IN LIGHT OF RECENT DECISIONS AND EVOLVING WORKPLACE TECHNOLOGY

By Bradford K. Newman¹

I. INTRODUCTION

California’s long standing public policy of encouraging employee mobility is a hallmark of the state’s start-up, tech-focused industry, and it is well understood that California Business & Professions Code section 16600 prohibits "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void[.]" However, when it comes to protecting a company’s intellectual property ("IP"), and particularly trade secrets, from potential "insider" (i.e. employee) threats, employee mobility that includes the movement of employees to and from competitors poses unique challenges. The legal limits of specific measures designed to protect IP can be unclear and confusing. And many companies are not aware of the latest developments concerning protective measures they have long taken for granted as permissible. This article addresses some of steps companies should be utilizing to protect their valuable trade secrets, and explains a very recent but important change in the law regarding the enforceability of employee non-solicitation agreements.

II. ACCOUNTING FOR CORE TRADE SECRETS—WHAT PRECISELY WARRANTS PROTECTION?

Trade secrets are valuable corporate assets in the form of "information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."²

Such assets are often intangible, and before they can be protected, a company must internally identify precisely what constitutes its non-public, commercially valuable information. This can be a daunting task, especially when courts generally disfavor overbroad classifications of purported trade secrets.³ Once core trade secrets are identified, companies can use a number of means to protect them, including, for example: (1) drafting, distributing and enforcing company policies designed to protect confidential information; (2) requiring employees to sign confidentiality agreements; (3) restricting internal access to confidential information; (4) restricting the use of certain computer media like cloud storage and USB devices; (5) electronically or physically tracking access to and disclosure of confidential information; (6) using confidentiality agreements with customers and licensees; and (7) implementing a high risk departure program, explained below. Based on recent developments in California jurisprudence, confidential information agreements can be especially valuable, as they can be used to prohibit an employee’s use of confidential information even if the information does not rise to the level of a trade secret. Protective measures are a legal necessity, as courts increasingly focus not only on the substance of the alleged trade secret, but on what steps the corporation takes to protect them.⁴

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III. UNDERSTANDING THE CAPABILITIES, AND GAPS, IN CORPORATE IT INFRASTRUCTURE: ESTABLISHING THE RULES AND A MONITORING PROGRAM FOR EXISTING EMPLOYEES

In light of the numerous and ever-evolving methods of data storage and transmittal, today’s companies face significant hurdles in protecting their confidential information from potential exfiltration by current and departing employees. As one means of protecting IP, companies should engage in some form of forensic monitoring of their own systems. While companies should consult with local counsel regarding legal limits on certain forms of monitoring, this article sets out a few potential means of data theft of which employers should be aware.

At a minimum, companies should institute and distribute a computer usage and/or acceptable use policy that details the company’s computer monitoring rules and various restrictions on an employee’s activity. Monitoring for misuse of the corporate email system alone, through standard third party data loss prevention programs, is not sufficient. Companies must also determine what will be allowed as far as "off-server" storage and transmission of critical company data through cloud storage, attached USB drives, and mobile applications. Employees can easily transfer an almost unlimited amount of company data off the company systems through these means. Questions that must be answered include, for example, whether the company will ban (and electronically block) the usage of attached storage devices, restrict access to and use of third party hosted cloud storage providers, outlaw the use of mobile messaging applications like WhatsAPP, prohibit the transfer of data sets above a certain designated size, and store especially sensitive data on segregated servers to whom only specifically designated employees will be provided access credentials. Once these risks are accounted for, they must be implemented from an IT perspective and then monitoring and notification mechanisms put in place. Once this is accomplished, clear policies placing employees on notice of the rules should be disseminated and all employees should be educated and sign acknowledgement forms.

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It should be noted that there are several additional technical means for preventing data theft that are beyond the scope of this article, and which will not be right for every company. Careful strategic thought, from a legal, technical and human relations perspective, is required before crafting the optimal and individualized plan for each company. The common requirements are the ability to identify what data requires the most protection and a complete understanding of the technology available to the employee base. Without this understanding, a company will never be able to craft a best-of-breed data loss program.

IV. PROTECTING INTELLECTUAL PROPERTY THROUGH CONTRACT

It is well-understood that a critical part of protecting data from insider threats involves requiring employees to sign agreements acknowledging the IP to which they will be exposed, confirming the company’s legitimate need to protect such information, and agreeing to hold it in confidence and to use it only for the company’s benefit. What many companies that operate in California do not know is that special language is required when it comes to protecting information that does not rise to the level of a trade secret and which in many other jurisdictions is colloquially referred to as "proprietary information" and often and incorrectly confused with a statutory "trade secret." And in light of recent case law, there is considerable confusion about the use of employee and customer non-solicitation agreements. Since almost every company uses some sort of contract as part of the effort to protect its IP, and too often times relies on a template form drafted years ago by outside counsel or a now departed in-house attorney, a clear understanding of California law in this regard is mandatory since the risk is that the company’s "Confidential Information Agreement" will be deemed void and/or violative of the law, which can expose the company to liability under California’s Private Attorney General Act (PAGA), Business and Professions Code section 17200 et seq. (unfair business practices) and a host of other potential risks.

A. Protecting Information That Does Not Rise to the Level of a Trade Secret

In data theft cases, for different reasons, both plaintiffs and defendants regularly argue over whether the information at issue is protectable when not a trade secret. To avoid preemption of common law claims under California’s Uniform Trade Secret Act, the plaintiff-corporation in a trade secret case may argue that some or all of what is at issue is merely "proprietary" rather than a statutorily protected trade secret. The defendant-employees and competitors may argue that the data is not a trade secret, and thus not protectable in any manner. This distinction between trade secret information and information that is non-public but does not rise to the level of a trade secret is a nuanced but important one that courts have grappled with over the years. In California specifically, a key Court of Appeal case and its progeny articulate the complexities of the issue that attorneys advising clients on data protection must thoroughly understand and account for when reviewing contracts designed to protect IP.

