August 09, 2013
Departing Partners Must Properly Navigate California’s Uniform Trade Secrets Act When Making a Lateral Move to a New Firm
A departing partner must be familiar with and properly navigate California’s Uniform Trade Secrets Act (Civil Code Section 3246 et seq.)(“UTSA”), which governs misappropriation of trade secrets, when informing clients of a move to a new firm. In the seminal 2004 case Reeves v. Hanlon (2004) 33 Cal.4th 1140, the California Supreme Court defined the scope of the UTSA in the context of a law firm partner departure and use of the firm’s client list.
In Reeves, a law firm sued two departed attorneys, alleging, among other things, misappropriation of trade secrets in violation of the UTSA. The trial court found that the departing attorneys had violated the UTSA by misappropriating the firm’s client list, and awarded the firm $22,000 under Civil Code section 3426.3(b), which represented a royalty fee of $10 for each of the 2,200 clients on the list. Defendants appealed and the Court of Appeal affirmed. The California Supreme Court granted review and affirmed.
The Supreme Court’s analysis began with the UTSA section 3426.1(d): “a client list qualifies as a ‘[t]rade secret’ if it ‘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 “[i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (citing Morlife, Inc. v. Perry (1997) 56 Cal.App.4th1514, 1520-1522.) The Court noted that the UTSA violation occurs when a departing attorney misappropriates the client list, for example, to solicit the firm’s clients or to obtain an unfair competitive advantage.
In Reeves, the departing attorneys did not dispute that firm’s client list derived independent economic value from not being generally known, nor that the firm took reasonable efforts to maintain its secrecy. Rather, the departing attorneys argued that no violation of UTSA occurred because the departing attorneys simply mailed professional announcements to clients appearing on the firm’s list.
The Court made clear that merely announcing a new business affiliation after departure, without more, would not constitute a UTSA violation because such an announcement is “basic to the individual’s right to engage in fair competition.” However, the Supreme Court agreed with the trial court’s determination that the departing partners violated the UTSA by using the trade secret client data in an improper manner “to directly solicit clients” and for their “own pecuniary gain to the detriment and damage of plaintiffs.” (Reeves at 1156.) The Court also found there was substantial evidence in the record supporting these findings, including testimony that the departing partners “used the data to solicit a number of plaintiffs’ clients directly by telephone.” Additionally, there was substantial evidence showing that departing partners’ “business announcement caused plaintiffs’ clients, many of whom lacked fluency in English, to believe the [firm’s partner] had died or his firm had gone out of business.” (Id. at 1156.) Because the trial court found that the departing partners’ conduct was not in furtherance of their right to engage in fair competition, the Supreme Court affirmed the trial court’s decision that the departing partners had violated the UTSA.
The Reeves case is a great illustration of how careful a departing partner must be in handling confidential trade secret information, such as its former firm’s client list, when communicating with clients about a lateral move.