It’s the Real Deal: California Court Finds Trade Secret Protection for Ideas

4 minute read | May.20.2014

Here’s a small-time Silicon Valley inventor’s worst nightmare: he shops his technology to a large multi-national company, but the company declines to implement his idea as pitched.  Instead, the multi-national company turns around and slaps its own name on the inventor’s concept, and even files its own patents covering that idea.  Of course, the technology giant also fails to give our unfortunate inventor any credit or compensation.

Maybe you think the inventor first should have filed for his own patent before pitching his technology.  Perhaps.  Or, suggests a recent decision of the California Court of Appeal, maybe trade secret law offers an independent solution to his dilemma.  In Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., the California Court of Appeal held that ideas can be protectable as trade secrets.  Accordingly, it affirmed a substantial damages award to Altavion, whose concepts for a digital stamping technology (DST) had been misappropriated by defendant KMSL, a research and development subsidiary of multifunction peripheral (MFP) device manufacturer Konica Minolta Business Technologies.

KMSL had previously considered employing DST into a new MFP technology that KMSL was developing that was designed to self-authenticate printed documents.  As part of negotiations for a proposed business partnership that would develop this new technology, KMSL received extensive confidential disclosures relating to DST from Altavion pursuant to a Non-Disclosure Agreement the parties entered into. Ultimately, the business negotiations between Altavion and KMSL broke down, and KMSL elected not to pursue the business partnership.  Instead, KMSL proceeded to develop its own DST solution. KMSL also continued to file for patents encompassing Altavion’s DST, which it had begun to do even as the parties were still talking – in total, KMSL filed 24 DST patent applications and obtained 8 patents. Altavion was not pleased when it discovered those patent filings, and it sued KMSL for misappropriation of trade secrets in San Mateo County Superior Court.  Altavion prevailed, receiving $1,513,400 in combined damages and prejudgment interest.   The company also received more than $3 million in attorney fees, as well as expert fees and costs.  KMSL then appealed.

KMSL argued that the mere concept of DST did not qualify for trade secret protection.  However, the Court of Appeal pointedly disagreed.  After comparing and contrasting trade secret law and patent law, the Court of Appeal concluded that “if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.”  This was not at odds, the Court said, with the distinction drawn in Silvaco Data Systems v. Intel Corp. between patent protection for an idea and trade secret protection for a fact.  Instead, secret ideas could fall under the definition of “information” in California Civil Code § 3426.1, subdivision (d).

Applying that conclusion to the facts, the Court of Appeal divided the information at issue in the case into three tiers of specificity and secrecy.  The least specific, and hence least secret, level of information was Altavion’s general idea of a barcode for creating “self-authenticating” documents and detecting alterations.  The next step down included the design concepts underlying Altavion’s DST.  And, most specific and most secret, were Altavion’s algorithms and source code.  Although algorithms and source code were unquestionably protectable as trade secrets, that information could not form the basis of Altavion’s trade secrets claim because Altavion had never shared that information with KMSL.

The court thus analyzed whether Altavion’s design concepts qualified for trade secret protection.  KMSL again sought to rely on the Silvaco case, but the court found that Silvaco, while drawing a distinction between source code and software design concepts, only held that design was not a trade secret “to the extent the design elements are disclosed and evident to the end user.”  Because Altavion had disclosed its design concepts only to KMSL, and that disclosure was subject to a NDA, Silvaco did not preclude a misappropriation claim.  In addition, there was sufficient evidence to support the trial court’s finding that Altavion’s design concepts had independent economic value from being kept secret.  The court further found that Altavion’s presentations to third parties did not undermine the finding that the secrecy had been maintained, because Altavion’s presentations only disclosed its general DST concept, not the underlying design details.

In sum, the Court of Appeal affirmed the trial court’s finding that KMSL misappropriated Altavion’s trade secrets, which constituted specific design concepts that Altavion had identified, as well as Altavion’s DST concept as a whole (being a combination of those elements).  The court also affirmed the award of a reasonable royalty, based on the trial court’s finding that neither Altavion’s actual loss nor KMSL’s unjust enrichment was unprovable.  Finally, the Court of Appeal affirmed the award of prejudgment interest and attorney fees.

The Altavion opinion offers a cautionary tale to those who, without compensation, seek to appropriate potentially valuable ideas disclosed in confidential business negotiations.  Indeed, the opinion underscores the wisdom of economist John Maynard Keynes, who once observed:  “The difficulty lies, not in the new ideas, but in escaping from the old ones….”