The State Bar of California
NYSBA
upcounsel
Law 360

Trade Secret and Non-Compete Agreements

Trade Secrets

California Civil Code §3426, et seq. known as the California Uniform Trade Secrets Act, or “CUTSA,” protects gives a right of action for owners of trade secret information against those who misappropriate a trade secret. As defined by CUTSA, a trade secret is information, such as a formula, pattern, compilation, program, device, method, technique or process, that derives independent economic value from not being generally known to the public, whose value derives from being kept secret, and where the owner uses reasonable measures under the circumstances to keep the information from public disclosure. (Ca. Civ. 3426.1(d).) One of the main differences between a trade secret and other forms of intellectual property, such as patents, copyrights and trademarks, is that more than one person can claim rights in and to trade secret information, whereas patents, copyrights and trademarks are owned exclusively against the world.

Although the definition is widely used to claim “trade secret” protection in general business information, a trade secret is actually much more narrow. Think, for example, Coke. The recipe for Coke is a formula that is maintained as a trade secret, rather than a patent, which would result in the formula being publicly known. Coke takes famously extreme precautions to protect its recipe from being publicly known. Many have tried and failed to duplicate the recipe for Coke. Had they succeeded in doing so, they could have used the very same recipe for a new cola product – they could not have used the name “Coca-Cola” or “Coke,” because those names are protected by trademark law. Think, for example, Pepsi, Mr. Pibb and Dr. Pepper, which brands have also become valuable in their own right by trying to duplicate Coke.

While the story of Coke provides one of the most famous examples of a trade secret, companies work every day to duplicate their competitors information as nearly as possible in order to exploit the value inherent in such information.

Until 2016, the cause of action for trade secret misappropriation was a state cause of action. In 2016, Congress passed the Defend Trade Secrets Act of 2016 (“DTSA”) establishing a new cause of action under federal law for trade secret misappropriation. The DTSA was modeled largely off of the Uniform Trade Secrets Act. Under DTSA, a “trade secret” is defined as “… all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if: (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” (18 U.S.C.A. § 1839(3).)

The creation of a new federal right of action to protect trade secrets has resulted in an increase in trade secret misappropriation litigation since 2016. Overall, there has been about a 30% increase in trade secret litigation since the passage of DTSA, and that growth has largely been seen in federal courts. State court actions for misappropriation of trade secrets have actually declined. Thus, DTSA caused a transition in trade secret litigation from state to federal courts.

In particular, litigation between employers and their former employees for starting competitive ventures following their termination has risen dramatically, threatening employee mobility and innovation created by the dissemination of ideas and information. These causes of action, whether in state or federal court, are hard-won battles not just between former employers and former employees, but between competitors. Thus, there is an inherent danger lurking in any new enterprise that a competitor, particularly it it’s a former employer, would seek to harm its competition through trade secret litigation.

Stephen has over two decades of experience litigating trade secret cases in state and federal courts on both the west and east coasts.

The California View on Non-Compete and Non-Solicitation Agreements

In California, former employees who start a new venture in competition with their former employer have protection from trade restraints not enjoyed in many other states. In California, all contracts in restraint of trade are void and unenforceable as a matter of law, including non-compete and non-solicitation agreements by employees. (Ca. Business & Professions Code §16600.) California has recognized the importance of employee mobility and its benefits, such as an individual exercising his or her right to work in their chosen profession and earn a living, a right to their wages and the larger benefits on the economy and on innovation gained as a result of the dissemination of information and ideas brought by greater employee mobility.

There are only two statutory exceptions to section 16600. Section 16601 and section 16602 allow a non-compete agreement to be made when contained in agreements for the sale of the goodwill of a business and the dissolution of a partnership. In other words, if someone sells their business, they cannot then open a new business the next day and compete directly with the business they just sold. Doing so would make the promise to sale the business a sham.

Non-compete agreements prevent an employee from working for a competitor of his or her former employer in a particular geography or market for a period of time following termination of employment. In some states, such agreements are enforceable if they reasonable limitation on time and geography. Such as a non-compete agreement preventing a former sales representative from working for a competitor in his or her sales region for a year following termination. Such a restraint would be upheld in Delaware, Florida, Texas or New York. However, in California, such a restraint on the employee’s mobility and right to work in his or her chosen profession and earn a living is void as a matter of public policy. In California, the employee’s rights in this regard are paramount, because the legislature has determined that protecting the employee mobility is a greater social good than protecting the former employer’s information. As such, section 16600 invalidates non-compete and non-solicitation agreements prohibiting former employees from working for a competitor or doing business with his/her former employer’s customers.

However, that does not mean a former employee can take and use and disseminate his or her former employer’s trade secret or confidential information. Doing so, could constitute misappropriation of trade secret information and unlawful business practices, entitling the former employer to damages, including lost profits, and restitution.

Non-compete agreements come in many forms and are found in many kinds of employment contract, including offer letters, employment agreements, non-disclosure agreements, proprietary inventions and assignment agreements, shareholder agreements and equity sharing plans.

Similarly, agreements between employers not to “poach” one another’s employees are also void as trade restraints. No-poach agreements between employers is a form of market segmentation determined by the United States Department of Justice to be a per se violation of antitrust laws. The purpose of antitrust protection is for the public good, in the case of no-poach agreements, the harm to the public by constraining employee mobility.

Navigating the minefield of trade secrets and employee mobility requires a skilled attorney knowledgeable in trade secrets and competition law for both employers and employees. Employers are not without protections for their important trade secrets and employees are not without their rights to seek and maintain new employment and new ventures. Stephen Moses provides over two decades of experience protecting and distributing trade secret information and other intellectual property for employers and employees alike.

Representative Cases
  • Represented multiple different newly formed enterprises against breach of contract (non-compete/non-solicitation) and trade secret misappropriation claims by a former employer in state and federal courts in California, Nevada, New York and Massachusetts, involving multiple industries, including logistics, construction equipment, marketing, finance, technology and security.
  • Represented employee who left one division of a major technology company to a similar division in an even bigger technology company against trade secret misappropriation and breach of non-compete claims and negotiated workaround.
  • Drafting non-disclosure agreements and proprietary inventions and assignment agreements for multiple employers in order to protect their trade secret information and other intellectual property.
  • Lead trial attorney in trade secret misappropriation case involving construction bids with favorable judgment for client.
Testimonials
★★★★★
"Stephen Moses has been a valuable business partner. He developed my Professional Services Agreement with my clients and did a great job of ensuring I was protected. He has also created Terms of Use and Privacy Policies for my clients' websites and he is conscientious, thorough, and responds quickly to requests. I highly recommend working with Stephen for your business law needs.” Leeann Alameda, Alameda Marketing Solutions