Trade Secret Misappropriation: What Employees Should and Should Not Do When Leaving a California Employer

A crucial lesson can be learned from a case this week where an electrical engineer of a California company was convicted of stealing trade secrets and distributing them to competitors.  Trade Secret litigation takes on many forms.  In California, the Uniform Trade Secrets Act, the Business and Professions Code (contracts in restraint of trade) and the Labor Code (employer owns trade secrets created by employee) are utilized by courts to preside over trade secret litigation.  Our firm handles different types of intellectual property matters throughout California and especially in our San Jose and Santa Clara Offices.

This case, U.S. v. Derek Wai Hung Tam Sing in U.S. District Court, is an example of what can go wrong when a worker does not have the rights to trade secrets.   This is contrary to where independent contractors, for instance, negotiate and may retain rights to work that they rendered for their employers.  Here, Mr. Sing kept trade secrets that belonged to his former employer after he was fired.   To exact revenge against his former employer, Mr. Sing not only retained but also distributed the trade secrets (with instructions on how to reverse engineer the designs) to his former employer’s competitors.  One of those competitors reported his actions to the former employer.  In March, the court will rule on how many years Mr. Sing will spend in prison for misappropriation of trade secrets.

A trade secret usually includes customer lists, formulas, processes, designs, sensitive marketing data, technics, compilations of information, unpatented inventions, and other business material that provide the holder with an economic edge over other businesses. It is common to protect trade secrets via a non-disclosure agreement (NDA). Similar to copyrights and patents, trade secrets may be assigned in a contractual agreement. The theft of trade secrets in California is referred to as misappropriation. An individual misappropriates trade secrets when he or she acquires the trade secret with knowledge (or having reason to know) that the method used to acquire was improper, or uses improper means to disclose the trade secret to a competitor. Recent cases involved the prosecution of companies that should have known that they received trade secrets.

Claims of trade secrets misappropriation often arise when an employee leaves a company and goes to work for a competitor. He or she may do the same type of work for the competitor, or call on some of the same customers, and California law gives great leeway to employees to pursue their chosen field of employment. Thus, prior employers must prove their former employees’ actual use of their trade secrets; California courts expressly disallow claims that the prior employee will inevitably use the prior employers’ trade secrets. And, prior employees can sell to the same customers so long as they have publicly available information about them, or the customers themselves disclose pricing or other information about the prior employer.  See these other blogs for similar content.

If you worked for a California company and have an intellectual property dispute, prompt action is vital to meet the statute of limitation before your claim may expire.  Contact the experienced employment law attorneys at Stephen Danz & Associates for a free consultation to discuss your circumstances and legal options.