NDA’s in the News
Non-Disclosure Agreements/Confidentiality Agreements (“NDAs”) are in the news again this week at the ongoing trial involving Apple, Inc., and Masimo Corp. in California federal court. In 2020, medical device maker Masimo filed suit against Apple, alleging that Apple Inc. lured two key Masimo employees to Apple (“Key Employees”) and thereafter stole Masimo trade secrets and patented technology for use in the Apple Watch. Masimo’s suit alleges that in 2013 Apple initiated discussions with Masimo about collaborating on specific technology to track heart rate, blood oxygen levels, and other indicators and that Apple thereafter began trying to poach Masimo employees. Masimo specifically alleges that after the Key Employees were hired by Apple, they soon began working on the same specific technology for Apple that they had worked on for Masimo, and that Masimo’s patented- protected technology ended up in the Apple Watch Series 4 and 5. Masimo is suing for infringement of 10 of its patents, seeking to replace itself as the owner of five patents belonging to Apple, and alleging misappropriation of trade secrets. Masimo is seeking $3.1 billion in damages from Apple. In 2022 Apple filed a suit of its own vs. Masimo, accusing it of stealing Apple Watch’s technology.
NDA issues came up in trial this week, as Masimo’s chief operating officer testified regarding the security measures Masimo took to protect confidential information and the NDAs that Masimo required the Key Employees to sign. Masimo’s COO detailed to the jury the steps Masimo takes to protect its trade secrets, research and development, and other aspects of its business. These measures include among other things requiring new employees to sign confidentiality agreements as a condition of their employment, restricted access to Masimo’s networks and computer servers, and highly secret and confidential digital drives that only certain employees can access. Masimo’s COO testified that its secret digital drives include the technology at issue in the litigation, and very few individuals at Masimo can access it. Not even the COO or Masimo’s founder and Chief Executive Officer Joe Kiani have access to that drive. At the trial this week, Masimo’s COO testified that before they left for Apple, the Key Employees had access to the secret digital drives, as well as other documents and other sensitive information that was subject to their NDAs with Masimo. The jury heard that the NDA at issue for one of the Key Employees required him to never disclose or use any of Masimo’s confidential information during his employment and after, and to promise that any inventions, works of authorship, development, improvements, or trade secrets developed during his tenure at Masimo would become Masimo’s property after his departure.
The security steps outlined in the Masimo v. Apple trial are commonplace among technology-based companies. Signed NDAs, along with “need to know access” and IT safeguards are regular tools businesses use to safeguard proprietary and confidential information. As long as the confidential matters do not involve workplace harassment or discrimination issues, California courts generally allow the enforceability of NDAs for confidential business, financial, and technical information as “trade secrets,” such as client lists (Gordon v. Schwartz (1956), 147 Cal. App. 2d 213, 217); unpatented inventions (Sketchley v. Lipkin (1950) 99 Cal. App. 2d 849, 854); product plans and designs (Vacco Indus., Inc. v. Van Den Berg (1992) 5 Cal. App. 4th 34, 50); recipes and chemical formulas (Brescia v. Angelin (2009) 172 Cal. App. 4th 133, 151), and more. California’s Civil Code Section 3426.1(d) adopted a modified version of the Uniform Trade Secrets Act (“CUTA”), and includes a definition of “trade secret” that protects a broad array of information as long as 1) the information is not generally known outside of the owner’s organization and control; 2) the owner derives economic value or business advantage by virtue of that secrecy; and 3) the owner makes reasonable efforts under the circumstances to preserve its secrecy. Cal. Civ. Code § 3426.1(d). The CUTSA definition of “trade secret” includes virtually any information, such as a formula, pattern, compilation, program, device, method, technique, or process, if the aforementioned three basic components apply.
To establish a violation of the CUTSA, a plaintiff must show (1) the existence of a trade secret, and (2) misappropriation of the trade secret. Cutera, Inc. v. Lutronic Aesthetics, Inc., 444 F. Supp. 3d 1198, 1205 (E.D. Cal. 2020). The CUTSA defines the “misappropriation” of a trade secret as the acquisition of a trade secret by “improper means,” which includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy.” Id. (quoting Cal. Civ. Code § 3426.1(a), (b)(1)). Misappropriation also means disclosure or use of a trade secret without the owner’s consent. Id., citing Cal. Civ. Code § 3426.1(b)(2)). “Use” includes “soliciting customers through the use of trade secret information.” Id., (citing PMC, Inc. v. Kadisha, (2000) 78 Cal. App. 4th 1369, 1383).
To prove ownership of a trade secret, plaintiffs “must identify the trade secrets and carry the burden of showing they exist.” InteliClear, LLC v. ETC Global Holdings, Inc., 978 F.3d 653, 659 (9th Cir. 2020) (quoting MAI Sys. Corp., 991 F.2d at 522). “Plaintiffs may not simply rely upon `catchall’ phrases or identify categories of trade secrets they intend to pursue at trial.” Id. (citing Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1167 (9th Cir. 1998)). “[A] trade secret may consist of a compilation of data, public sources or a combination of proprietary and public sources.” United States v. Nosal, 844 F.3d 1024, 1042 (9th Cir. 2016). “Expressed differently, a compilation that affords a competitive advantage and is not readily ascertainable falls within the definition of a trade secret.” Id. at 1042. “As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret.” Morlife, Inc. v. Perry (1997) 56 Cal. App. 4th 1514, 1522.
The NDA issues will surely continue to be a focus of the evidence before the jury in the Masimo v. Apple trial and serve as a reminder to businesses with confidential information to review their NDA and proprietary information security practices.
The attorneys at TALG regularly assist our clients with these issues and invite you to contact us with any questions.