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With The California Supreme Court Poised To Rule On Non-compete Agreements, Trade Secret Agreements May Come Into Play More Frequently

Right now, California state courts won't enforce a non-compete agreement between an employer and employee absent equal bargaining power or payment for the agreement.  In federal court, such contracts can be upheld, however, if narrowly drawn.  Our state supreme court is considering clarifying the rule on non-compete agreements - something MIPTC will report on when the opinion is issued.

As an alternative to drafting non-compete agreements, many California lawyers use trade secret agreements, which are legal, and actually codified in our California's Uniform Trade Secrets Act, in the Civil Code, starting at section 3426.  Essentially, trade secrets are how a company does business, and may include things like customer, vendor and employee lists, as well as the way the business operates in the marketplace. 

With a trade secret agreement in place, a company can prevent a departing employee from using its hard-earned capital to the advantage of a new employer.  In the right circumstances, courts will issue injunctions preventing the departed employee and new employer from using the old employer's information.

Not quite as sweeping as a non-compete agreement, but just about as powerful.

Like with all lawsuits, the statute of limitations can bar trade secrets claims.  The statute is three years - if you don't bring your suit against the departed employee/new employer within three years of the date you learn your trade secret information is being used, the court will dismiss your claim.

The legislature reasoned that after three years, most of the trade secret information is stale anyway. 

But the question answered by this case, Cypress Semiconductor Corp. v. Sup.Ct., helps define when the statute starts to run, and gives some backhanded advice to companies trying to protect their trade secrets.

Let's get to a short setup of the case.  Silvaco Data Systems developed computer code called SmartSpice for its automation software.  A Silvaco employee left in 2000 and used the software in a similar program for his new employer Circuit Systems, Inc. called DynaSpice. Silvaco sued the employee and CSI and settled in 2003. 

In 2000 and after, CSI had been licensing its DynaSpice software to other companies, including Cypress Semiconductor Corporation.  Silvaco, however, waited to sue Cypress until after it settled with CSI. 

When CSI responded to Silvaco's complaint, it claimed that the statute of limitations barred the claim since Silvaco had failed to sue within three years of when it learned of the violation of its trade secrets.  The trial court sided with Silvaco, but the appellate court reversed in the opinion in the case citation link.

The lesson here?  If you're going to sue over a trade secret violation, then follow the trail and see if not only your departed employee and new employer are using your trade secrets.  You may have to sue others to protect your rights.  And sue in time.

Posted by J. Craig Williams on Friday, June 06, 2008

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