Calif. Court Resets Trade Secrets Clock

Zusha Elinson

The Recorder

A California appellate court has clarified when the clock starts ticking for trade secret holders to sue third parties who have acquired their stolen intellectual property.

Three years after filing a suit over stolen computer source code, the subsequently victorious plaintiff also sued the defendant's customers for having acquired the proprietary information. At question was when the three-year statute of limitations had started -- when the plaintiff filed its original suit, or when it won.

The San Jose-based 6th District Court of Appeal ruled that the timer starts when the plaintiff has "any reason to suspect" that the third party knows it received tainted goods. That means that software maker Silvaco, which sued Circuit Semantics Inc. in 2000 and won the trade secrets case three years later, must go back to the trial court to argue the facts in its subsequent suit against Cypress Semiconductor Corp. Silvaco, which sued Cypress in 2003, must establish when it first suspected that Cypress was aware it had purchased stolen IP from Circuit Semantics.

The Friday opinion caught the attention of tech companies and their lawyers because of the frequency of trade secret cases in the industry. Rebecca Edelson, a Steptoe & Johnson IP lawyer, called Judge Eugene Premo's 14-page ruling a mixed bag, with advantages for both sides in a trade secrets fight.

"If you look at trade secret holders, it's a victory in the sense that they can't lose the rights before they know about them," said Edelson, who co-edits the State Bar's book, "Trade Secret Litigation and Protection in California." "On the other hand, it's a victory for the third parties who may be misappropriating trade secrets, in the sense that the court is placing a burden on the trade secret holder to act."

Cypress' attorney, Morrison & Foerster partner Arturo Gonzalez, had argued that Silvaco was time-barred because the company sued Circuit Semantics more than three years before it sued Cypress. But Santa Clara Superior Court Judge Marcel Poché sided with Silvaco's lawyers at Dechert, ruling that the clock started ticking only after the Circuit Semantics matter was decided -- which would have put the losing company's customers on notice that they'd wrongly acquired Silvaco IP.

The dispute had its beginnings in 1998, when Silvaco says one of its former employees began using its SmartSpice code in chip design software made by Circuit Semantics.

Among the customers Silvaco later pursued were Hewlett-Packard and Intel. The Intel case had been dismissed on summary judgment, and the HP suit has been stayed pending the Cypress decision. A number of other Circuit Semantics customers have already settled with Silvaco.

While not shooting down Silvaco's suit, the decision does let MoFo use a statute of limitations defense against the argument at trial.

"They didn't get a win, but they got the opportunity to present the facts to a trier of facts," said Rick Grossman, a Townsend and Townsend and Crew partner who heads his firm's trade secrets practice.

Both sides hailed the opinion in Cypress Semiconductor v. Superior Court (Silvaco Data Systems), 08 C.D.O.S. 6671, as a victory.

"The judges didn't accept every single argument we made, but they made the conclusion that we wanted," Gonzalez said Monday. "You can't do what Silvaco did here -- sit back and wait and then, once the products become profitable, sue." Gonzalez also said that the decision can be used by the other defendants still fighting Silvaco over the same charges. "The same exact statute of limitations argument can be made by the other defendants," he said. "And many of them have a stronger argument because Silvaco sued them later."

Dechert's Jill Kopeikin said it's a victory for her side, because the court adopted much of her client's reasoning in the opinion, and also because the claim isn't time-barred. Kopeikin said the result is that each case will have to be taken individually to determine whether the claims are within the statute of limitations -- something that her side will be able to prove in court, she emphasized.

Randy Kay, a DLA Piper trade secrets lawyer who is co-editor with Edelson of the "Trade Secrets" tome, said it's a ruling lawyers will have to study.

"One message is to evaluate all potential misuse of your trade secrets when you discover misappropriation," he said, "because your claims could become time-barred if you don't investigate."

And yes, Kay and Edelson will add the case to the second edition, due out late this year, Kay said. Look for it in Chapter 7.