Trade Secrets

Whether you can prohibit an employee from using information gained from you in future employment is essentially dependent on if that information can be classified as a trade secret, a term that is somewhat misleading. The term "trade secret" implies a highly protected, extremely secretive method of production and conjures up images of "Secret Formula X" in a guarded vault. In fact, the definition is much more broad in relation to the area of employer confidentiality.

A trade secret is information, including a formula, pattern, program, customer list, device, technique or process that:

  • Derives actual or potential independent economic value from not being generally known to the public or to people who can obtain economic value from its disclosure or use
  • Is the subject of reasonable efforts under the circumstances to maintain its secrecy1

A showing of value, by itself, is not sufficient to satisfy the statutory definition of a trade secret. Other businesses must be unaware of the information and must be able to put that information, if it were known to them, to beneficial use.2

To be considered a trade secret, information must be:

  • Closely guarded
  • An investment of considerable amount of time and expense by the employer
  • Not readily available to the public3

Some examples of trade secrets include:

  • Customer lists that you compiled with a significant investment of time and/or money. Such a list would be a trade secret if you refined a general customer list by noting particular product or other preferences of each customer.
  • A particular method or sequence of manufacturing a product
  • A closely guarded product formula (the Coca-Cola® formula is a classic example)
  • The identity of a source of raw material not generally known in the industry
  • Compensation and other financial data
  • Marketing strategies
  • Labor relations strategies
  • Research into new materials, processes, etc.
  • Pending projects

Inevitable Disclosure

In many states, employers can block employees from going to work for a competitor under the doctrine of "inevitable disclosure." The theory behind this rule is that if an employee is exposed to trade secrets in one job, he/she will inevitably disclose those secrets to a new employer.

In cases such as Whyte v. Schlage Lock Co., California courts have made it clear that the inevitable disclosure doctrine does not apply in California.4 Therefore, in California a former employee cannot be prevented from employment with one of the company's competitors because the former employee might inevitably disclose trade secrets of the first employer.

General Knowledge or Skills Not Protected

A person has a substantial interest in the unrestrained pursuit of his/her livelihood and generally is allowed to change employers and compete with former employers.5 If an employee does not use any of the former employer's trade secrets,6 he/she can use the general knowledge, skill and experience acquired from prior employment and even solicit some of the same clients to better succeed when working for later employers.7

Employees Can Discuss Working Conditions

Employers also need to make certain that their trade secret agreements do not violate state or federal laws that allow employees to discuss wages, working conditions and other terms of employment. For more information, see Confidentiality Policies.

Trade Secret Claims and Required Notice

Employers can pursue claims of trade secret misappropriation in federal and state court.

The federal Defend Trade Secrets Act (DTSA) gives employers another method to pursue claims of trade secret misappropriation in federal court, including the ability to obtain compensatory damages, punitive damages and attorneys' fees.

If you want to use all of the benefits of the DTSA to protect your trade secrets, you must give employees notice that they are entitled to DTSA whistleblower protections. You must notify employees that they are immune from liability under federal or state trade secret law if they confidentially disclose trade secrets for the purpose of reporting illegal conduct to government agencies.8

Employers should include this immunity notice in any confidentiality or trade secret agreement with employees or contractors, including in employee handbook provisions.

  • The DTSA is a new area of the law. Employers with questions regarding protecting trade secrets should seek advice of counsel.

1.Civ. Code secs. 3426-3426.10

2.Abba Rubber Co. v. Sequist, 235 Cal. App. 3d 1 (1991)

3.State Farm Mutual Automobile Ins. Co. v. Dempster, 174 Cal. App. 2d 418 (1959)

4.Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002)

5.KGB, Inc. v. Giannoulas, 104 Cal. App. 3d 844 (1980)

6.Matull & Associates v. Cloutier, 194 Cal. App. 3d 1049 (1987)

7.American Alloy Steel Corp. v. Ross, 149 Cal. App. 2d. 215 (1957)

8.18 U.S.C. sec. 1833