Critical Importance of Realistically Identifying and Protecting Trade Secrets and Confidential Information

California employers often face an upward battle when it comes to protecting against competitive activity by former employees. In addition to expressly precluding noncompete contracts under California Business and Professions Code (“B&P”) Section 16600, California imposes hurdles to pursuing claims against former employees for taking business information that is confidential but does not rise to the level of a trade secret. Moreover, the California Code of Civil Procedure further limits employers from bringing a trade secret claim under California’s Uniform Trade Secrets Act (“UTSA”) unless the employer can, as a threshold matter, identify the purported trade secrets with “reasonable particularity.”

This impedes companies from using the mechanisms of discovery to learn what an employee has taken in order to validate a claim for trade secret misappropriation; allegedly misappropriated trade secrets must be known at the outset of litigation or the case will get dismissed. Therefore, it is important for companies to identify and properly monitor for potential misappropriation so that they are well positioned to bring a claim for actual or threatened misappropriation when the circumstances arise.

In order to safeguard their trade secrets, companies doing business in California need to be on the offensive to ensure that they are properly protected at both the beginning and end of the employment relationship. At the beginning of an employment relationship, employers may set the groundwork for protecting trade secrets by entering into confidentiality and nondisclosure agreements with their employees. These agreements will help establish one element of a claim under the UTSA, which is that the employer took reasonable steps to identify its trade secrets and maintain their confidentiality.

While many employers take proper measures at the onset of the employment relationship by entering into trade secret and confidentiality agreements, employers also need to make sure that they are taking similar precautions at the end of the employment relationship to prevent trade secret misappropriation. At a minimum, an employer should monitor and analyze an exiting employee’s use of electronic systems, such as his or her work computer, email, and any mobile drives or devices. An exit interview should also be conducted (see the second article of this Take 5 for a detailed discussion of exit interviews).

In addition to proper monitoring at the end of the employment relationship, employers may also be able to spot instances of misappropriation by staying alert to warning signs—such as an employee working off-hours without authorization, taking home or making unnecessary copies of proprietary or other confidential material, and conducting searches or downloading documents that appear unrelated to the employee’s current projects. Tracking and keeping a record of an employee’s electronic footprint may enable an employer to meet the requirements under Section 2019.210 of the California Code of Civil Procedure in the event of later trade secret litigation. Further, even if an employer finds evidence or possible evidence of misappropriation, employers must be cautioned from proceeding with trade secret litigation where there is little evidence of damages or misappropriation.

For example, in FLIR Systems, Inc. v. Parrish, the California Court of Appeal affirmed a $1.6 million attorney fee award for the defendants (former employees of the plaintiff), finding that the plaintiff’s UTSA action was brought in bad faith.  Among other reasons, the court found bad faith because there was no evidence of economic harm to the plaintiff and no actual or threatened misappropriation. While there was evidence that the defendants downloaded confidential information onto a hard drive, the hard drive was later destroyed without being accessed. The plaintiff discovered the download only after it had already filed its complaint, which suggested that the real reason that the plaintiff filed the case was to chill competition by the defendants, who had started a rival business.  The Parrish case serves as a cautionary tale for employers that are keen to utilize trade secret protections as a means of circumventing California’s restraints against competition.

Because California strongly favors employee mobility, simply downloading confidential information may not be enough, particularly if an employer is not aware of that taking at the outset of litigation. In addition to monitoring for employee misappropriations, employers are well advised to assess potential economic harm prior to filing litigation. If the court views the litigation as an effort to restrain employees from competing—as opposed to curing an actual or threatened misappropriation—an employer may find itself not only losing the litigation but also paying attorneys’ fees to its former employees under UTSA.