by Jason E. Goldstein, Esq.
Buchalter, PC
CMA members possess valuable intellectual property rights. These include “trade secret” information regarding their investors and the “brand name” which is associated with their company. This article will discuss what a trade secret is and the steps necessary to establish and protect a trade secret from misappropriation by others. This article will also discuss what a trademark/service mark is, why obtaining such a “mark” is important to protect a CMA member’s “brand” and how the obtaining of a mark can protect your brand from being exploited by others on the internet.
What Is a Trade Secret?
What is a trade secret? “In short, the test for a trade secret is whether the matter sought to be protected is information (1) that is valuable because it is unknown to others and (2) that the owner has attempted to keep secret.” DVD Copy Control Ass’n v. Bunner, 116 Cal.App.4th 241, 251 (2004).
California Court of Appeal decisions have consistently affirmed the proposition that a valuable customer list that is the result of time, effort and expense on the part of an employer, and is the subject of reasonable measures to protect its secrecy, will be afforded trade secret protection under California law. For example, in Abba Rubber Co. v. Seaquist, (1991) 235 Cal.App.3d 1, 19, the Court of Appeal succinctly explained why a customer list can constitute a trade secret by holding, among other things, that:
“By itself, the knowledge of the identities of the businesses who buy from a particular provider of goods or services is of no particular value to that provider’s competitors. However, that information is valuable to those competitors if it indicates a fact which they previously did not know: that those businesses use the goods or services which the competitors sell.” [Emphasis added]
In the private money world, information about persons who are willing to invest in private mortgage loans and their unique investing criteria (interest rates, points, property type, loan terms, etc.) is of immeasurable value to those who hope to compete in the private money space. The value of this hard-earned business information is priceless. This is why competitors – or soon-to-be competitors – are sometimes willing to take any means necessary to acquire this information – including stealing it.
If a private mortgage lender has acquired its investor information as the result of time, effort and expense, as opposed to mere reference to telephone books and trade directories which are known to all, and the customer information is the subject of reasonable efforts to protect its secrecy, it will be afforded trade secret status entitled to protection under both civil and criminal law. See, e.g., California Penal Code § 499c (criminal misappropriation) and 18 U.S.C. § 1832 (Economic Espionage Act).
How to Establish a Trade Secret?
As discussed above, “the test for a trade secret is whether the matter sought to be protected is information (1) that is valuable because it is unknown to others and (2) that the owner has attempted to keep secret.” DVD Copy Control Ass’n v. Bunner, 116 Cal.App.4th 241, 251 (2004).
The unknown to others portion of the trade secret test is perhaps the most argued by former employees who attempt to get away with stealing their former employer’s trade secrets. Nonetheless, it is important to note that the unknown to others requirement does not mean that trade secret protection is barred if the information sought to be protected is readily ascertainable because the Uniform Trade Secret Act (UTSA) adopted by California omits any mention of a readily ascertainable defense. Abba Rubber Co., 235 Cal.App.3d at 21.
Instead, the unknown to others requirement appears to mean that the customer information sought to be protected must be comprised of information that has been winnowed down from a large universe of potential customers into a smaller list of customers or potential customers that utilize the particular product or service sought to be sold or provided.
For example, in American Credit Indemnity Co., the Court of Appeal found that a trade secret customer list existed when it was the result of time, effort and expense incurred to winnow down a large universe of potential customers to the 6.5% of the customers that actually utilized the service sought to be provided. American Credit Indemnity Co., 213 Cal.App.3d at 630-631.
The secrecy requirement appears to be a little more straightforward. Courts have held that requiring employees to sign a confidentiality agreement is a reasonable step to ensure the secrecy of a proposed trade secret. Whyte v. Schlage Lock Co., 101 Cal.App.4th 1443, 1454 (2002). However, equity can restrain the misappropriation of trade secrets independent of any contract regarding the proposed trade secret. Pasadena Ice Co. v. Reeder, 206 Cal. 697, 702 (1929).
Courts have also held that advising employees of the existence of the trade secret, limiting access to the trade secret to only those persons that need to know, and controlling plant access, are also reasonable steps to ensure secrecy. Courtesy Temporary Services, Inc. v. Camacho, 222 Cal.App.3d 1278, 1288 (1990).
