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Reminder to Professional Services Firms – Do Not Take Your Trade Secrets for Granted

For most (if not all) professional services firms, client databases, client contact lists, and information reflecting client preferences are regarded by such firms as trade secrets that are essential to the business.  Invariably, businesses identify this type of information as proprietary and trade secret in their employee confidentiality agreements and handbooks and subject them to duties of confidentiality.  However, a recent federal ruling provides an important reminder that the term “trade secret” is a legal term of art subject to strict standards and merely labeling general categories of company information as trade secrets does not make them so—no matter how important the information is to the business.  To be prepared to protect their trade secrets from misappropriation, firms should take inventory of what they regard as their trade secrets and critically assess whether they actually qualify as such, and if not, whether steps can be taken to make them qualify.

In Whiteslate, LLP v. Dahlin (S.D. Cal., July 7, 2021) No. 20-CV-1782 W (BGS) 2021 WL 2826088, a law firm brought suit against its former associate attorney and client, and alleged, among other claims, that, in the process of interviewing with the firm’s client for an in-house counsel position, the former associate attorney and client misappropriated the firm’s trade secret client information.  In support of its trade secret misappropriation claims under both the Defend Trade Secrets Act (“DTSA”) and California Uniform Trade Secrets Act (“CUTSA”), the law firm identified the trade secrets as “contracts, document templates, and other work-product, as well as [the law firm’s] client list and database.”  The former associate attorney and his new employer moved to dismiss the law firm’s misappropriation claims under the DTSA and CUTSA on the grounds that the law firm failed to identify the trade secrets with “the necessary specificity to constitute a valid trade secret.”  Whiteslate, LLP, 2021 WL 2826088, at *6.  The court agreed and found, “Plaintiff merely identifies the alleged trade secret material as ‘contracts, document templates, and other work-product, as well as [the law firm’s] client list and database,’ and recites a boilerplate definition of what constitutes a valid trade secret.”  Id.  The court reasoned these alleged materials merely amount to “catchall  phrases” or “categories of information” that fail to establish a valid trade secret.  The court thus dismissed the law firm’s DTSA and CUTSA claims on this basis with leave to amend the complaint.  Id.

The Whiteslate decision serves as an important admonishment that, no matter how valuable certain information may be to a business, such information can only be protected as a trade secret to the extent the business can identify and articulate its trade secrets with reasonable particularity.  The CUTSA defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Civil Code section 3426.1(d).  The DTSA provides a virtually identical definition.  Most, if not all, professional services firms possess information that likely meets this definition at least in the form of tailored client lists or databases developed over years of hard work and expense.  Given the importance of this information to any business, firms would be well advised to take a detailed inventory of what they consider to be their trade secrets and objectively analyze whether that information meets the legal definition of a trade secret.  By doing so long before litigation arises to protect trade secrets, firms will provide their outside litigation counsel a strong head start to the litigation, which is especially crucial when immediate action is necessary, such as a petition for an immediate temporary restraining order to cease further misappropriation.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 223
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About this Author

Joseph Peacock Employment lawyer Sheppard Mullin
Associate

Joseph Peacock is an associate in the Labor and Employment Practice Group in the firm's San Diego (Del Mar) office.

1.858.720.7493
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