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In Silvaco Data Systems v. Intel Corp,⁵ the California Court of Appeal held that Silvaco’s common-law claims (including claims for conversion, unlawful business practices, and conspiracy) were preempted because they overlapped with the plaintiff’s trade secret misappropriation claim. In issuing its order, the Court found that there was no attempt "to identify any ‘Silvaco property’ other than the trade secrets supposedly used to create [the product]. The non-CUTSA claims therefore. . . . attempt to evade the strictures of CUTSA by restating a trade secrets claim as something else."⁶

In often cited dictum, the Court in Silvaco noted that "[i]nformation that does not fit [the statutory definition of a trade secret], and is not otherwise made property by some provision of positive law, belongs to no one, and cannot be converted or stolen. . . ."⁷ How that bears in practice is somewhat an open question. Some cite to Silvaco for the proposition that all common law claims premised on the misappropriation of information that does not rise to the level of trade secret protection are preempted, as only trade secrets are afforded protection under California law.⁸ However, others argue that, based on the Court’s carve out for information "otherwise made property by some provision of positive law," the Court intended to exclude certain confidential information from preemption when it is affirmatively made the property of the company.⁹

Silvaco was followed by SunPower Corp. v. SolarCity Corp., decided by the United States District Court for the Northern District of California.¹⁰ In SunPower, Judge Lucy Koh noted that the Court agreed with Silvaco‘s holding that claims based on the misappropriation of information that ultimately fails to qualify as a trade secret may be superseded.¹¹ But Judge Koh concluded that, in light of Silvaco‘s language regarding information "made property by some provision of positive law," claims based on "non-trade secret proprietary information" are not preempted if a defendant can allege facts that show that "the [non-trade secret proprietary] information . . . was ‘made property by some provision of positive law,’" on grounds different from the UTSA, or that there is a material distinction between the wrongdoing alleged in the UTSA claim and that alleged in the non-UTSA claim.¹²

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To avoid the pitfalls explained by Judge Koh in SunPower, it is critical that companies utilize contracts that specifically delineate the difference between the entity’s trade secrets and less confidential information that the company nevertheless seeks to protect through contract. Specific language must be utilized, and experienced counsel familiar with this issue should be consulted to draft and/or review key provisions. Similarly, when asserting claims based on theft of information that does not rise to the level of a trade secret, a plaintiff-company in California should consider affirmatively pleading that the information has been made its property by "positive operation of law" vis-a-vis confidential information agreements.

B. Protecting IP Through Restrictions on Post-Employment Solicitation

1. California’s Historic Prohibition on Non-Competition Agreements

In addition to specific contractual provisions protecting against disclosure of confidential information, companies should also consider the efficacy and enforceability of specific post-employment restrictive covenants that prohibit or limit customer and employee solicitation. This analysis will depend largely on where the company is located and where the employees in question primarily work and reside, as the law on restrictive covenants varies widely from state to state. While most states permit restrictive covenants that adhere to a rule of reasonableness,¹³ in enacting California Business and Professions Code section 16600, the legislature long ago made clear that California’s public policy strongly favors free employee mobility. Nevertheless, over the years the Ninth Circuit Court of Appeal created a judicial exception to the statutory prohibition against non-competes that colloquially became known as the "narrow restraint" exception to Section 16600. Under this exception, courts would enforce narrowly tailored non-compete agreements that prohibited employees from working in specified parts of a market, based on the logic that "only contracts that totally prohibit an employee from engaging in his or her profession, trade or business are illegal."¹⁴

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In the landmark Edwards decision in 2008, the California Supreme Court rejected all attempts by courts to fashion judicial exceptions to Section 16600 that were not found in the statute itself.¹⁵ Thus, in Edwards, the California Supreme Court unanimously held that a provision in an employment agreement that "partially" or "narrowly" restricted an employee from providing services to only particular (not all) customers in competition with a former employer was invalid under California Business & Professions Code Section 16600.¹⁶ As the Court explained, the only exceptions to non-compete agreements between an employer and employee are the statutory exceptions the legislature explicitly included in § 16600 et seq.¹⁷

2. The Historical Approach to Employee Non-Solicitation Agreements

In Edwards, the Supreme Court declined to make any ruling as to the enforceability of Arthur Andersen’s employee non-solicitation agreements, which operated to prevent the poaching of Arthur Andersen’s workers by a recently departed employee.¹⁸ Thus, between 2008, when Edwards was decided, and 2018, when AMN was decided, in unpublished and federal trial court decisions, California courts continued to follow the historical approach to enforcing post-employment employee non-solicitation agreements according to the Sixth District of the Court of Appeal’s analysis in the seminal 1985 case of Loral Corp. v. Moyes,¹⁹ in which the Court adopted a rule of reasonableness standard to enforce the use of the non-solicitation provision that prohibits departing employees from "raiding" the former employer’s employees.²⁰ The Sixth District further held this restriction did not run afoul of Section 16600 as the "restriction only slightly affects employees. They are not hampered from seeking employment with [the defendant’s new employer] nor from contacting [the defendant]. All they lose is the option of being contacted by him first."²¹

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Following the Loral decision, California courts did not really adopt a strict "who contacted whom first test," but rather examined the particularized facts of each clause and controversy, and generally found that Business and Professions Code Section 16600 "invalidates agreements which penalize a former employee for obtaining employment with a competitor," but "does not necessarily affect an agreement delimiting how that employee can compete."²² Under California law, "a former employee may engage in a competitive business for herself and compete with her former employer, provided such competition is fair and legal."²³ Further, such employee non-solicitation restrictions impact former employee’s "conduct in a very limited way. [The employee] is not prohibited from recruiting anybody, just those within the employ of [former employer]."²⁴

