The Messy Process of Making and Applying the Law

It was a hot August afternoon in 1984, and I had just finished testifying to the California Senate committee considering a new law, the Uniform Trade Secrets Act (UTSA). I had been sent to Sacramento to support this legislation, which was supposed to provide a “uniform” standard among the states. But some lawyers from the State Bar were pushing for changes that I thought might cause problems. One of these was to remove the requirement that a trade secret owner prove the information was not “readily ascertainable.”

If you’re still reading, well done! You’ve demonstrated your intellectual curiosity. Please keep going; I promise this will not be a dry, academic rant about something that can’t possibly matter to you. Instead, this is a story about the unintended consequences of casual law-making and the ways that courts can amplify those effects without really understanding what they’re doing.

For 150 years before that day in Sacramento, trade secret law had emerged organically from the opinions of individual judges explaining their decisions. This is what we call the “common law,” and it happened at the state level. As a result, the rules about trade secrets varied quite a bit depending on where you lived. This was inconvenient for companies that operated across state lines. So, in an effort to create a national standard, the UTSA was proposed in 1979.

Trying to Harmonize State Trade Secret Law

The flaw in this plan was that the model statute had to be adopted in each individual state, and each legislature was free to fiddle with the language. Quite a few of them did that, and one of them was California. This is what brought me to Sacramento, to try to convince the Senate that there was real value in keeping the statute exactly as it was proposed, to get the benefit of a truly common interstate framework.

Naturally, a key part of the UTSA was to define what could be claimed as a trade secret. It required the owner to prove that the information was not “generally known” or “readily ascertainable by proper means.” In other words, you couldn’t assert a secret if the information was already out in the public domain, or if it could be figured out so quickly that its value from secrecy was trivial. On the other hand, if it would be very difficult or take a long time to “reverse engineer” the information (that is, take it apart or study it to see how it worked), you could assert a right against anyone who had not actually done that reverse engineering in a fair way.

This approach made a lot of sense, and it distilled the rules as they had been developed at common law over the decades. However, the California State Bar representatives opposed the “readily ascertainable” provision. They had seen a decision from an Indiana court applying the new UTSA in that state, where the judge had decided that an insurance company couldn’t protect a customer list because the information could have been easily collected from the individual policyholders. They feared that this interpretation (which as it turned out was not followed by other courts) might be applied in California.

Negotiating a Compromise on ‘Readily Ascertainable’

I tried to convince the Senators that the Indiana case was an outlier, and that we needed the original language of the UTSA in order to discourage frivolous trade secret claims. However – and this is where I learned an important lesson about legislatures – the Senators were not interested in this “fine point,” and they proposed that we go upstairs and find a room to discuss coming to an agreement. Less than two hours later we returned with a deal. The plaintiff would not have to prove that the information was “readily ascertainable,” but the issue was preserved as an “affirmative defense,” meaning that a defendant could assert it to avoid liability. I wrote out the compromise language on a tablet (the paper kind that we had back then) and it was adopted as the official comments to the statute:

The phrase “and not being readily ascertainable by proper means by” was included in this section as originally proposed by the National Conference of Commissioners on Uniform State Laws. It was removed from the section in favor of the phrase “the public or to.” This change was made because the original language was viewed as ambiguous in the definition of a trade secret. However, the assertion that a matter is readily ascertainable by proper means remains available as a defense to a claim of misappropriation.

By this time we had lived the adage that “laws are like sausages; it is better not to see them being made.” (The quote is often attributed, unreliably, to Otto von Bismarck). But the story gets more tangled after passage of the UTSA, when the courts got hold of it. While the legislature didn’t seem to care much about the language in the statute, the courts – rather, some of them – really put it through the meat grinder.

Derailing the Statute with ‘Dictum’

At first it seemed there would be no problem implementing the law. The only change we had made was to shift the burden of proof, so that it was the defendant who would have to prove that something was readily ascertainable, instead of the plaintiff having to prove the negative. It never seemed remotely possible that a court would graft on to the statute an additional requirement to prove not only that the information was “ascertainable” but also that the defendant had in fact ascertained it before the dispute arose.

