Trade Secret Disclosure Statements Under California Law
December 2, 2019
Businesses must protect their assets to stay in business. These include physical assets, such as equipment and inventory, as well as information. Intellectual property law protects original creative works, inventions, designs, and other non-tangible assets through the copyright, trademark, and patent systems. But not all information is subject to intellectual property protection. Trade secret laws allow businesses to safeguard information whose value comes from not being widely known to the public.
The Uniform Trade Secrets Act (UTSA) allows lawsuits to penalize the unauthorized disclosure of trade secrets, or to enjoin potential disclosures. California adds a twist for trade secret owners. A plaintiff in a lawsuit under the UTSA most likely wants to disclose as little as possible about the specific trade secrets at issue. Under California law, however, the plaintiff must identify the trade secret(s) in a filing with the court. They may be able to obtain a protective order to prevent the information from becoming public.
What are Trade Secrets?
The UTSA, which begins at § 3426 of the California Civil Code, defines a “trade secret” as almost any type of information that meets two criteria:
- It “derives independent economic value” from being unknown by either the public or those who could “obtain economic value from its disclosure or use”; and
- Its owner has made reasonable efforts to keep it secret from the public or from other interested parties.
Common types of trade secrets are client or customer lists, manufacturing processes, and computer algorithms. Famous examples include the formula for Coca-Cola and the Google search algorithm. Both companies go to great lengths to maintain the secrecy of that information, such as by making it known only to trusted employees who have signed extensive non-disclosure agreements (NDAs). Both the formula and the algorithm derive value from secrecy. No other company has ever made a drink that tastes exactly like Coca-Cola, and no other search engine company has achieved what Google has achieved.
How are Trade Secrets Enforceable?
Almost every state in the U.S. has enacted the UTSA in some form. The statute allows courts to enjoin the future misappropriation or unauthorized disclosure of trade secrets, or to require payment of a royalty in the event of use or disclosure. It also allows owners of trade secrets to recover damages for actual losses caused by past misappropriation or disclosure, as well as unjust enrichment acquired by the defendant. If a plaintiff can demonstrate “willful and malicious misappropriation,” attorney’s fees, costs, and punitive damages of up to twice the total amount of other damages may be awarded.
The Defend Trade Secrets Act (DTSA) of 2016 adds many of the features of the UTSA at the federal level. The bill amended 18 U.S.C. § 1836(b) to allow private causes of action in federal court when trade secrets involve products or services used in interstate or international commerce. In “extraordinary circumstances,” the DTSA allows a federal court to issue an ex parte order for the seizure of property to prevent the disclosure of trade secrets.
What is a California Trade Secret Disclosure Statement?
Section 2019.210 of the California Code of Civil Procedure imposes a duty on a plaintiff filing a lawsuit under California’s UTSA. It does not apply to federal lawsuits under the DTSA. Before a plaintiff may begin the discovery process, it must “identify the trade secret with reasonable particularity.” If the court has issued protective orders to prevent the disclosure of documents or other information related to the ongoing case, this information can remain confidential. The key is that the plaintiff must disclose it to the court and the defendant.
This rule highlights the contrasting goals of parties in a trade secret lawsuit. The plaintiff, perhaps not unreasonably, wants to avoid identifying or describing the trade secret issue for as long as possible. The sooner that a plaintiff identifies the trade secret, the greater is the risk that it may become even more widely known.
The defendant, on the other hand, wants as much detail about the alleged trade secret as they can get. Defending against a claim of alleged misappropriation or unauthorized disclosure is difficult without a description of what one is alleged to have misappropriated or disclosed. Defending against an application for an injunction is particularly difficult without a clear idea of what is to be enjoined.
The trade secret disclosure statement is often a major point of contention in litigation.
California’s trade secret disclosure rule attempts to balance these interests by requiring disclosure early in the case, but allowing the plaintiff to ask the court to seal the court records. The DTSA also protects both sides in this type of case by immunizing the parties against civil liability under any trade secret law, state or federal, for disclosing information to a court under seal.