Sunday, November 30, 2008

Yield Dynamics Delivers Dynamic Trade Secret Defense

In Yield Dynamics, Inc. v. TEA Systems Corp. 154 Cal.App.4th 547, 66 Cal.Rptr.3d 1 (007), the court of appeal concluded that a claim for misappropriation of trade secrets could not be found absent a showing of independent economic value. In Yield, plaintiff claimed that its former employee had wrongly misappropriated plaintiff’s proprietary source code by placing a sequence string of that code into defendant’s newly released product. The trial court granted defendant’s motion for nonsuit on the basis that the plaintiff company failed to demonstrate that the allegedly misappropriated source code had an independent economic value.

California’s Uniform Trade Secrets Act (”UTSA” or “Act”) defines a trade secret as certain types of information (e.g. formulas, plans, designs) that a company has taken reasonable steps to protect, and which is valuable because it has been kept secret. See Civil Code section 3426.1. The Act defines “misappropriation” as the acquisition by improper means, and subsequent use or disclosure of such trade secrets. Id.; Morlife, Inc. v. Perry, 56 Cal.App.4th 1514, 1526 (1997) (former employee’s use or disclosure of confidential customer information to solicit new accounts on behalf of a new employer constitutes the misappropriation of a trade secret); Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Garcia, 127 F.Supp.2d 1305, 1306 (C.D. Cal. 2000) “Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” Civil Code section 3426.1(a).

While most defense lawyers focus on establishing that the purported trade secrets fail to qualify for protection because the plaintiff neglected to take reasonable steps to secure their secrecy, or because the defendant either does not use the “secrets” or the “secrets” are in the public domain, few take the tact that the information taken lacks value to anyone beyond the parties themselves. This is precisely the argument levied by Terrence Zavecz, the founder and, as relevant here, sole employee of defendant TEA Systems Corporation in the Yield case. Zavecz argued that where the defendant cannot exploit the information allegedly misappropriated in order to gain a competitive advantage over (or to the disadvantage of) the original owner, then despite any reasonable efforts to maintain the secrecy of the information at issue, the plaintiff’s trade secret claim must fail.

The Court of Appeal agreed. Upholding the lower court’s conclusions, the Sixth Appellate District held that the allegedly misappropriated items were properly defined as “trade secrets” because plaintiff had not established any independent economic value associated with their secrecy. Specifically, the Court ruled that Yield had failed to establish that the segments of computer code at issue in Yield possessed independent economic value entitling the plaintiff to trade secret protection in that code. The Yield Court held that in order to establish the independent economic value element necessary to maintain a trade secret misappropriation claim, the plaintiff must prove more then simply secrecy and usefulness. The plaintiff must establish a discrete competitive advantage to the persons who could utilize the information to the economic disadvantage of the plaintiff, thus creating an economic value in the plaintiff maintaining secrecy over the information. The Court stated that a trade secret misappropriation claim will fail where the defendant cannot exploit the information, and thereby gain a competitive advantage, to the disadvantage of the original owner. 154 Cal.App.4th at 560-572.

In reaching its ruling, the Court adopted the definition of a trade secret found in the Restatement (Third) of Unfair Competition (1995). The Restatement defines a trade secret as business or technical information “that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.” (Rest.3d, Unfair Competition, sec. 39.) The Court acknowledged that this advantage “need not be great,” but must be “more than trivial.” (Rest.3d, Unfair Competition, sec. 39, com. e, p. 430.) That is, merely stating that information was helpful or useful to another person in carrying out a specific activity, or that information of that type may save someone time, does not compel a factfinder to conclude that the particular information at issue was “sufficiently valuable . . . to afford an . . . economic advantage over others.” (Rest.3d, Unfair Competition, § 39.) Rather, the factfinder is entitled to expect evidence from which it can determine how useful the information is, e.g., how much time, money, or labor it would save, and that these savings would be “more than trivial.” (Rest.3d., Unfair Competition, sec. 39, com. e.)

Thus, the Yield case ruled that where the information taken lacks value to anyone beyond the parties themselves, and provides no genuine competitive advantage to others, it will not qualify as a trade secret under the UTSA. This ruling provides another viable attack for invalidating a plaintiff’s alleged trade secrets. Not only should the defense attack the plaintiff’s efforts to protect its purported secrets, and argue that the information was in the public domain (or never actually employed by the defendant), but where appropriate, it should strongly consider an attack based on demonstrating that the information lacks “independent economic value.”

Jonathan Pink can be reached at or 949-223-7173