3. The Fourth District Changes Everything in AMN

For more than thirty years, Loral remained the standard in California for contractual employee non-solicitation agreements. But in November of 2018, everything changed. In AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc.,²⁵ the California Court of Appeal for the Fourth District affirmed a lower court ruling that an employer’s non-solicitation agreement constituted an unenforceable non-compete in violation of Business and Professions Code Section 16600.²⁶ AMN involved recruiters in the medical field, and soliciting nurses was part of the core job responsibilities of the employees at issue. The Fourth District found that the employees "were in the business of recruiting," and so the restriction on employee solicitation "restrained [them] from engaging in their chosen profession."²⁷ Importantly, although the AMN Healthcare court took into account the defendants’ specific profession as recruiters in making its ruling, the Court also broadly questioned the "continuing viability" of Loral’s use of a reasonableness standard in evaluating the enforceability of non-solicitation provisions in the wake of Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937 (2008).²⁸

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In January 2019, two months after AMN was decided, Judge Beth Labson Freeman of the United States District Court for the Northern District of California issued her decision in Barker v. Insight Glob., LLC.²⁹ Relying on the California Court of Appeal’s logic (and dicta) in AMN Healthcare, Judge Freeman revived the plaintiff-employee’s previously dismissed claim brought pursuant to California Business & Professions Code Section 17200 challenging his employer’s post-employment non-solicitation agreement. The District Court reasoned that in California, the "law is properly interpreted post-Edwards to invalidate employee nonsolicitation provisions."³⁰ Further, the District Court specifically rejected the notion that the AMN Healthcare holding was limited to the profession of recruiting: "the Court is not persuaded that the secondary ruling in AMN finding the nonsolicitation provision invalid under Loral based upon those employees’" particular job duties "abrogates or limits the primary holding."³¹

Even after Barker, some still questioned whether a new trend was at hand. Then, in April 2019, the Northern District applied AMN Healthcare and Barker in another case to invalidate an employee non-solicitation agreement. In WeRide Corp. v. Huang,³² a different judge sitting in the Northern District of California denied a request by an employer for a preliminary injunction based on the company’s employee non-solicitation provision because "the clause is void under California law."³³ The decision, authored by Judge Edward J. Davila, held that "the Court finds the reasoning of Barker and AMN, including their application of Edwards, to be persuasive," and noted that the plain language of Section 16600 clearly prohibits restrictions on trade "of any kind" including post-employment contractual employee non-solicitation agreements.³⁴

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4. The Circuit Split Creates Additional Complications

As explained above, there is currently a split between two different districts within California’s unified Court of Appeal. The Sixth District follows Loral, which holds that properly drafted employee non-solicitation provisions are lawful; the Fourth District follows AMN Healthcare, which holds all such agreements are void under Bus. & Prof. Code Section 16600. In California, where a split like this exists as to the same issue between two districts of the Court of Appeal and the Supreme Court has not weighed in, trial courts throughout the state must choose which of the decisions to follow.³⁵ And as to the federal district court rulings in Barker and WeRide, they will no doubt be persuasive in the Northern District of California, but from a purely legal perspective, are not binding on other California federal courts. In fact, other California federal courts, such as the Central District of California, have permitted employee non-solicitation agreements—although not since the Barker and WeRide cases.³⁶

From a practical standpoint, until the California Supreme Court decides the issue, employers seeking to use and/or enforce these provisions must make some difficult, but hopefully informed, decisions that properly account for the trifecta of recent decisions, whether the other four districts of the Court of Appeal will follow Loral or AMN, and the risks of continued usage of employee non-solicitation agreements. These concerns are addressed below.

5. Risks for Employers Until the Supreme Court Decides This Issue

Throughout California, both foreign and domestic companies continue to utilize employee non-solicitation clauses, and employees continue to challenge them in the trial courts. Some major tech companies like Google have notified their employees that they will no longer use or enforce post-employment employee non-solicitation clauses.³⁷ Each company must make its own decision on the use and enforcement of these provisions pending guidance from the California Supreme Court. To assist the decisional calculus, the following are some of the considerations that should be included in a risk matrix:

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• A PAGA Claim for Violation of Labor Code Section 432.5. The Private Attorneys General Act ("PAGA") allows a private citizen to pursue civil penalties for violations of the California Labor Code that do not independently provide for damages.³⁸ Under Labor Code § 432.5, it is unlawful for an "employer, agent, manager, superintendent, or officer thereof" to require "any employee or applicant to agree, in writing, to any term or condition known" to be prohibited by the law. Thus, an essential element of establishing a PAGA claim based on a violation of Section 432.5 is a showing that the employer knew the term was prohibited by law. Based on the Court of Appeal split, employers may be able to defend against such claims by noting it is far from clear whether in fact these provisions are prima facie void as violative of Bus. & Prof. Code Section 16600.
• Individual and Putative Class Actions Under Section 17200. California courts have recognized that an employer’s business practices concerning its employees are within the scope of Cal. Bus. & Prof. Code Section 17200 et seq. and have previously found non-compete agreements to be unlawful under this statute.³⁹ The AMN Healthcare, Barker and WeRide decisions increase the risk that employee non-solicitation agreements will likewise be the subject of UCL individual and collective actions.

6. Prohibiting Solicitation Through the Use of Confidential Information

It is well-settled that an employer can prevent trade secret information from being misused (in the context of employee solicitation or otherwise). Further, with regard to information that does not rise to the level of a statutorily-protected trade secret, but that is otherwise treated as confidential, nothing in the Barker or WeRide decisions prevents an employer from restricting misuse or dissemination.

