By: Charles L. Post and James Kachmar

As many readers of this Blog know, we’ve been awaiting the California Supreme Court to issue its decision in the Brinker case. This morning it did so. As our attorneys continue to analyze the decision involving issues of employee rest periods and meal breaks, we will be publishing several blog updates in the coming days discussing the impact of the decision on California employers.

Continue Reading CASE ALERT: California Supreme Court Hands Down Brinker Decision

By:    Lizbeth V. West, Esq.

The California Supreme Court just announced this morning that it will issue its decision in the Brinker v. Superior Court case at 10:00 a.m. tomorrow, April 12, 2012.

For all of our clients and guests who will be joining us at our Sacramento office tomorrow morning for our Wage & Hour seminar (from 9 a.m. – noon), we will of course have the decision hot off the presses to discuss and review with you.

IT WILL BE EXCITING FOR US ALL TO LEARN TOGETHER WHAT THE COURT HAS DECIDED!
 

  • Corrales v. Corrales, 198 Cal.App.4th 221 (August 10, 2011)

Just as employees owe a duty of loyalty to their current employers, partners owe a duty of loyalty to one another. When one partner opens a secret “side business” (that does the same thing as the partnership) that partner breaches the duty of loyalty.  When that happens the breaching partner’s competing business may be valued as an asset of the partnership. Bad news for the guy with the secret business.

Rudy and Richard Corrales formed RC Electronics in 1989.  Rudy ran the business and Richard supplied financing and business know how.  Richard already had a thriving business occupying him full time.  He became involved in RCE because Rudy could not obtain enough financing on his own to start a business. The business was successful for several years. In 2004, however, Richard discovered that Rudy, his wife and their two daughters had formed a competing business, PK Electronics, to perform the same services performed by RCE but without Richard.  When Richard inquired about PKE, Rudy refused to tell him anything and cut off all communications with him.

The trial court held that partnerships must consist of at least two persons and that the partnership was dissolved upon Richard’s withdrawal.  But the trial court declined to award damages resulting from the plaintiff partner’s concealment of a competing business.  The appellate court reversed and found that any funds improperly obtained by the competing business entities were to be included in the assets of the partnership for winding up purposes.

Takeaway:  Although mired in the technicalities of partnership law, this case is at bottom a breach of loyalty case.  It is not at all unlike cases against executive officers, managing employees and the like who violate the duty of loyalty to their current employers by conducting business contrary to the current employer’s interest prior to the termination of their employment.  It is a useful set of facts to keep in mind.  The conduct of business contrary to the interest of a current employer (or partnership) is a breach of the duty of loyalty.

  • Unpublished Cases.

The following cases, although not officially published, contain useful insights as to how courts view trade secret unfair competition and breach of duty cases.

  • Farmers Insurance Exchange v. Song (February 23, 2012)

 Song was a Farmers insurance agent.  He signed Farmers standard agent appointment agreement which, among other things, provided that: “The agent acknowledges that all manuals, lists and records of any kind (including information pertaining to policy holders and expirations) are the confidential property of [Farmers] and agrees they shall not be used or divulged in any way detrimental to [Farmers] and shall be returned to [Farmers] upon termination of the agency.”  About four years later Farmers terminated its agency relationship with Song.  More than a year after that, Farmers filed a lawsuit after Song repeatedly refused to comply with Farmers request to return all the confidential client information as required by section 1 of the agreement.  The complaint alleged breach of contract, misappropriation of trade secrets, intentional interference with contractual relations, unfair competition and breach of fiduciary duty.  It sought both damages and injunctive relief.

Shortly after filing, Farmers moved for a preliminary injunction to enjoin Song from using Farmers’ trade secrets, including Farmers’ confidential policy holder information for any purpose including but not limited to soliciting insurance business.  Farmers also sought an order requiring Song to immediately surrender to Farmers all copies of the trade secrets and lists.  The trial court issued the preliminary injunction.

Song appealed, claiming that the agreement offended California’s public policy prohibiting restraints on the pursuit of a business or a lawful trade or profession.  (Citing Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 945-946.)  The Court of Appeal rejected the argument however, noting that a lengthy line of cases has consistently held former employees may not misappropriate the former employer’s trade secrets to unfairly compete with a former employer.   Song also argued that the policy holder information at issue in the case was not protectable as a trade secret.  The Court of Appeal rejected that argument as well, citing a line of cases that enjoined former insurance agents from soliciting policy holders using customer files that contained the names, addresses and telephone numbers of policy holders.  Although it is a rule notable for its many exceptions, compilations of customer information including customer identity, contact information and some information relating to their customer status (say policy expiration dates, etc.) have long been recognized as trade secret by California courts.

