Reminder: If You Suspect Your Trade Secret Has Been Misappropriated, Take Action Now!

by: Matthew Day

As a reminder to employers and owners of trade secret information, you should take prompt action if you suspect someone has stolen your trade secret and sold it to a third party. Last year, the California Court of Appeal addressed the issue of when the statute of limitations begins to run for the misappropriation of trade secrets in Cypress Semiconductor Corp. v. Superior Court, 163 Cal.App.4th 575 (2008). Don’t forget to take appropriate actions to protect your business’s most valuable information.

The holding in Cypress represents a significant departure from the previous rule, where the statute of limitations did not begin to run until the third party knew or had reason to know that the misappropriated information constituted a trade secret. Now, under theCypress framework, the statute of limitations begins to run when the plaintiff has any reason to suspect that a third party knows or reasonably should know that the information is a trade secret.

In Cypress, the third party who used information which constituted misappropriated trade secrets, argued that the single claim rule applied – namely, that the California Uniform Trade Secrets Act (CUTSA) statute of limitations period begins to run on all third party actions when the plaintiff learns of the original misappropriation. However, the court rejected this argument finding that such reasoning would allow “malevolent third parties to merely lie low and wait out the clock.” As a result, through no fault of their own, plaintiffs “would forever lose their trade secrets with recourse only against the original misappropriator.”

Instead, after considering Sections 3426.1 and 3426.6 of the CUTSA, the court found that a more reasonable interpretation of the single claim clause is that each new misuse or wrongful disclosure is a single claim of continuing misappropriation rather than a separate claim. Thus, a plaintiff may bring a claim, with its own statute of limitations period, against each subsequent third party who acquires, uses or discloses the information obtained in the original misappropriation. Any continuing misappropriation by that third party constitutes a single claim.

The court further held that the third party’s actual state of mind does not matter in determining the running of the statute. The court noted that for the purpose of statute of limitations “the proper focus is not upon the defendant’s actual state of mind but upon the plaintiff’s suspicions.” In addition, a plaintiff’s suspicions must be reasonable such that there is a sufficient factual basis to suspect that he or she has been injured in some way. This shift from the previous standard requires trade secret owners to take affirmative steps to protect their trade secrets.

How to Protect Your Trade Secret?

The implications of the Court’s holding in Cypress are clear: Failure of the trade secret owner to take affirmative action against third parties who may misappropriate the trade secret could result in forfeiture of a claim for misappropriation, and more importantly, forfeiture of protection of the trade secret itself.

A trade secret owner must be proactive and promptly investigate instances of possible misappropriation in order to ensure the trade secret remains protected. Specifically, the trade secret owner should determine which third parties may be in possession of its trade secret, and let these third parties know that the information being used is a protected trade secret. This allows a trade secret owner to avoid later factual legal battles as to when it had knowledge, or reasonably should have had knowledge, that the trade secret was misappropriated.

Finally, business employers should carefully consider the conditions under which they separate from former top-level employees. Although standard non-solicitation agreements can offer some protection to employers, without adequate trade secret protection, it is possible that a company’s most valuable asset could be used by former employees in a competing business upon departure.

For more information on trade secrets, businesses are always encouraged to seek legal counsel for specific questions.