However, whether employers in the Fourth District may bar post-employment solicitation of employees through use of confidential information that does not arise to the level of a statutorily protectable trade secret, remains an open question in light of the particular verbiage of the Court’s decision in AMN Healthcare.⁴⁰ After finding the contractual prohibition on employee solicitation violated Section 16600,⁴¹ the Court turned to AMN’s tort claims, which were predicated on the defendant’s alleged disclosure of AMN’s confidential information prior to her resignation. In finding each claim failed as a matter of law, the Court noted that "section 16600 precludes an employer from restraining an employee from engaging in his or her profession, trade, or business, even if such an employee uses information that is confidential but not a trade secret!"⁴² But in subsequently addressing the claim for breach of the duty of loyalty specifically, the Court stated that, "to the extent defendant owed any duty to AMN not to disclose alleged AMN confidential information, the duty arose from [the contract] and any breach of such duty would be grounded in contract, not tort."⁴³

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7. The Use of A Foreign Law Selection Clause to Get Around the Non-Compete Ban: An Impermissible Workaround?

Because of California’s pro-employee mobility policies and strict restrictions on the use of non-compete and non-solicitation agreements, historically, many companies (particularly those headquartered in other states) tried to protect their IP by utilizing restrictive covenants and confidentiality agreements that intentionally contained foreign choice of law provisions. In doing so, these companies would include a choice of law provision applying a law of a state that is regarded as more "employer friendly." California courts responded by often refusing to apply foreign laws that offended the state’s fundamental public policies. Some companies then turned to mandatory forum selection provisions. Employees could still try to invalidate the forum selection clause in California state court. But the employers’ odds of success were far better in federal court, because federal law strongly favors forum selection clauses.⁴⁴

However, in 2017, California adopted the California Labor Code Section 925, which prevents employees from including foreign choice of law provisions with California-based employees so as to prohibit employee mobility. Specifically, companies that enter contracts with employees primarily living or working in California can no longer include foreign choice of law or forum provisions in non-negotiable, low-level agreements designed to protect intellectual property, prohibit customer solicitation, assign inventions, and the like. The law specifically empowers an employee to void foreign choice of law or forum selection provisions in an employment contract entered as a condition of employment, and if successful, to recover an award of reasonable attorneys’ fees and costs.

While Labor Code Section 925 dramatically minimizes the use of foreign choice of law provisions, this Labor Code Section does not apply if the employee is represented by counsel in negotiating the terms of the agreement. Further, the provision only applies to contracts entered into, modified or extended after January 1, 2017, and as such, many long-term employees are not affected.

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V. THE NECESSITY FOR A HIGH RISK EMPLOYEE DEPARTURE PROGRAM

Data theft sometimes occurs at the moment when employees decide to leave for a competitor. The more senior the employee, and the more data to which they have access, the greater the risk. The goal of a high risk departure program is to proactively identify areas of risk, and then formulate and institute mitigating measures designed to avoid data theft where possible and to detect it early should it occur. The first step is to identify which employees (and/or job classifications) qualify as "high risk", and institute safeguards according to what is called a "high risk departure program."

High risk employees will vary by company, but often include those who leave the company on bad terms, employees who have a monopoly over niches of core company confidential information or lead in next-gen product development, short-term key hires, employees hired by a competitor who has a history of raiding, remote employees, and employees with exclusive or intimate key client or customer relationships.

Upon learning a high-risk employee might depart the company, internal processes should trigger a multi-layered and cross-disciplinary response. First, through communication with the employee’s supervisor, human resources and the legal department, the company should immediately be able to answer three questions: (1) was the high risk employee privy to sensitive information; (2) did the high risk employee disclose she accepted a position with a competitor, or was evasive when asked, or do other reasons raise a concern she is going to work for a competitor; and (3) did the employee leave on good terms.

Second, as soon as a high risk employee gives notice, or when other signs indicate the high risk employee is leaving (including where the company decides to terminate the high risk employee for performance reasons), it is imperative that the company compile a list of relevant computer media, including all company and personal computers, electronic storage devices, phones, etc. that the employee has used in connection with her work for the company and make sure they are accounted for and returned prior to the final date of employment. A forensic image should be made of corporate emails and Internet usage over the company’s servers and computer media. This data set should then be inspected for potential data theft and usage of unauthorized storage devices, cloud storage accounts and similar conduct that often accompanies improper data transfer. Throughout this process, companies should work with counsel to ensure the right forensic expert is retained, and where the employee works remotely in another state, pay particular attention to jurisdictional requirements relating to licensing of forensic investigators. The forensic expert must use software and protocols that have been proven reliable to courts. The hard drive of the high risk employee’s company computer should be preserved for at least six months.

Once the termination or resignation is official, the employee should participate in an exit interview and sign an exit certification, detailing physical (hard copy documents) and digital company property still in the employee’s possession, and affirming her agreement to work with company to ensure return of the property and continue abiding by the confidentiality and non-use obligations in the relevant contracts. Depending on the circumstance, the company should also conduct interviews with, and potentially inspect and monitor the computers of, the employee’s team members. It is also important to review (or send to outside counsel to review) confidential information agreements and other applicable contracts. IT, with buy-in from the high risk employee’s supervisor, HR and legal departments, should also determine when and how to disable the employee’s access and passwords. It is important to note that there are several other aspects of a high risk departure program, beyond the noted examples, that can be optimized on an individual company basis depending on the specific data at issue and the nature of the workplace.

