How Companies Can Stop Trade Secret Disclosure in California

November 9, 2022 Article
Bloomberg Law
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When an executive, founder, or employee with access to trade secrets or confidential information leaves a company to work elsewhere, employer trade secrets might be used by a competitor.

Under two laws, California’s Uniform Trade Secrets Act and the federal Defend Trade Secrets Act, employers can enjoin threatened trade secret misappropriation before actual misappropriation has occurred under certain circumstances.

Here’s how it can work, and what companies can do to reduce the chance of disclosure.

To enjoin threatened trade secret misappropriation, an employer must establish four things. This includes the likelihood of its success on the merits of the claims, the likelihood of irreparable harm if relief isn’t granted, the balance of equities tips in its favor, and if the injunction is in the public interest.

Based on a review of California’s state and federal jurisprudence, the most outcome-determinative prongs of this analysis are likelihood of success on the merits and balance of equities. These cases present best practices for employers looking to secure a potential injunction in these scenarios.

Likelihood of Success on Merits

This factor is often where injunctions are won or lost. For a successful threatened trade secret misappropriation claim, the movant must prove actual misuse or disclosure of any trade secrets by the defendant in the past, intent to misuse or disclose trade secrets, or wrongful refusal to return trade secrets when demanded by a former employer. Showing mere wrongful possession of trade secrets is not enough.

In Zendar Inc. v. Hanks, plaintiffs showed the defendant downloaded confidential information from his company computer to a device off-site in a folder labeled “revenge.” This fact, along with proof that the defendant emailed the employer’s investors to “punish” his former employer, was sufficient to prove threatened trade secret misappropriation.

In addition, where the movant can show the defendant has refused to return company equipment containing confidential information, success on the merits is likely.

Balance of Equities

The other potentially determinative factor in an injunctive relief motion is the balance of equities prong. Where burden on a defendant is temporary delay or minimal lost revenue, but harm faced by plaintiffs is permanent—like significant lost market share—such a balance supports injunctive relief.

In EL T Sight Inc. v. Eyelight Inc., the court noted an order directing the defendant to limit interactions with certain acquisition representatives would impose minimal burden on the defendant—as there are many competing companies in the field with whom to do business. But without an injunction, the plaintiff lost business opportunities in which they had invested.

Conversely, if a defendant has committed substantial capital to a venture that would be permanently lost were the injunction granted, courts are less likely to grant a preliminary injunction.

Courts are particularly likely to find the balance of equities favors the plaintiff where the plaintiff seeks “very narrow relief.” In Bank of Am NA v. Immel, the court found the balance of equities favored the plaintiff because it sought only return of its confidential customer contact information and a “prohibition on the use of that information by defendants,” rather than attempting to preclude defendants from beginning new employment or soliciting clients through proper means.

In Zendar, the plaintiff employer successfully protected their intellectual property by requiring employees to sign a confidential information and inventions assignment agreement that defined confidential information.

Best Practices for Employers

Based on the cases discussed above, employers should adopt these best practices to prevent departing employees from disclosing trade secrets.

  • Impose robust employee exit procedures.
  • Require departing employees to return or destroy confidential information before they leave.
  • Review employees’ download activity in the weeks prior to departure.
  • Have departing employees sign an acknowledgment of their obligation not to retain any confidential information.
  • Monitor subsequent employment of departing employees who employers have reason to think may be misappropriating information

Reproduced with permission. Published November 9, 2022. Copyright 2022 The Bureau of National Affairs, Inc. 800-372-1033. For further use, please visit http://www.bna.com/copyright-permission-request/.