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Effective Trade Secret Protection: Speed is of the Essence

Date: 6.16.2008

A recent ruling by the California Court of Appeal emphasizes the need for employers to act quickly when claiming misappropriation of trade secrets.  Cypress Semiconductor Corp. v. Superior Court (Silvaco Data Systems), No. H032114 (Cal. Ct. App. May 30, 2008).

Cypress Semiconductor stemmed from the defection of an employee and the misusue of trade secret information.  Silvaco Data Systems developed and licensed a software product known as “SmartSpice.”  An employee left Silvaco and began working for a competitor, Circuit Systems.  The employee incorporated some of Silvaco's SmartSpice trade secrets into a Circuit Systems product known as “DynaSpice.”  Silvaco sued the former employee and Circuit Systems for misappropriation of trade secrets.  At the time, Silvaco did not notify or take any action against Circuit Systems customers who had licensed DynaSpice.

Silvaco subsequently sued Cyprus Semiconductor, a company that had licensed DynaSpice from Circuit Systems, and continued to use DynaSpice in its own products.  Silvaco's claim was brought under the California Uniform Trade Secrets Act (“CUTSA”), Cal. Civ. Code §§ 3426 et seq.  Cyprus Semiconductor asserted as a defense the three-year statute of limitation under CUTSA.  It argued that because the lawsuit against Cyprus was brought more than three years after Silvaco learned about the former employee's misuse of Silvaco's information, it was time-barred.  Silvaco countered that it did not know of misuse by third parties (Circuit Systems' customers such as Cyprus) until far later, and had started suit within the three-year limitations period of learning of that misuse.   Therefore, it argued, the case was not time-barred.

The California Court of Appeals found that a misappropriation claim against a third party accrues when the plaintiff discovers that defendant's misappropriation.  This does not mean, however, that the plaintiff must have knowledge of all facts supporting a winning claim before the statute of limitations “clock” begins to run.  Rather, the statute of limitations begins to run when the plaintiff “discovers” a cause of action, i.e., when the plaintiff has reason to suspect the factual basis of a claim.  Thus, the proper focus for purposes of the commencement of the statute of limitations is on the plaintiff's reasonable suspicions.  To that end, the Court of Appeal stated, “[T]he plaintiff should not be expected to wait until he or she has direct proof of the defendant’s mental state before filing the lawsuit.” 

Accordingly, the Court of Appeal found that the trial court should have examined when the plaintiff first had any reason to suspect that Circuit Systems' customers obtained DynaSpice knowing, or with reason to know, that the software contained the plaintiff's trade secrets.  This question could not be answered as matter of law, and thus Cyprus Semiconductor was entitled to a jury determination on its statute of limitations defense.  The court returned the case to the trial court.

A. Robert Fischer, Chair of Jackson Lewis's Trade Secret, Non-Compete and Workplace Technology practice group, notes that Cyprus Semiconductor points out a number of issues important to employers beyond that of the statute of limitations.  According to Mr. Fischer, “Many employers don't necessarily think of their business information as being a trade secret.  However, virtually all employers have information they would never willingly give to a competitor.  That information, whether you think of it as being a “trade secret” or not, is entitled to protection.  That protection can be greatly enhanced by fairly simple steps to identify and protect such business information, through agreements with employees, practical steps such as limiting the distribution of or access to certain documents, and requiring terminated employees to return everything from the employer they have, whenever requested to do so by the employer and upon the termination of their employment.”  Jackson Lewis attorneys are ready to assist employers protect business information, from drafting agreements and conducting training about employees' obligations to protect the information, to litigating claims for misappropriation.