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VI. POTENTIAL APPROACHES FOR CIVIL LITIGATION: TROS AND PRELIMINARY INJUNCTIONS

Where litigation arises in data theft cases,⁴⁵ many plaintiff-companies seek a temporary restraining order ("TRO") at the outset of the litigation. This process often involves a significant amount of activity, with detailed briefing, expedited discovery, and evidentiary hearings that closely resemble a trial.

Typically, the request for a TRO is made alongside or immediately following the filing of the complaint. In other cases, a party may file a request for an evidence preservation order ex parte, and then request an order to show cause as to why a TRO should not be granted. In deciding to grant an ex parte evidence preservation order, the court does not look to the merits of the underlying claims.⁴⁶ Instead, the inquiry "concerns whether there is evidence in the [defendant’s] computer[s] and other electronic storage media that [plaintiff] will be able to discover."⁴⁷ Courts are more likely to grant such ex parte orders where there is a risk that the defendant may destroy evidence, such as a case involving a defendant who previously lied about possessing company data or deleted such data.⁴⁸

To the extent a party elects to move for a TRO, the motion must be supported by specific admissible evidence of misconduct evidence, usually in the form of a sworn declaration, of the irreparable harm a plaintiff will suffer if the TRO is not granted. In a trade secret case, as discussed above, the plaintiff must also describe the trade secrets with reasonable particularity, as well as the misappropriation that occurred. In deciding whether to issue a TRO pursuant to California Civil Procedure Code Section 527 (or Rule 65 of the Federal Rules of Civil Procedure), a court must weigh: (1) the likelihood that plaintiff will ultimately prevail on the merits; and (2) the relative interim harm to the parties from issuance or nonissuance of the injunction.⁴⁹ These factors are interrelated, such that "the greater the [] showing on one, the less must be shown on the other."⁵⁰ The moving party bears the burden of proof, and the court will balance the harms to each party in order to determine whether granting the TRO is appropriate.

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In the event the TRO is granted, there is usually a statutory limit as to how long the TRO may remain in effect. Before the TRO expires, the court will schedule a hearing for a preliminary injunction. The hearing on the preliminary injunction is typically a full evidentiary hearing, with live witnesses, and pre-hearing discovery is typically very important as a result. In order to obtain expedited discovery, a plaintiff may wish to file a motion for expedited discovery alongside the request for a TRO. The plaintiff may also wish to file a proposed protocol for forensic inspection and a proposed protective order to ensure the parties’ privacy is preserved.

A preliminary injunction is intended to prevent irreparable harm until the trial. "A preliminary injunction is an extraordinary remedy never awarded as of right."⁵¹ The standard for obtaining a preliminary injunction is typically similar to the standard for obtaining a temporary restraining order. Generally, the movant must establish (1) likelihood of success, (2) irreparable harm, for which there is no adequate remedy at law, and (3) that denial will cause greater irreparable harm and suffering to the defendant than if the injunction is granted, and that (4) granting the requested relief serves the public interest more so than denial.⁵² The ultimate determination of whether a preliminary injunction should issue thus turns on a careful balancing of all factors.

Although a preliminary injunction hearing bears some similarity to a trial, in that live witnesses, documentary evidence, and experts are presented, an injunction is "customarily granted on the basis of procedures that are less formal and evidence that is less complete than in a trial on the merits."⁵³ As such, courts may allow otherwise inadmissible evidence to be introduced at a preliminary injunction hearing.⁵⁴

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VII. CRIMINAL ENFORCEMENTS

When a company discovers employee data theft, it must decide whether to pursue criminal charges. One benefit of referring a matter to law enforcement is a potential felony conviction for the former employee. However, a criminal case also requires a higher burden of proof, likely requiring more extensive evidence of data theft. It also limits the employer’s control over case decisions and the evidence associated with the data theft. In pursuing criminal charges, the government typically relies on three main statutes: (1) the Economic Espionage Act;⁵⁵ (2) the Computer Fraud and Abuse Act;⁵⁶ and (3) the Mail and Wire Fraud statutes.⁵⁷ None of these statutes require a plaintiff to meet exactly the same elements as the Uniform Trade Secrets Act, but all three criminalize similar misconduct, including the theft or improper dissemination of confidential or sensitive information.

In recent years, federal prosecutors have focused extensively on combating economic espionage from foreign nationals. In today’s political climate, there is a clear focus on international economic espionage, especially as it relates to China, perpetrated by "insider" employees.⁵⁸ Since 2012, more than 80% of cases have implicated China.⁵⁹ In light of this shift, companies should keep in mind the availability of criminal prosecution where there is evidence of serious data theft, particular where foreign entities are involved.

VIII. RECRUITING A COMPETITOR’S EMPLOYEES

On the other end of the spectrum, it is inevitable that a company will hire from a competitor at some point. Just as companies maintain data theft policies, programs and protocols, they should implement internal policies to ensure the company avoids legal liability where possible in connection with hiring from a competitor.

First, companies should carefully manage the recruiting process, particularly where third-party recruiters are involved. Regardless of whether an internal or third-party recruiting function is utilized, companies should implement an internal executive-level owner of the recruiting policy, who is also charged with training recruiters and updating the policy as technology evolves. Additionally, companies should manage the recruiting and advertising approach—under no circumstances should a company advertise a preference for hiring employees of a particular company, and recruiters should be trained carefully on appropriate questions to ask a candidate. Second, before the interview process, companies should know how the company learned of the candidate. Where there are particular risks involved, like if the candidate and referring employee both formerly worked for the candidate’s current employer, the legal department should be involved.

