Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

In Sybase, Inc. v. Superior Court of Alameda County, No. A132541, 2011 WL 5117117 (2011), the Court of Appeal of the State of California First Appellate District found, in an unpublished opinion, that the trial court abused its discretion when it ordered the production of a trade secret source code. The court found that the real party in interest did not meet the evidentiary burden imposed by the California Supreme Court in Bridgestone/Firestone, Inc. v. Superior Court, 7 Cal.App. 4th 1384 (1992) (“Bridgestone”) which set forth the standards governing whether a trade secret must be disclosed in litigation.

Plaintiff in the underlying action, Sybase, Inc. (“Sybase”), a developer of data management software, sued ANTs Software, Inc. (“ANTs”) for, among other things, breach of a written contract and unfair competition arising out of the alleged breach of an employee non-solicit provision.

Sybase sought damages based, in part, on the reduced functionality of its product due to the departure of the key engineer (Mathew) who was solicited. Sybase claimed that because of the engineer’s departure it would never be able to release the product it originally intended to develop and, therefore, it developed a different product (code named “Aries”), which it asserted was much less functional and drew less customer interest.

ANTs sought disclosure of the Aries source code, which the parties agreed was a trade secret, Sybase objected and ANTs moved to compel, claiming that it needed the Aries source code to defend against Sybase’s claims. ANTs supported its motion with, among other things, excerpts from the deposition transcripts of two Sybase engineers, which testimony indicated that certain integration issues were unrelated to Mathew’s departure. Sybase argued, in part, that it needed to examine the source code to determine whether the integration failure issues had anything to do with Mathew’s departure. The trial court issued an order compelling the production of the Aries source code, finding that ANTs could not adequately defend the case without access to the source code. The court subsequently entered a protective order, which set forth specific procedures to protect the source code.

Sybase filed a petition for writ of mandate with the Court of Appeal, which found that ANTs had not met the particularized showing required by Bridgestone. The court noted that in Bridgestone expert testimony showed a review of the trade secret formulas at issue would be “helpful” to the defense of the action, but the expert did not describe with precision how and why the formulas were a “predicate” to his ability to reach conclusions and disclosure was ultimately denied. The Court of Appeal found that ANTs likewise failed to establish with sufficient particularity that the disclosure of the trade secret was necessary for a fair resolution of the action.

 ANTs contended the source code was necessary to determine why its product was not integrated. The court rejected this argument because ANTs failed to demonstrate the source code for Aries would in fact provide the information it sought and because ANTs’ own evidence showed it would be able to obtain deposition testimony that addressed this issue.

The court also found that ANTs did not present sufficient evidence to show that the Aries source code would reflect the extent to which it incorporates or was influenced by another software product, and suggested that that expert testimony could have been submitted to establish that threshold question.

Finally, the court rejected ANTs’ theory that it needed to examine the Aries source code to refute or evaluate Sybase’s claim that the product it had ultimately brought to the market lacked the robust features and was less functional than an integrated product would have been. The court found that ANTs did not have to examine the product’s source code in order to defend against the allegation that the product itself was less functional and that an expert could reach any necessary conclusions about the product’s functionality by examining the product instead of the source code.

Importantly, the court declined ANTs’ request to remand to the trial court with directions, which would have allowed it to present specific expert declaration evidence to establish why the source code was necessary to its defense. The court stated that existing law reasonably identified the applicable standards and it would not grant “a second bite at the apple.”

The take away here is that before a litigant moves to compel trade secret information which it deems critical to its prosecution or defense of a claim, it must fully develop the trial court record and present particularized evidence to establish why the information is relevant and necessary. If it does not, it may not get a second opportunity to do so.
 

Co-authored by Viktoria Lovei.

The Supreme Court of Kansas recently issued an opinion in Wolfe Electric, Inc. v. Duckworth and Global Cooking Systems, LLC, No. 99,536 (Ka. Oct. 21, 2011), a trade secret misappropriation and restrictive covenant case brought by a manufacturer of conveyor pizza ovens, Wolfe Electric, against its former president, Duckworth, and his new conveyor pizza oven company, Global Cooking Systems. At trial, the jury had found in favor of Wolfe Electric on all causes of action, including breach of contract and misappropriation of trade secrets in violation of the Kansas Uniform Trade Secrets Act (“KUTSA”), and awarded it damages in a variety of categories. The defendants appealed the jury verdict on numerous grounds and the Supreme Court reversed the jury verdict and remanded the case back to the trial court. While there were numerous issues before the Supreme Court, the court’s reversal was based on its finding that multiple jury instructions were erroneous. In particular, the Supreme Court held that the jury instructions did not properly conform to KUTSA by allowing defendants to be held liable for misappropriating confidential information when KUTSA only prohibits the misappropriation of trade secrets. The court found that the trial court also erred by providing various instructions which allowed the jury to find defendants liable for actions (e.g., merely forming a competitive business) which were not prohibited by the narrow restrictive covenants in Duckworth’s employment contract. In that regard, the Supreme Court also held that because the interpretation of a contract is a question of law for the court to decide, the trial court erred by allowing the jury to interpret Duckworth’s employment contract.

While not presenting any new substantive trade secret or non-compete issues, the decision reaffirms that erroneous jury instructions are ripe grounds for appeal and potentially reversal and should therefore be scrutinized closely to ensure that they accurately state the law.