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April 2012

Preventing Former Employees in California from Using Company Trade Secrets to Solicit Its Customers

California has a strong public policy against covenants not to compete and in favor of employee mobility. A federal court recently had to balance that policy against the policy embodied in the Uniform Trade Secrets Act in narrowly framing a preliminary injunction prohibiting a former account executive from using the company's customer information to compete for those customers for his new employer. The court's order is instructive in several ways.

In Edwards v. Arthur Andersen LLP,1 the California Supreme Court held that employee noncompetition agreements are void as against public policy—even if narrowly drawn—unless they fall within certain statutory exceptions. The Court expressly declined to address whether the Uniform Trade Secrets Act, codified in California Civil Code sections 3426, et seq. ("UTSA"), provides such a statutory exception.2

The Court in Edwards rejected the "narrow-restraint" exception to the policy used in the Ninth Circuit. The Court's decision is also at odds with earlier California decisions upholding non-solicitation and non-interference provisions of limited duration.3

Recently, in Pyro Spectaculars Inc. v. Souza,4  federal Magistrate Judge Gregory Hollows issued an order preliminarily enjoining a former account executive for a fireworks production company from soliciting certain of the company's customers. The order was based not on a non-compete agreement but instead solely on the UTSA. (It is unclear from the court's order whether defendant had signed a non-solicitation agreement with PSI.) Cf. The Retirement Group v. Galante5 injunction held to be overbroad to extent it prohibited former employee from soliciting customers using information other than the employer's trade secrets.

By way of background, plaintiff Pyro Spectaculars, Inc. ("PSI") was founded by the Souza family in the early 1900s, and is one of the largest fireworks production companies in the U.S. Over several decades, PSI compiled an extensive Excel® database of customer information that PSI referred to as its "Booking Form" program. Defendant Steven Souza ("Souza") was an Account Executive and his wife was a pyrotechnics operator who had shot shows for PSI. According to the order, Souza took a copy of the program before he left PSI to join a competitor, and used it to solicit PSI customers.

Souza had tried to hide the fact that he took a copy of PSI's Booking Form database. He even used a "disk wiping" program on his company loaned computer, which made proof problems for the company much more difficult and expensive than they needed to be.

Practical Tip: Employers should require departing employees—especially those with access to important company trade secrets—to return all computers and other company property no later than their last day of work, and to immediately make forensically sound images of the computers' hard drives before allowing such computers to be reissued to other employees. Contact lists on employees' mobile devices, whether company issued or the employee's own device, also should not be available to employees after their employment terminates. (Some companies allow storage and access of such information only from the "cloud" (i.e., over the Internet), such as through a company-directed 3rd-party provider.) 

Trade secret misappropriation cases involving "customer lists" often center on whether the customer information is truly a trade secret and, if so, whether the defendant can profit from its use. The court in Pyro Spectaculars found that the Booking Form program included  a surprising amount of detailed information that can now actually be found fairly readily on the Internet. Such information included customer names, addresses, phone numbers, contact persons, plot plans, shell counts and descriptions, and even PSI proposals, contracts and prices for both public and private entities. (Given the large number of public entities that put on fireworks shows, some information was available through public records requests.) The court stated essentially that if that had been all there was, it would find for the defendant.

However, the court also found that the Booking Form program also contained information that was not easily and readily available, such as: contact information for PSI's "contact person" at each customer; detailed financial, cost, and budgeting information for shows; a breakdown of the specific products used in individual shows; customer special preferences and requirements; and customer feedback. Additionally, the court found that the compilation of such information in the Booking Form program as a whole (i.e., including public information) itself constitutes a trade secret. (Section 3426.1 of the UTSA expressly lists "compilations" as a type of trade secret if it derives independent economic value from not being generally known and reasonable efforts have been made to maintain its secrecy.) Finally, the court found that Souza's probable misappropriation of PSI's trade secrets has "tainted" his knowledge of non-trade secret customer information such as to make it very difficult, at least in the immediate future, for him to separate the two.

Practical Tip: One lesson for employers is that simply complaining that "customer lists" or contact lists were taken is not enough. The employer must be able to show in detail that the former employee misappropriated a material amount of important confidential customer information that is not conveniently available to the public, that compiling all of such information (plus any publicly available information) required a substantial amount of time and energy, and that the former employee benefited from having the compilation. A more hopeful lesson is that if such a showing can be made, it can support an injunction against the former employee using the combination of the employer's trade secrets plus publicly available information.

After finding that the Booking Form program constituted a PSI trade secret, the court analyzed other considerations to determine if an injunction would be proper, including the likelihood of irreparable harm, the balance of the equities between the parties, and the public interest. With respect to the last factor, the court discussed Edwards, recognizing California's strong public "policy in favor of open competition, employee mobility, and the right to pursue a business or occupation," as well as California's policy of protecting trade secrets. Balancing the competing public interests caused the court to craft its order narrowly.

Interestingly, the court noted that California's statute against non-compete agreements "does not constrain a court in equity from fashioning an appropriate remedy focused on the misappropriation of trade secrets." Souza had failed to comply with a prior discovery order compelling him to produce his and his wife's computers and storage media, had used the disk wiping program, and had otherwise acted in ways that caused the court to be "skeptical" about whether Souza would continue to use PSI's trade secrets in the future, and how difficult it would be for PSI to prove such use if Souza or his new employer successfully solicited PSI's customers.

In light of the above considerations, the court enjoined defendant for a limited (six-month) period from soliciting—i.e., initiating, directly or indirectly, any contact with—any PSI customers with whom Souza had had contact or was responsible while at PSI. However, if any such customer first contacted Souza, he would be permitted to respond and accept their business. The injunction also does not prohibit others at Souza's new employer from soliciting PSI's customers (even if Souza had had contact with or responsibility for them while at PSI), provided that Souza is not involved, directly or indirectly, in any such solicitation. Given the pre-judgment posture of the case, the court was mindful that damages could still be available to PSI if it learned through discovery that Souza violated the injunction or the new employer had also misappropriated PSI's trade secrets. In light of the admitted misappropriation and egregious misconduct by Souza, the narrow scope of the injunction must have been a disappointment to PSI.

The court noted that the trade secrets at issue were not "secret recipes" or technologies, the mere use of which by him, his current employer, or others would constitute misappropriation. If the nature of the trade secrets at issue had been different from customer information, however, this may imply that the scope of the injunction could have been broader.

Practical Tip. Trade secret misappropriation cases can be difficult to win even where the facts paint an inequitable picture. California's public policy in favor of the free mobility of employees can act as a "head wind" in such cases, and constrains a court in equity from fashioning what employers would consider a just and appropriate prophylactic remedy. The best course of action for employers, therefore, is to take extra steps to secure—and retrieve—all important company trade secrets before the employee leaves the company. This may be particularly difficult with highly compensated and smooth-talking account executives, so the company should establish and enforce "no-exceptions" policies to guard against the possibility of trade secret misappropriation by its employees in the first place.

 



1 Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008).
2 Id. at 946, n. 4.

3 See, e.g., Loral Corp. v. Moyes, 174 Cal.App.3d 268 (1985) holding that agreement by employees prohibiting them for limited time from soliciting other employees was reasonable and thus valid.
4 Pyro Spectaculars, Inc. v. Souza, case no. CIV S-12-0299 GGH (E.D. Cal. March 21, 2012).
5 The Retirement Group v. Galante, 176 Cal.App.4th 1226 (2009).

Intellectual Property

Gordon I. Endow


Intellectual Property

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