Friday, November 22, 2002
State Supreme Court Limits Scope of Protection for Trade Secrets
By a MetNews Staff Writer
A plaintiff who releases a claim for trade secrets misappropriation cannot, under the California Uniform Trade Secrets Act, later sue for a new misuse of those secrets, the state Supreme Court ruled yesterday.
“We conclude that in a plaintiff’s action against the same defendant, the continued improper use or disclosure of a trade secret after defendant’s initial misappropriation is viewed under the UTSA as part of a single claim of ‘continuing misappropriation’ accruing at the time of the initial misappropriation,” Justice Carlos Moreno wrote for a unanimous court.
The ruling, which an intellectual property attorney involved in the case said was not “the end of the world” but would have far-reaching consequences, came in response to a certified question from the Ninth U.S. Circuit Court of Appeals. The federal panel sought the state high court’s assistance in order to resolve an issue raised by Cadence Design Systems, Inc. in an appeal arising from its long-running litigation with Avant! Corporation.
The ruling comes a little more than a week after the two companies, competitors in the field of integrated circuit design automation, announced a settlement of their ongoing dispute. The parties did not ask the Supreme Court to dismiss the proceedings before it.
Avant! agreed to pay Cadence $265 million. In addition, licensing agreements were entered into by Cadence, Avant!, and Synopsys, Inc., which acquired Avant! last year.
The payment is in addition to about $200 million in restitution that was ordered last year after Avant! and several former employees entered into plea agreements in Santa Clara Superior Court. Five of the individual defendants went to jail.
Avant! was formed in 1991 by former Cadence employees. In March 1994, G.C. “Gerry” Hsu left a Cadence vice presidency to become chief executive officer of Avant!.
Hsu resigned that past last year after entering his plea last year. He did not go to jail, but paid a $2.7 million fine.
When Hsu first joined its competitor, Cadence accused Hsu and Avant! of misappropriating trade secrets and other unlawful conduct, and threatened suit. A settlement was eventually negotiated, as part of which Hsu and the two companies entered into a mutual general release.
The June 1994 agreement specifically covered “any anticompetitive activity or unfair competition or trade secret misappropriation” and included an explicit waiver of unknown claims that would otherwise be preserved under Civil Code Sec. 1542.
In the summer of 1995, a Cadence engineer discovered a “bug” in an Avant! program that was similar to one he had inadvertently created several years earlier while writing code for a Cadence product. Prosecutors began an investigation, obtained a warrant to search Avant!’s headquarters, and seized—among other things—a log that showed line-by-line copying of Cadence source code in 1991 by one of the former Cadence employees who founded Avant!.
Shortly after the raid, Cadence sued Avant! on several theories, including misappropriation under the UTSA. But a federal district judge granted a partial summary judgment, agreeing with Avant! that the 1994 agreement barred any claim based on subsequent misuse of a trade secret that was initially misused prior to the signing of the release.
Cadence’s appeal of that ruling led the Ninth Circuit to certify the issue ruled on yesterday by the high court.
Moreno emphasized that the court’s ruling was “narrow,” and that a defendant who continues to misuse a misappropriated trade secret might still be enjoined or face increased liability.
Bernard Burk, a San Francisco attorney who argued on behalf of several technology companies that backed Cadence’s position, said the decision may prove “an impediment to straightforward negotiations when employees change jobs in a competitive environment.”
Daniel H. Bookin of O’Melveny & Myers, who argued for Avant!, was not available for comment.
The case is Cadence Design Systems, Inc. v. Avant! Corporation, 02 S.O.S. 5669.
Copyright 2002, Metropolitan News Company