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


FENWICK & WEST LLP
    FENWICK & WEST 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.


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    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?"




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    FENWICK & WEST LLP


    What is a Trade Secret?
    UTSA [1-2]

       Information
       Economic value
       Not generally known
       Not readily ascertainable
        (by proper means)
       Treated as secret



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    Technical Information [2-3]

       Formulas
       Plans, Designs or Patterns
       Processes
       Methods and Techniques
       Negative Information
       Software



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    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

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    Personnel Information [3-4]

       Key Personnel
       Compensation Plans
       Receptivity to Solicitation




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    How Can You Get Into Trouble
    With Trade Secrets? [13-16]

       Acquisition
       Use
       Disclosure




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    FENWICK & WEST 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?


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     Wrongful Use of a Trade Secret
     [14-15]

        Use Without Consent of the Owner; and
            Obtained using improper means; or
            Obtained in violation of obligation not to disclose; or
            Obtained by you under agreement or obligation not
             to use the way you are using; or
            Obtained by you knowing it was disclosed by
             accident



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     FENWICK & WEST LLP


     Wrongful Disclosure
     of a Trade Secret [15-16]

        Disclosure Without Consent of the Owner; and
            Obtained using improper means and/or;
            Obtained in violation of obligation not to disclose
             and/or;
            Obtained by you under agreement or obligation not
             to use the way you are using and/or;
            Obtained by you knowing it was
             disclosed by accident.


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     Protection of Trade Secrets [18]

        Trade Secrets Are Fragile
         and Easily Lost
        Confidential Information Not
         Automatically a Trade Secret




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     Major Sources Of Risk [19-20]

        Mobility of Labor Force
        Physical Security
        R&D "Cowboys"
        Publishing Information - Journals
         and Conferences
        Personal Computers
        E-mail
        Company Trash

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     FENWICK & WEST 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."




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      FENWICK & WEST 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.*

15
      * See Cal. Bus. & Prof. Code § 16601 and 16602.              1123301
     FENWICK & WEST 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




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     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.

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     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:
            California first (former employer enjoined)
            Minnesota second (former employee enjoined)
        What is a well intentioned California employer to
         do?

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     FENWICK & WEST LLP


     Protecting Your Company's
     Trade Secrets [35-36]

        On Terminating Employees:
            Exit Interviews and Audits
            Reaffirmation of Confidentiality
             Agreements
            Demand Letters
            Searching Departing Employee's
             Files, Computer, E-mail Box
            "Inevitable Disclosure"


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     Protecting Your Company From
     Trade Secret Liability [51-58]

        Have a written policy against possession or
         use of others'
         trade secrets
        Enforce it




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     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



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     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
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     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


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     When You Find Another Company's
     Secrets Among Yours [57]

        Isolate and contain it
        Investigate
            Source of information
            Extent of contamination
        Remedial Steps to Consider
            Discipline or termination of offending employees?
            Isolate and keep; destroy; or return information?
            Confession and negotiation with trade secret
             owner?
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     Remedies for Trade Secret
     Misappropriation [58-62]

        Civil Injunctive Relief
            Enjoin use of the secrets
            Compel return of materials and information
        Damages
            Compensatory
            Punitive
            Attorneys' Fees and Costs
        Criminal Prosecution


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     Civil Litigation [60-62]

        Reasons to consider
            Need to protect
            Send a message
            Stop others
            Swift strong action may lead to a
             negotiated settlement
        Reasons for caution
            Cost
            Generally cannot prevent someone
             from working for a competitor
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            Risks of cross-complaint            1123301
     FENWICK & WEST 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


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