We should pause here and establish two things. First, a point of English morphology: the suffix “-able” implies possibility. Indeed, dictionaries define ascertainable as “possible to find out” or “capable of being determined.” In contrast, there is no dictionary anywhere that defines “ascertainable” as “having been determined.” That would be nonsensical.

Second, a point of law: you can defend a trade secret claim by proving that you discovered the information through proper reverse engineering, but not by arguing that you “could have” reverse engineered. That is because reverse engineering is hard work. But if getting to the “secret” takes only a trivial effort, that is what we call “readily ascertainable,” and the law will not bother with it, even if you took it, because you “could have” quickly discovered it.

In the first California appellate case to address this portion of the UTSA, American Paper & Packaging Prods., Inc. v. Kirgan, the court denied protection for customer information that, while not generally known to the public, was “readily ascertainable” by others familiar with the business, through a process that “was neither sophisticated, difficult, nor particularly time-consuming.” A few years later another case, ABBA Rubber v. Seaquist, reversed a trade secret injunction for procedural reasons, and that should have been the end of it. But the opinion went on to provide “guidance . . . in the event that any further injunctions” might be considered.

Again, we need to pause for a very brief but important lesson in the law. There is a big difference between what a court says that is necessary to its ruling (the “holding”) and other, more or less gratuitous, observations it might make (the “dictum”). The holding is entitled to respect and sometimes deference; while the dictum is not supposed to matter. This is something you learn in the first few weeks of law school.

Well, the ABBA Rubber court went into dictum in a big way, offering its free advice that “whether a fact is ‘readily ascertainable’ is not part of the definition of a trade secret,” but relates only to an “absence of misappropriation.” Therefore, the court concluded, to take advantage of this exception, the defendant would have to prove not just that the information was ascertainable, but that it had actually been ascertained.

Ignoring State Law in Federal Courts

The court was basically making this up, but because it was just “dictum” it shouldn’t get any respect from other courts; right? Wrong. The federal courts, beginning with the august Ninth Circuit Court of Appeals in Imax Corp. v. Cinema Technologies, embraced the decision uncritically, ignoring both the earlier American Paper case as well as ABBA Rubber’s fractured logic. And once the mistake took root in Imax, it was repeated in several later (unpublished) opinions from the federal district court in Los Angeles: Medtronic Minimed, Inc. v. Nova Biomedical Corp., Extreme Reach, Inc. v. Spotgenie Partners, LLC, Chartwell Staffing Services v. Atlantic Solutions Group, Inc., and Masimo Corp. v. Apple Inc.

Pausing again for another clarifying point: in the United States we have parallel court systems, state and federal. Federal courts can make judgments about state law, but they are supposed to interpret it by following the rulings of the state’s appellate courts.

Here, the federal courts mostly cited each other, making some really big mistakes along the way. They generally ignored the California Judicial Council form jury instruction which describes the correct application of the “readily ascertainable” defense. They dismissed the American Paper case as having been decided before the UTSA, which was forehead-slapping wrong. And they ignored other California appellate court decisions that were consistent with American Paper, including Morlife, Inc. v. Perry, Syngenta Crop Protection, Inc. v. Helliker, and San Jose Construction, Inc. v. S.B.C.C. In fact, the federal judge in Masimo was so intent on waving away San Jose Construction that he incorrectly (and ironically) characterized its holding as dictum, while embracing the ABBA Rubber progeny borne of dictum.

What are the lessons to be drawn here? First, don’t accept as gospel what might appear as “settled law” in judicial opinions. Instead, if the announced rule seems odd, follow it upstream to its source, looking for the place where the process took a wrong turn. Second, as between state and federal courts, look first to the former for interpretation of state law. And third, studies show that the vast majority of direct personal impact on citizens comes from state legislation, not federal. Maybe we should pay less attention to what happens (or doesn’t) in Congress and focus more on what is going on in our state capitols.

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Author: 3dfoto