  • Ruznak Auto Group v. McTaggert (10/12/2011)

Can a voluntary dismissal of a trade secret case without prejudice support a “bad faith” award of attorney’s fees under the California Uniform Trade Secrets Act?  Not in this case.  In Ruznak, a British automobile sales and service group sued two former employees and their new company for misappropriation of trade secrets, common law unfair competition and unfair competition in violation of Business and Professions Code section 17200.  The complaint also alleged breaches of fiduciary duty.  The complaint alleged that the plaintiff was in the business of automobile sales and service, that it employed defendants as a service manager and service technician and that when their employment was terminated they misappropriated plaintiff’s trade secrets including a customer list, took them to their new business, and used the list to solicit Ruznak’s customers.  After several months of settlement negotiations and when faced with a threat that the defendants would file cross-complaints for wrongful termination, the plaintiff voluntarily dismissed the case without prejudice.

Defendant McTaggert then filed a motion for attorney’s fees under the California Uniform Trade Secrets Act which allows an award of attorneys’ fees for a prevailing defendant when the action alleging misappropriation of trade secrets was filed in “bad faith”.  The defendants’ moving papers included declarations which stated that plaintiff had filed the lawsuit based on fabricated allegations for the purpose of putting defendant out of business.  Plaintiff filed contrary declarations including declarations of persons within the plaintiff group stating they had an objective and reasonable basis for believing that a trade secret list had been taken by the departing employees.  Perhaps the most important holding in the case is that the Court applied the objective/subjective bad faith test required for a determination of fees under the CUTSA.  Although the Court declined to find bad faith (a decision that was upheld by the Court of Appeal), the most important take away may be that a voluntary dismissal without prejudice does not insulate a plaintiff from a claim of bad faith attorney’s fees.

By: James Kachmar

As you know, documentation is essential to performing even routine HR functions. You have potential employees fill out numerous pre-hire documents. You have employees sign employment agreements and other documents when hired. During the course of employment, you have employees sign additional documents, such as acknowledgments regarding your employee handbook, change in employment status documents, etc. But have you sat down recently to review whether all of the documents you are having employees sign are consistent? The recent case of Grey v. American Management Services demonstrates why you should.

Continue Reading Employers – Have You Checked Your Documents Lately?

Under California law, you must bring an action for trade secret misappropriation within three years after the misappropriation has been discovered or should have been discovered.  (Cal. Civ. Code §3426.6.)  This means that you must act when you first suspect you are the victim of trade secret misappropriation rather than waiting until you can confirm it as a matter of fact.

The case of Gabriel Technologies Corporation v. Qualcomm Incorporated (2012 U.S. Dist. LEXIS 33421) reinforces this point.  There, a U.S. District Court threw out plaintiff’s claims for trade secret misappropriation because they were filed more than three years after the plaintiff first suspected misappropriation.

In the late 1990s, two technology companies, Locate (whose assets were acquired by Gabriel) and SnapTrack (later acquired by Qualcomm), entered into a licensing agreement to jointly develop GPS technology. Gabriel later discovered that SnapTrack filed numerous patents using the technology the parties jointly developed.  Gabriel sued Qualcomm in 2008 asserting claims for trade secret misappropriation (among others) and sought more than $1 billion in damages.

Qualcomm moved for summary judgment claiming that the undisputed evidence showed that plaintiff suspected the alleged trade secret misappropriation more than three years before filing the lawsuit and that its trade secret claims were therefore barred by the statute of limitations.  Qualcomm pointed to two pieces of evidence in support of its contention.  First, Locate’s cofounder and chief technology officer sent a January 2003 email in which he stated that SnapTrack’s product was “a direct rip off” of plaintiff’s technology.  The CTO admitted in deposition that he suspected that their trade secrets had been “ripped off” at the time he sent the email.

Defendant also offered evidence that in June 2004, as the parties were renegotiating the licensing agreement, the plaintiff’s CFO grew suspicious because Qualcomm wanted to strike certain language regarding “proprietary rights” that had appeared in an earlier licensing agreement.  The CFO admitted in deposition that he grew suspicious at that time that Qualcomm or SnapTrack had engaged in some type of misconduct concerning Locate’s intellectual property.

In granting summary judgment for Qualcomm as to the trade secret misappropriation claim, the Court noted that “[u]nder California’s discovery rule, suspicion of wrongdoing will trigger the statute of limitations.”  The Court continued by recognizing the well-established California law that “[w]hen there is reason to suspect that a trade secret has been misappropriated, and a reasonable investigation would produce facts sufficient to confirm this suspicion (and justify bringing suit), the limitations period begins, even though the plaintiff has not conducted such an investigation.”   The court concluded: “So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her.”

The Court’s holding in Gabriel Technologies makes clear that if you suspect your trade secret information has been taken, you should immediately conduct an investigation and consult with an attorney concerning the matter.  Waiting to confirm actual misappropriation years after your suspicion first arose may result in your claims for trade secret misappropriation becoming time barred.  Companies are well advised that if they have a suspicion of misappropriation; they must act immediately to protect their rights.