Steps to Take After the Misappropriation of Trade Secrets
In this electronic age where the information contained in an entire computer system can be transferred anywhere in the world with the click of a mouse or downloaded onto a removable storage device and whisked away without drawing any attention, immediate action must be taken to protect the misappropriated trade secrets upon discovery of their theft. This is because once information is disseminated to the general public, it may lose its trade secret protection since the information sought to be protected would no longer be unknown to others.
The UTSA authorizes courts to enjoin actual or threatened misappropriation of trade secrets. See California Civil Code § 3426.2(a). If the information sought to be protected is valuable because it is unknown to others, and reasonable steps have been taken to ensure the secrecy of this information, the proper steps have been taken to immediately file suit upon the discovery of the misappropriation and to seek the entry of a temporary restraining order and the issuance of an order to show cause re: why a preliminary injunction should not be granted.
Obtaining a temporary restraining order followed by a preliminary injunction will provide the victimized former employer with a tool to protect its misappropriated trade secrets from being further disseminated. The possibility of a contempt judgment will hang over the head of the recalcitrant former employee and all of the persons or companies that would seek to use this ill-gotten information.
Moreover, prompt injunctive relief can be critical to a misappropriation of trade secret case since money damages are normally not the end game of such a lawsuit. Instead, the most sought-after end game is normally the protection of the valuable customer information and to prevent its unauthorized use and dissemination by third parties. As stated in Vacco Industries, Inc. v. Van Den Berg, 5 Cal.App.4th 34, 55 (1992), the fact that, “the compensatory damages from defendants’ willful and malicious misappropriation were not substantial may only reflect that they had not yet been successful in financially injuring the plaintiffs and that the injunctive relief, interposed to prevent such harm, was the most significant relief which the plaintiffs sought or obtained.”
What is a Trademark (and what is a Service Mark)?
Everyone has heard of the term “trademark.” But what is a trademark, and does it apply to CMA members?
To begin with, a “trademark” is a, “word, name, symbol, or device, or any combination thereof – (1) used by a
person, or (2) which a person has a bona fide intention to use in commerce and applies to register on the principal register established by this chapter to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.” 15 U.S.C. § 1127.
Since CMA members generally do not sell any products, a trademark may not apply to CMA members. However, a “service
mark” is virtually identical to a trademark and it can provide a CMA member with the protection it needs to prevent the unauthorized use of the CMA member’s brand by a competitor.
The term “service mark” means, “any word, name, symbol, or device, or any combination thereof – (1) used by a
person, or (2) which a person has a bona fide intention to use in commerce and applies to register on the principal
register established by this chapter, to identify and distinguish the services of one person, including a unique service, from the services of others and to indicate the source of the services, even if that source is unknown. Titles, character names, and other distinctive features of radio or television programs may be registered as service marks….”
How Can a “Mark” Protect My Business?
Each CMA member’s company name or logo becomes its “brand.” A CMA member’s brand has value. It is this “brand name” that its customers (investors, borrowers or other brokers) associate with the service they are looking for in connection with obtaining a loan. This “brand name” is also generally what is used for a website address. Having an appropriate mark avails the owner of many protections that it would not otherwise have under the law to protect its brand. For example, if your company name is “Joe’s Loans” and your website is “joesloans.com,” you should get a mark to protect that brand name. If you do, and someone starts a competing company called “Joe’s Loans,” buys the domain name, “joesloans.net” and tries to make its website a replica of yours to fool the public into thinking that the public is actually doing business with you. In that situation, having the mark to “Joe’s Loans” may provide a basis to stop the competitor from making money off your name by trying to confuse the public into believe that they are you.
One such basis is the Anticybersquatting Consumer Protection Act (ACPA) which was enacted to protect the holder of a mark from someone that would attempt to use its name in a domain (website address) in a manner in which it is confusingly similar to a protected mark. 15 U.S.C. § 1125(d). The ACPA provides a basis to get damages and an injunction preventing the use of the confusingly similar domain. See e.g., City of Carlsbad v. Shah (S.D. Cal. 2012) 850 F.Supp.2d 1087, 1114 (granting permanent injunction against “registering, attempting to register, acquiring, owning, trafficking, or using an Internet domain name that is comprised in whole or in part of the Marks
or any other term or phrase confusingly similar to the Marks.”)
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