FENWICK & WEST LLP ICC 21st Annual Seminar March 15, 2002 John C. Fox Trade Secret Protection Collides With California's Right of Mobility

F ENWICK & W EST LLP The Conundrum (1)California employees enjoy free mobility of employment. (2)Employees sometimes take and use their former employer's trade secrets and are often perceived to be doing so (whether correctly or not). (3)Covenants not to compete are largely illegal in California, thus often permitting a departing employee to position himself/herself with a direct market competitor.

F ENWICK & W EST LLP What is a Trade Secret? - Common Sense Approach [1] "Would I care if this were disclosed to my main competitor?" "Would my main competitor care if this were disclosed to me?"

F ENWICK & W EST LLP What is a Trade Secret? UTSA [1-2] Information Economic value Not generally known Not readily ascertainable (by proper means) Treated as secret

F ENWICK & W EST LLP Technical Information [2-3] Formulas Plans, Designs or Patterns Processes Methods and Techniques Negative Information Software

F ENWICK & W EST LLP Business Information [3-4] Financial Information Cost and Pricing Internal Market Analyses or Forecasts Customer Lists Unannounced Business Relationships Business Opportunities - Acquisitions Marketing or Advertising Plans

F ENWICK & W EST LLP Personnel Information [3-4] Key Personnel Compensation Plans Receptivity to Solicitation

F ENWICK & W EST LLP How Can You Get Into Trouble With Trade Secrets? [13-16] Acquisition Use Disclosure

F ENWICK & W EST LLP Wrongful Acquisition of a Trade Secret [14] The Key Questions to Ask: How Did I Get the Information? From Whom Did I Get It? How Did He/She Get It? Does the Person Offering the Information To Me Have the Right to Give It To Me?

F ENWICK & W EST LLP Wrongful Use of a Trade Secret [14-15] Use Without Consent of the Owner; and n Obtained using improper means; or n Obtained in violation of obligation not to disclose; or n Obtained by you under agreement or obligation not to use the way you are using; or n Obtained by you knowing it was disclosed by accident

F ENWICK & W EST LLP Wrongful Disclosure of a Trade Secret [15-16] Disclosure Without Consent of the Owner; and n Obtained using improper means and/or; n Obtained in violation of obligation not to disclose and/or; n Obtained by you under agreement or obligation not to use the way you are using and/or; n Obtained by you knowing it was disclosed by accident.

F ENWICK & W EST LLP Protection of Trade Secrets [18] Trade Secrets Are Fragile and Easily Lost Confidential Information Not Automatically a Trade Secret

F ENWICK & W EST LLP Major Sources Of Risk [19-20] Mobility of Labor Force Physical Security R&D "Cowboys" Publishing Information - Journals and Conferences Personal Computers Company Trash

F ENWICK & W EST LLP The Covenant Not to Compete Problem [29] California Business and Professions Code §16600 provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

F ENWICK & W EST LLP Statutory Exceptions to B&P §16600 [29] Covenants not to compete are lawful when entered into as part of: The sale of the goodwill of a business; The sale by a shareholder of all his or her shares in a corporation, or a sale by the corporation of all or substantially all of its assets, together with the goodwill; or The dissolution of a partnership, dissociation of a partner from a partnership, or sale or other disposition of a partner’s interest in a partnership. * * See Cal. Bus. & Prof. Code § and

F ENWICK & W EST LLP The Downside to Overreaching Covenants Not to Compete [32-33] Walia v. Aetna, Inc., 93 Cal.App.4th 1213 (11/12/01) (Rev. granted in Cal. Sup. Ct. 2/27/02) $180,000 Compensatory Damage Award $1,080,000 Punitive Damages (SF) Jury Award

F ENWICK & W EST LLP The Race to the Courthouse [30-31] The Application Group, Inc. v. The Hunter Group, Inc. 61 Cal.App.4th 881 (1998), review denied, 1998 Cal.LEXIS 2968 (1998) Valid Non-Competition Agreement between Maryland employer and its employee. Employee joins California company – does §16600 trump the Maryland Non-Competition Agreement? Comity Analysis: Policies behind §16600 outweigh Maryland employer’s right to enforce contractual agreement not to compete.

F ENWICK & W EST LLP Is There Still a Race to the Courthouse? [31] Advanced Bionics v. Medtronic, 87 Cal.App.4th 1235 (2001), review granted, 2001 Cal.LEXIS 3764 (2001) Dueling Injunctions: n California first (former employer enjoined) n Minnesota second (former employee enjoined) What is a well intentioned California employer to do?

F ENWICK & W EST LLP Protecting Your Company's Trade Secrets [35-36] On Terminating Employees: n Exit Interviews and Audits n Reaffirmation of Confidentiality Agreements n Demand Letters n Searching Departing Employee's Files, Computer, Box n "Inevitable Disclosure"

F ENWICK & W EST LLP Protecting Your Company From Trade Secret Liability [51-58] Have a written policy against possession or use of others' trade secrets Enforce it

F ENWICK & W EST LLP When Interviewing Potential Employees [51-52] Resist the impulse to pump for information Explain your trade secret policy Ask about confidentiality and non-competition agreements with prior employers

F ENWICK & W EST LLP Upon Hiring A New Employee [52-54] Risk analysis "Woodshed" him/her about bringing nothing from former employers Have signed agreement that new employee has brought nothing Counsel new employee, as necessary, on conduct in leaving former employer Provide assurances to former employer in some cases

F ENWICK & W EST LLP Once The New Employee Is On Board [55-57] A second "woodshedding" may be necessary If you "raid" competitor's employees, are you sure you are not relying on human resources trade secrets to do so? "Clean room" may be advisable, in some cases

F ENWICK & W EST LLP When You Find Another Company's Secrets Among Yours [57] Isolate and contain it Investigate n Source of information n Extent of contamination Remedial Steps to Consider n Discipline or termination of offending employees? n Isolate and keep; destroy; or return information? n Confession and negotiation with trade secret owner?

F ENWICK & W EST LLP Remedies for Trade Secret Misappropriation [58-62] Civil Injunctive Relief n Enjoin use of the secrets n Compel return of materials and information Damages n Compensatory n Punitive n Attorneys' Fees and Costs Criminal Prosecution

F ENWICK & W EST LLP Civil Litigation [60-62] Reasons to consider n Need to protect n Send a message n Stop others n Swift strong action may lead to a negotiated settlement Reasons for caution n Cost n Generally cannot prevent someone from working for a competitor n Risks of cross-complaint

F ENWICK & W EST LLP Criminal Prosecution [62-66] Scope of criminal statute is narrower Impact on civil action where civil action also brought Protecting your confidential information is more difficult Victim cannot control scope, timing or conduct of prosecution