Who 'Owns' a Secret? Whether Trade Secret Licensees Have Standing to Sue in California

If the eye-popping damages awards in several recent lawsuits are any indication, companies are increasingly coming to see their private information as one of their most valuable assets—and California juries apparently agree. For example, last November, a Santa Clara County jury awarded $223 million in ASML US v. XTAL, which may increase after the court rules on punitive damages. But unlike patents or copyrights, where there’s a formal government process and documentation defining the scope of the ideas that are protected, trade secrets are protected only by the trade secret owner’s efforts to keep the information secret. In the words of the U.S. Court of Appeals for the Fourth Circuit, “one ‘owns’ a trade secret when one knows of it, as long as it remains a secret,” see DTM Research v. AT&T, 245 F.3d 327, 332 (4th Cir. 2001).

The lack of a formal document or process that defines the property interest for trade secret owners has raised a question over who, exactly, has enough “ownership” of a trade secret to have standing to sue for misappropriation. Yet California courts haven’t yet reached this seemingly basic issue.

The California Uniform Trade Secrets Act (CUTSA) isn’t clear on this point. It says that a “complainant may recover damages for the actual loss caused by misappropriation,” but it doesn’t define what rights a “complainant” needs to have to be able to sue. Cal. Civ. C. Section 3426.3(a). In a lawsuit where my firm represented the plaintiff, who was also the trade secret licensee, the court for the Northern District of California recently found that licensees do have standing to sue under the CUTSA, holding that in trade secrets cases, “the better focus for determining whether a party can assert a misappropriation claim is on that party’s possession of secret knowledge, rather than on the party’s status as a true “‘owner.,” as in BladeRoom Group v. Facebook,219 F. Supp. 3d 984, 990 (N.D. Cal. 2017) (citations omitted).

California state courts, however, have not yet reached the question of licensee standing. See Farhang v. Indian Institution of Technology, Kharagpur, No. C-08-02658 RMW, 2010 WL 2228936, at *12 (N.D. Cal. June 1, 2010) (“While ownership of a trade secret is clearly sufficient to establish standing, it is not clear whether ownership of the trade secret is always necessary to have standing.”). The closest California courts have come to deciding this issue was in Jasmine Networks v. Superior Court, 180 Cal. App. 4th 980 (2009). There, the court held that a party that previously owned the trade secrets could sue for damages caused by misappropriation that had occurred while it owned the trade secrets. The court rejected any “current ownership rule” under the CUTSA and reversed a decision dismissing the complaint, see VasoNova v. Grunwald, No. C 12-02422 WHA, 2012 WL 6161041, at *4 (N.D. Cal. Dec. 11, 2012) (citing Jasmine Networks).

The result in BladeRoom is consistent with federal trade secrets law, which explicitly allows licensees to sue. In particular, the 2016 Defend Trade Secrets Act says that “an owner of a trade secret that is misappropriated may bring a civil action” under the act, and it goes on to define “owner” to include the “person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.”

Despite the federal rule and the result in BladeRoom, California state courts haven’t reached this issue. But results from other states strongly suggests that, when they get around to it, California state courts are likely to agree that licensees may sue. Specifically, at least five other states that, like California, have statutes authorizing “complainants” to file trade secret misappropriation suits. See 12 Pa. Cons. Stat. Section 4304; Wis. Statutes 134.90(4)(a); Rhode Island G.L Section 6-41-3; Mich. Comp. Law. Section 445.1904; Tenn. Code Ann. Section 47-25-1704(a). In every one of those states, courts have found that that licensees may sue. See, e.g., Advanced Fluid Systems v. Huber,28 F. Supp. 3d 306, 323 & n.4 (M.D. Pa. 2014) (holding that “ownership, in the traditional sense, is not prerequisite”); Metso Minerals Industries v. FLSmidth-Excel, 733 F. Supp. 2d 969, 977-79 & n.12 (E.D. Wis. 2010) (holding that nonexclusive licensee could bring misappropriation claim);Parking v. Rhode Island Airport, No. CIV.A. P.B.2004-4189, 005 WL 419827, at *4 (R.I. Super. Feb. 18, 2005);DaimlerChrysler Servs. v. Summit National, No. 02-71871, 2006 WL 1420812, at *8 (E.D. Mich. May 22, 2006),aff’d289 F. App’x 916 (6th Cir. 2008);Williams-Sonoma Direct v. Arhaus,304 F.R.D. 520, 527 (W.D. Tenn. 2015).

For now, however, trade secret licensees in state courts don’t have any state court decisions directly on point to rely on. The best discussion may come from language in one of California’s leading trade secret rulings, Silvaco Data Systems v. Intel,184 Cal. App. 4th 210, 220 (2010): “The sine qua non of a trade secret, then, is the plaintiff’s possession of information of a type that can, at the possessor’s option, be made known to others, or withheld from them.” If lawful possession of secret information is the equivalent of “ownership” in the trade secret context, then licensees should indeed have standing to sue. While that seems like the most likely outcome, recent damages awards show that whether or not California courts ultimately agree about licensee standing is a multimillion dollar question.

Reprinted with permission from the April 2, 2019 issue of The Recorder. © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.