In December, 2007, the California Judicial Council published sample jury instructions for trade secret misappropriation claims.  Some of the instructions were revised and others added in April, 2008 (the Table of Contents directs the reader down to Section 4400 of the instructions entitled “Trade Secret”). The instructions raise a number of interesting unanswered questions that are likely to be faced in litigation leading up to, or following, their use.

Section 4400.  This is an introductory section.  It is designed to introduce the jury to the nature of a misappropriation claim.  At one point, the user is instructed to describe the holder of the trade secret, either as an “owner” or a “licensee.”  As the instruction points out, however, no reported California state court decision has addressed whether a licensee has a sufficient interest to assert a claim of trade secret misappropriation.

Section 4401.  This Section deals with the essential factual elements of a claim for misappropriation.  Here the plaintiff must define its trade secret with some particularity, and must also be clear about the theory of misappropriation being asserted in the case.  One example given is that the jury should not be instructed on misappropriation based solely on acquisition (as distinguished from a related disclosure or use) because in “some” cases, the acquisition itself “will not result in damages and will only be relevant to injunctive relief.”  This of course raises the issue of which cases the jury should be instructed on where misappropriation is limited solely to acquisition – if any at all.  See, e.g., Central Valley General Hosp. v. Smith, 162 Cal. App. 4th 501, 528-529, 75 Cal. Rptr. 771, 792 (Cal. App. 2008) (issuance of an injunction based on a claim of threatened misappropriation requires a greater showing than mere possession by a defendant of trade secrets where the defendant acquired the trade secrets by proper means).

Sections 4402 and 4404.  These Sections define what a “trade secret” is.  The definition used comes directly from California’s version of the Uniform Trade Secret Act.  However, while the Act requires that a trade secret be the subject of efforts that are reasonable under the circumstances to maintain its secrecy, Section 4402 excludes this language. However, a later instruction, Section 4404, instructs the jury at length about what means are reasonable under the circumstances to maintain the secrecy of a trade secret.  The Section 4404 instruction gives the jury eight different factors to consider in determining what is reasonable under the circumstances, and then instructs that “the presence or absence of any one or more of these factors is not necessarily determinative.”  Whether just one of these factors may prove to be sufficient to withstand a defense of lack of secrecy remains to be seen.

Section 4412.  This Section, added in April 2008, attempts to define “Independent Economic Value.”  The Judicial Council seems to rely heavily on a 2007 case, Yield Dynamics, Inc. v. TEA Systems Corp., 154 Cal. App. 4th 547, 564–565, 66 Cal. Rptr. 3d 1 (Cal. App. 2007), which held that the value must be more than trivial to the owner and it must be to the owner specifically that the trade secret have value.  But what if the value to the owner is simply not having the trade secret become known?  For example, many companies do not patent their inventions and simply “shelve” them to preclude anyone from having access to the trade secret so as to compete with them.  Is this more than trivial value when the trade secret is not being exploited?

Section 4403.  This Section, entitled “Secrecy Requirement,” instructs the jury that employees and appropriate non-employees (with an obligation to keep the information secret) may have access to trade secrets without destroying their secrecy.  However, the instruction states that the trade secret may only be maintained in the employee context “as long as they [the employees] are instructed to keep the information secret.”  What is left unclear is what will constitute appropriate “instruction” to an employee.  Will a short mention in a long employee handbook do?  Is a specific description in a non-disclosure agreement required?

Sections 4405-4407.  Sections 4405-4407 distinguish between misappropriation by acquisition, by disclosure, and by use.  With respect to misappropriation by acquisition, the instructions state that the court is to also use the instruction found at Section 4408, Improper Means of Acquiring Trade Secret (discussed below).  The rationale for this instruction is that “In some cases, the mere acquisition of a trade secret, as distinguished from a related disclosure or use, will not result in damages and will only be relevant to injunctive relief.  Because generally the jury should only be instructed on matters relevant to damage claims, this instruction should not be given unless there is evidence that the acquisition resulted in damages, other than damages from related disclosure or use.”  However, one could argue that the jury should be instructed on misappropriation by acquisition in order to determine the facts necessary to form the basis for possible injunctive relief, with a separate instruction informing the jury that it may only award damages for misappropriation by use or disclosure (unless the potential facts suggest otherwise).     With regard to misappropriation by disclosure or use, the Judicial Council states that “Each act of misappropriation based on improper disclosure requires that the defendant have ‘knowledge of the trade secret.’ (See Civ. Code, § 3426.1(b)(2).)"  However, no reported California state court decision has interpreted the meaning of "knowledge of the trade secret.”  This possible "comprehension" requirement of a trade secret misappropriation claim may or may not be required.  See J. Kopeikn, "Does the ‘Hear No Evil, See No Evil, Speak No Evil’ Defense Apply Under the UTSA?," New Matter (published by the Intellectual Property Law Section of the State Bar of California), Vol. 33, No. 2, at 10.

Section 4408 and 4420.  Section 4408 attempts to define what are “Improper Means of Acquiring a Trade Secret.”  However, the instruction seems to attack this in the negative by listing at least five means of acquisition that are proper, including independent invention efforts, reverse engineering, obtaining knowledge through a license agreement, observing the trade secret in public use or display, and obtaining the information through published literature.  (These factors are taken directly from the Restatement of Torts, one of the sources cited by the Judicial Council.)  Meanwhile, Section 4420 deals with a related affirmative defense to a claim for misappropriation, i.e. that the information was “readily ascertainable by proper means.”  However, the instruction states that "There is no fixed standard for determining what is ‘readily ascertainable by proper means,’" and goes on to describe only in limited fashion what may constitute proper means.  Whether this instruction will be held to give the jury sufficient guidance is an open question.

Sections 4409-4410.  These instructions deal with damages and unjust enrichment remedies for misappropriation.  The first Section instructs the jury to determine if the misappropriation caused damages, and if not, then whether a reasonable royalty for unjust enrichment is appropriate.  The instruction then states that the court will determine the amount of the royalty.  However, as the Judicial Council points out, “no reported California state court case has directly held that ‘reasonable royalty’ issues should not be presented to the jury.”  Since the amount of an appropriate royalty would seem to be an issue of fact, the instruction might arguably have the issue backward.  Shouldn’t the court be deciding whether a royalty is appropriate, then if so have the jury determine the amount?  Cf. 35 U.S.C. § 284 (allowing jury to determine reasonable royalty rate as damages in a patent infringement action).

Section  4411.  This Section addresses punitive damages.  It appears to be a blend of (1) the UTSA, and (2) California’s laws on the availability of punitive damages, including a  requirement that the willful and malicious conduct be proven by clear and convincing evidence.  See Cal. Civil Code § 3294(a).  However, as the Judicial Council notes, “No reported California state court case has addressed whether the jury or the court should decide whether any misappropriation was ‘willful and malicious,’ and if so, whether the finding must be made by clear and convincing evidence rather than a preponderance of the evidence.”  Will California courts import the state’s general punitive damages law requirement of clear and convincing evidence into the UTSA?

Conclusion.  Many questions are raised and remain unanswered by these relatively new jury instructions.  Furthermore, there appear to be no published cases in which they have been used and tested.  The future remains uncertain for many of the instructions, as plaintiffs and defendants fight in the trenches and trial courts attempt to make new law without significant appellate court guidance.

Authored by:

Robert S. Gerber

(858) 720-8907