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Once the interview process has started, the company should take precautions to ensure the candidate does not disclose a third party’s confidential information or trade secrets. At the outset of the interview, the candidate should review and execute a Candidate Letter and Certification, affirming that he or she can perform the outlined job functions without breaching any contractual agreements or disclosing third parties’ intellectual property. The company should train its interviewers on protocols that assure the candidate that the company has no need to learn of, and does not want any, confidential or trade secret information the applicant has received at a current or prior employer. Further, the applicant should confirm she did not bring to the interview and will not use or disclose any prior employers’ confidential information or trade secrets.

Before making an offer, the company should review the motivation for hiring the employee, particularly in light of potential accusations of trade secret misappropriation or unfair competition. Where there are concerns about potential liability, the company’s legal department should be involved. In the offer letter and as part of the employee’s onboarding process, the company should reiterate that it has no need or desire to learn any third parties’ trade secrets or confidential information. Once the company makes a formal offer and the employee accepts, the company should ensure that the employee signs a Confidential Information and Inventions Assignment agreement. The provisions relating to third party information should be orally reinforced with the employee. The employees’ managers and team should also be instructed on how to avoid breaching applicable contractual agreements pertaining to the new hire.

In some cases with high-risk new hires, it may make sense to use the company’s IT Department or third-party forensic experts to conduct a random audit of a new hire’s devices to ensure that the new hire has not violated company policies by porting a third party’s trade secrets onto company computer media. Even absent full-blown "audits," it is important to check an employee’s activity after he or she is hired to determine whether the employee has placed large amounts of data on company computers or shared drives or has solicited third-party confidential information from former colleagues.

IX. CONCLUSION

Companies doing business in California must be aware of the readily developing law that impacts their ability to protect their intellectual property. Particularly in light of major shifts in California courts’ treatment of post-employment employee non-solicitation provisions, employers should revisit and optimize their contractual and other internal processes for protecting intangible assets.

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Notes:

^1. Bradford Newman founded and serves as the Chair of Paul Hastings’ International Employee Mobility and Trade Secret Practice and is the author of the leading treatise "Protecting Intellectual Property In The Age of Employee Mobility" (ALM Media 2014).

^2. U.T.S.A. § 1(4); Cal. Civ. Code § 3426.1.

^3. See, e.g., Swarmify, Inc. v. Cloudflare, Inc., No. C 17-06957 WHA, 2018 U.S. Dist. LEXIS 91333 (N.D. Cal. May 31, 2018) (denying preliminary injunction where plaintiff’s trade secrets encompassed "broad, sweeping concepts about streaming in general") (emphasis in original); Founder Starcoin v. Launch Labs, Inc., No. 18-CV-972 JLS (MDD) (S.D. Cal. July 9, 2018) (denying preliminary injunction upon finding plaintiff’s alleged trade secret was not particular enough to warrant protection as commoditizing celebrities through blockchain and cryptocurrency is general knowledge and not a novel idea).

^4. See, e.g., Way.com, Inc. v. Singh, No. 3:18-cv-04819-WHO, 2018 U.S. Dist. LEXIS 215243, at *28-29 (N.D. Cal. Dec. 20, 2018) (denying plaintiff’s preliminary injunction and holding that "[e]ven if Way could successfully show that the information constitutes trade secrets, it is unlikely to be able to show that it used reasonable means to protect them. Way’s person most knowledgeable testified that it protects all its asserted trade secrets by requiring employees to sign an Employee Handbook and PIAA agreement . . . It uses no other methods of protection."); Natera, Inc. v. Progenity, Inc., 2014 Cal. Super. LEXIS 2179, *3 (granting motion for judgement on the pleadings without leave to amend relating to trade secret misappropriation claim under CUTSA upon finding plaintiff’s "cautionary message" in its emails transmitting its purportedly secret customer lists were not reasonable efforts to protect its trade secrets).

^5. Silvaco Data Systems v. Intel Corp., 184 Cal. App.4th 210 (Cal. App. 2010).

^6. Id., 184 Cal. App.4th at 240.

^7. Id., 184 Cal. App.4th at 239 n.22 (emphasis supplied).

^8. See e.g., Alta Devices, Inc. v. LG Elecs., Inc., No. 18-CV-00404-LHK, 2019 U.S. Dist. LEXIS 72952, at *19 (N.D. Cal. Apr. 30, 2019) ("CUTSA supersedes claims based on the misappropriation of information, regardless of whether such information ultimately satisfies the definition of trade secret.") (citing Silvaco Data Systems v. Intel Corp., N. 8 supra, 184 Cal. App.4th at 236—240); Heller v. Cepia, L.L.C., 2012 U.S. Dist. LEXIS 660 at *22 (N.D. Cal. Jan. 4, 2012) ("Therefore, Heller’s common law claims against Cepia premised on the wrongful taking and use of confidential business and proprietary information, regardless of whether such information constitutes trade secrets, are superseded by the CUTSA." (citing Silvaco Data Systems v. Intel Corp., supra, 184 Cal. App.4th at 236—240)).

^9. See PQ Labs, Inc. v. Yang Qi, 2012 U.S. Dist. LEXIS 79354 at *12 (N.D. Cal. June 7, 2012) ("If a claim is based on confidential information other than a trade secret, as that term is defined in CUTSA, it is not preempted."); TMX Funding, Inc. v. Impero Technologies, Inc., 2010 U.S. Dist. LEXIS 60260 at *13 (N.D. Cal. June 17, 2010) (holding that plaintiff could "continue to pursue [his] [tort claims] so long as the confidential information at the foundation of the claim is not a trade secret, as that term is defined in [the UTSA].").

^10. SunPower Corp. v. SolarCity Corp., 2012 U.S. Dist. LEXIS 176284 (N.D. Cal. Dec. 11, 2012).

^11. Id. at *13.

^12. Id. at *14.

