FALL 2008

Trade Secrets


Course No. 9200-704 (and 804)-801

ID No. 16545

MW 3:00 - 4:30 p.m.
Room L-134
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
Copyright © 2000, 2002, 2003, 2006, 2008   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on  Moss, Adams & Co. v. Shilling

1.  The court did not apply California's version of the Uniform Trade Secrets Act because it had only recently been enacted and was inapplicable to the events at issue in the case.  See Cal. Civ. Code § 3426.10 (statute effective only as to misappropriation on or after January 1, 1985).  Therefore the court did not address whether the defendants' clients' names and addresses were "generally known" or "readily ascertainable" within the meaning of the UTSA's definition of "trade secret."  Rather, it applied pre-UTSA precedent.  Would the court have reached the same result under the UTSA?

2.  Note that the court applies a two-step logic.  The first step is to say that the clients' names were not trade secrets because the defendants had developed personal relationships with them.  Many courts have taken a similar approach under the common law, looking for the "center of gravity" of the customer relationship: if the relationship is a personal one with the defendant, then the customer's identify cannot be a trade secret, but if the relationship is primarily with the employer, it may be.  The second step here was to note that, once the clients names were properly known, their addresses were readily ascertainable from the telephone directory.

3.  Does the UTSA provide textual support for the first step?  It says a trade secret is information not "generally known" or "readily ascertainable."  To whom must the information not be "generally known" or "readily ascertainable"?  The UTSA's definition says "other persons who can obtain economic value from its disclosure or use[.]"  UTSA, § 1(4)(i).  But what does this mean?  The phrase "other persons" appears to refer to persons other than the owner of the alleged trade secret.  In this case, the defendants certainly qualify as "other persons[.]"

But does the defendants' knowledge alone make the clients' names "generally known" or "readily ascertainable"?  Surely the word "generally" must have some limiting effect.  Otherwise the defendants' own knowledge would negate trade secrecy in any trade secret case.

Were the clients' names in this case generally known in any meaningful sense?  Would other accounting firms generally know who are the clients of any particular firm?  Would it be easy to find out?  Isn't the universe of potential accounting clients a lot bigger than the universe of manufacturers that ship goods in American Paper and Packaging?

4.  Recall that California has a strong policy, explicitly enshrined in statute, against noncompetition covenants.  See Cal. Bus. & Prof. Code § 16600, discussed in American Paper and Packaging.   If the accounting firm had forced its employees to sign covenants not to compete, this statute would render those agreements unenforceable.  The statute, however, has an exception, inter alia, for agreements to protect the employer's trade secrets.  Was this lawsuit a transparent attempt by the firm to circumvent the statute by calling its client list a trade secret?

If so, the California courts would have a basis for reaching the same result even under the UTSA.  Since the general prohibition against covenants not to compete is of equal dignity with the trade-secret statute, a court could, for example, find the trade-secret claim a sham and apply the general prohibition against noncompetition covenants.

Most states, however, are not like California in this respect.  They do not have broad prohibitions against noncompetition covenants, with narrow and specific exceptions for such things as trade-secret protection.  Instead, most states will enforce noncompetition covenants if they are "reasonable" in duration, geographic extent, and subject matter.  One of the things that may help make a noncompetition covenant seem "reasonable" is a legitimate interest in protecting trade secrets.  Most states thus do not have a strong statutory policy that can "trump" a trade-secret claim in a case like this one.

5.  In a state with no such supervening policy, would/should the plaintiff firm win this case on the ground that its client list is not "generally known".or "readily ascertainable" to other accounting firms?  Or might the defendant still win on the ground that there was no misappropriation?  In answering these questions, would/should it make any difference if the defendants had themselves "recruited" the clients at issue?

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