If you are contemplating selling your business, you should consider having the acquirer sign an agreement not to disclose your company’s trade secrets or to solicit your employees in the event the acquisition is unsuccessful. In Hooked Media Group, Inc. v. Apple, Inc., Apple, Inc. (“Apple”) had recruited several engineers from Hooked Media Group, Inc. (“Hooked”) to work for them after negotiations to acquire Hooked failed. Though the former Hooked engineers developed for Apple “a detailed plan for a . . . system much like Hooked’s version,” the Court of Appeal held that Apple was not in violation of the Uniform Trade Secrets Act (“UTSA”). The Court found that by hiring Hooked’s engineers Apple had not improperly acquired the trade secret information. In line with the Hooked decision, companies must demonstrate the improper acquisition or use of trade secrets, in order to prevail on a UTSA claim. Given California’s public policy prohibiting restrictions on the mobility of employees, an acquiring entity should be asked to sign an agreement not to solicit the employees of the acquiree and not to use trade secret information learned during the acquisition process, should negotiations prove unsuccessful. This is also true for any employers who provide services to clients and are concerned that their clients may solicit their employees to work directly for them.
In its decision, the Court of Appeal found that even though Hooked’s trade secret information inevitably would be relied on by the engineers in their work for Apple, this was not enough to prevail on a claim for misappropriation of trade secrets. The Court declined to find that Apple had improperly acquired the trade secret information by recruiting Hooked’s Chief Technical Officer (“CTO”) and its engineers, after Apple’s attempt to purchase Hooked was unsuccessful. The Court reaffirmed that the inevitable reliance on trade secret information by the CTO and the engineers during their employment with Apple was not a violation of the UTSA in and of itself, without any evidence that the information had been improperly acquired by Apple.
The Court also rejected Hooked’s claim that Apple had violated the UTSA by using information about the makeup and skills of its engineering team that were shared during the acquisition process. The Court found that Hooked could not prevail on this argument, because it had not made “reasonable efforts to maintain the secrecy of the information, as required for a claim under the UTSA.” The Court found that after Hooked had disclosed information about the makeup and skills of its engineering team to Apple during their negotiations after Apple refused to sign a non-disclosure agreement, Hooked could not demonstrate that it had made reasonable efforts to protect its secrecy.
This challenging ruling means that California employers should review both their non-disclosure and non-solicitation agreements in order to attempt to maximize the protections afforded by California law. In order to ensure that trade secret information is protected under the UTSA, which requires that a company make reasonable efforts to protect its secrecy, employers should revisit their agreements and policies. Employers should also ensure that any contracts they have with other businesses contain non-solicitation clauses.
Not sure how to proceed further? Give our office a call so that we might advise you on how to protect your company and its employees.