^13. See, e.g., In re Document Technologies Litigation, 275 F.Supp.3d 454 (S.D.N.Y. 2017) (applying rule of reasonableness to invalidate employee non-solicitation provision); Miner, Ltd. v. Anguiano, 383 F.Supp.3d 682 (W.D. Tex. 2019) ("[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee."); Emerick v. Cardiac Study Ctr., Inc., 170 Wash. App. 248, 254 (2012) ("Courts will enforce a covenant not to compete if it is reasonable and lawful."); Lae Beauty v. Giansanti, 2017 Fla. Cir. LEXIS 8980, *5 ("The Court may not refuse to give effect to a valid non-compete agreement on the ground that enforcement would have an overly burdensome effect on employee and the only authority the court possesses over the terms of a non-compete agreement is to determine the reasonableness of the time and area limitations.").

^14. IBM Corp. v. Bajorek, 191 F.3d 1033 (9th Cir. 1999) (restricting work for only one competitor); General Comm. Packaging v. TPS Package 126 F.3d 1131(9th Cir. 1997) (restricting work for only one customer and related entities introduced through that relationship); Latona v. Aetna U.S. Healthcare Inc., 82 F. Supp. 2d 1089 (C.D. Cal. 1999) (declining to uphold a non-solicitation provision that was not narrowly tailored and would dramatically impact employee’s ability to obtain future employment).

^15. Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 942 (2008).

^16. The pertinent provision at issue in Edwards stated: "If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client. For twelve months after you leave the Firm, you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation." Id.

^17. In Edwards, the California Supreme Court held that "[n]oncompetition agreements are invalid under section 16600 in California, even if narrowly drawn, unless they fall within applicable statutory exceptions of sections 16601, 16602, or 16602." Id. at 955.

^18. Id.

^19. Loral Corp. v. Moyes, 174 Cal. App. 3d 268, 278-79 (1985); see, e.g., Gartner, Inc. v. Parikh, No. CV 07-2039-PSG, 2008 WL 11336333, at *9 (C.D. Cal. Oct. 10, 2008) (upholding the validity of an employee non-solicitation provision); Am. Home Shield of California, Inc. v. Fid. Nat. Home Warranty Co., No. D039241, 2003 WL 21085278, at *8 (Cal. Ct. App. May 14, 2003) (unpublished) (noting that a provision prohibiting solicitation of employees could be enforceable); Robinson v. Jardine Ins. Brokers Int’l Ltd., 856 F. Supp. 554, 558 (N.D. Cal. 1994) (declining to grant a preliminary injunction on an overbroad customer non-solicitation provision, but noting that "an employer may under certain circumstances contractually prohibit an employee from soliciting its clients or raiding its workforce for a limited period of time following termination of employment.").

^20. See id. at 179 (noting that the former employee in that case was appropriately "restrained from d isrupting, damaging, impairing or interfering with his former employer by raiding [his former employer’s] employees under his termination agreement.").

^21. Id.

^22. John F. Matull & Assocs., Inc. v. Cloutier, 194 Cal. App. 3d 1049, 1054, 240 Cal. Rptr. 211, 214 (Ct. App. 1987) (emphasis added).

^23. Id.

^24. Gartner, Inc. v. Parikh, No. CV 07-2039-PSG, 2008 WL 11336333, at *9 (C.D. Cal. Oct. 10, 2008).

^25. 28 Cal. App. 5th 923 (Nov. 1, 2018).

^26. Id. at 939.

^27. Id.

^28. Id. at 938-39 ("Because the Edwards court found section 16600 ‘unambiguous’ (Edwards, supra, 44 Cal.4th at p. 950), it noted that ‘if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect’ (ibid); and that it was up to the ‘Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.’ (Ibid.). We thus doubt the continuing viability of Moyes post-Edwards. But our decision in the instant case does not rest on that analysis alone. Even if Moyes’s use of a reasonableness standard survived Edwards, we find Moyes factually distinguishable to our case. Unlike the former employee in Moyes, who was an executive officer of the plaintiff employer, in the instant case individual defendants were in the business of recruiting and placing on a temporary basis medical professionals, primarily nurses, in medical facilities throughout the country. If enforced, section 3.2 of the CNDA thus restrained individual defendants from engaging in their chosen profession, even in a "narrow" manner or a "limited" way. We thus independently conclude section 3.2 of the CNDA is void under section 16600.").

^29. No. 16-cv-07186-BLF, 2019 U.S. Dist. LEXIS 6523 (N.D. Cal. Jan. 11, 2019).

^30. Id. at *8.

^31. See Barker v. Insight Glob. LLC, No. 16-CV-07186-BLF, 2019 WL 176260, at *3 (N.D. Cal. Jan. 11, 2019).

^32. No. 5:18-cv-07233-EJD, 2019 WL 143934, at *10 (N.D. Cal. April 1, 2019).

^33. Id.

^34. Id.

^35. See Auto Equity Sales, Inc. v. Superior Court, (1962) 57 Cal.2d 450 (holding that "[c]ourts exercising inferior jurisdiction must accept the law declared by courts of superior jurisdiction. It is not their function to attempt to overrule decisions of a higher court . . . [however] the rule under discussion has no application where there is more than one appellate court decision, and such appellate decisions are in conflict. In such a situation, the court exercising inferior jurisdiction can and must make a choice between the conflicting decisions.").

^36. See Sonic Auto., Inc. v. Younis, 2015 WL 13344624, at *2 (C.D. Cal. May 6, 2015) ("[A] contract may prohibit employees, upon termination of their employment, from soliciting other employees to join them at their new employment.").

^37. Google Ends ‘No Poaching’ Requirement for Former Employees, June 12, 2019, Hassan Kanu (https://news.bloomberglaw.com/daily-labor-report/google-ends-no-poaching-requirement-for-former-employees); Google says it’s no longer punishing former employees who poach their colleagues; see also June 12, 2019 Luke Stangel (https://www.bizjournals.com/sanjose/news/2019/06/12/google-no-poach-clause-goog.html).

^38. Cal. Lab. Code § 2699.

^39. See Application Group v. Hunter, 61 Cal. App. 4th 881 (finding that an unlawful covenant not to compete was a violation of Section 17200).

^40. See, e.g. Destinations to Recovery v. Evolve Initiatives LLC, No. B259011, 2015 Cal. App. Unpub. LEXIS 7946, at *17 (Cal. App. 2nd, Nov. 5, 2015) ("To be sure, defendants might use Destinations’ trade secrets and proprietary information to solicit its patients and employees to migrate over to Evolve; to that extent, the nonsolicitation provisions are valid."); Snelling Servs., LLC v. Diamond Staffing Servs., No. A135049, 2013 Cal. App. Unpub. LEXIS 5425, at *56 (Cal. App. 1st, July 30, 2013) (rejecting argument that CUTSA preempted unfair competition claim upon finding that it is possible that "some or all of the information alleged to have been misappropriated did not constitute trade secrets, but that the solicitation of Snelling employees using confidential salary information for the purpose of luring away Snelling’s customers constituted unfair competition nevertheless.").

^41. Though the court dismissed AMN’s breach of contract claim, it did not address the fact that a basis for the breach of contract claim was the asserted disclosure of confidential information under provision 2 of the contract (a separate provision than the non-solicitation provision in section 3.2).

^42. AMN Healthcare, Inc., 28 Cal. App. 5th at 940.

^43. Id. at 941.

^44. See, e.g., Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, 571 U.S. 49 (2013).

^45. Note that in trade secret cases filed in California, before commencing discovery on trade secret claims, plaintiffs must identify their alleged trade secrets "with reasonable particularity." Cal. Civ. Proc. Code § 2019.210. A recent Northern District of California case suggests that trade secret plaintiffs who significantly change their trade secret disclosure do so at their own peril, and courts may allow the opposing party to use the original disclosure to show the "shifting-sands nature" of the plaintiff’s case. See Swarmify, No. C 17-06957 WHA, 2018 U.S. Dist. LEXIS 91333. As a result, it is important for employers to conduct a careful investigation, including forensic examination, before bringing suit for trade secret misappropriation.

^46. Dodge, Warren, & Peters Ins. Servs., Inc. v. Riley, 105 Cal. App. 4th 1414, 1420 (2003).

^47. Id.

^48. See ReadyLink Healthcare v. Cotton, 126 Cal. App. 4th 1006, 1023 (2005) (where the defendant has already engaged in misconduct, courts are especially inclined to recognize the existence of a threat of future misconduct and issue injunctive relief).

^49. See Cohen v. Board of Supervisors, 40 Cal. 3d 277, 286 (1985); see also Cal. Civ. Proc. Code § 513.010(b) (to obtain a TRO, the plaintiff need only show: (1) "the probable validity of [its] claim to possession of the property;" and (2) a probability of "immediate danger that the property . . . [will be] transferred, concealed, or removed, or may become substantially impaired in value").

^50. Butt v. State of California, 4 Cal. 4th 668, 678 (1992); Pleasant Hill Bayshore Disposal, Inc. v. Chip-It Recycling, Inc., 91 Cal. App. 4th 678, 696 (2001) (injunction appropriate where plaintiff demonstrated a high "likelihood of success on the merits," even if plaintiff could not "show that the balance of harm tips in [their] favor") (citation omitted).

^51. Winter v. Nat. Resources Def. Council, Inc., 555 U.S. 7, 24 (2008).

^52. Id.

^53. U. of Texas v. Camenisch, 451 U.S. 390, 395 (1981).

^54. Flynt Distribg. Co., Inc. v. Harvey, 734 F.2d 1389, 1394 (9th Cir. 1984) ("The urgency of obtaining a preliminary injunction necessitates a prompt determination and makes it difficult to obtain affidavits from persons who would be competent to testify at trial. The trial court may give even inadmissible evidence some weight, when to do so serves the purpose of preventing irreparable harm before trial.") (citing 11 C. Wright and A. Miller, Federal Practice and Procedure, Civil, § 2949 at 471 (1973)).

^55. 18 U.S.C. §§ 1831 et seq. Note that the DTSA amends the federal economic espionage act to create a civil cause of action.

^56. 18 U.S.C. § 1030.

^57. 18 U.S.C. §§ 1341, 1343.

^58. See, e.g., United States of America v. Weiqiang Zhang & Wengui Yan, Case No. 2:13-mj-08318 (U.S. District Court for the District of Kansas) and United States of America v. Hailong, Case No. 4:13-mj-00267 (U.S. District Court for the Southern District of Iowa) (sentencing researchers trying to smuggle valuable trade secrets, in the form of rice seeds used to treat gastrointestinal diseases to prison time for conspiracy to steal trade secrets, conspiracy to commit interstate transportation of stolen property, and interstate transportation of stolen property); United States v. Sinovel Wind Grp. Co., Case No. 13-cr-00084-jdp, 794 F.3d 787 (7th Cir. 2015) (defendants convicted of conspiracy to commit trade commit trade secret theft, theft of trade secrets, and wire fraud because Sinovel conspired to obtain AMSC’s trade secrets so it could use them in the manufacture and retrofitting of their turbines without having to pay the more than $800 million dollars that they owed pursuant to the parties’ contract).

^59. https://www.cnbc.com/2019/09/23/chinese-theft-of-trade-secrets-is-on-the-rise-us-doj-warns.html.