When it comes to determining liability for stolen trade secrets used by unsuspecting third parties, the question in litigation often becomes who knew what when? It has not always been clear when the statute of limitations for these third-party lawsuits begins ticking. Does it start when the trade-secret owner realizes its stolen intellectual property has been licensed to third parties? Does it begin when the trade-secret owner files a lawsuit against the company that stole the secrets and then licensed them to others? Or does it only begin counting down when third-party users are notified that they possess stolen IP?

In a recent case closely watched in the high tech industry, the California Court of Appeal clarified when the three-year statute of limitations countdown begins. According to the unanimous ruling in Cypress Semiconductor Corp. v. Superior Court, the “statute of limitations on a cause of action for misappropriation begins to run when the plaintiff has any reason to suspect that the third party knows or reasonably should know that the information is a trade secret.” The appellate court’s conclusion overturned a trial court’s decision that found the statute of limitations began when the third party had actual notice of the trade-secret owner’s claim.

Both parties involved in the lawsuit had logical arguments, according to Rebecca Edelson, a partner at Steptoe & Johnson. “On [the trade-secret owner's] side, how can the statute of limitations start before the claim accrues? But the statute is also designed to keep [third] parties from sitting on a claim until the statute expires.”

Stolen Spices
In Cypress, which arises under California’s Uniform Trade Secrets Act, the original trade-secret owner is Silvaco Data Systems, which develops and licenses electronic design automation software. Silvaco maintained a source code dubbed SmartSpice as a trade secret. Beginning in late 1998, a former Silvaco employee then working for Circuit Systems Inc. (CSI) started incorporating SmartSpice code into a CSI product called DynaSpice. CSI then licensed DynaSpice to other companies, including Cypress. When Silvaco began to suspect misappropriation in 2000, it sued the employee and CSI. However, Silvaco did not directly notify CSI customers that it had licensed DynaSpice for use in their own products.

On Aug. 18, 2003, Silvaco and CSI entered into a settlement agreement, which found that DynaSpice used Silvaco’s trade secrets. Under the agreement, CSI was ordered to stop licensing DynaSpice, inform its customers that DynaSpice contained Silvaco’s trade secrets and encourage those customers to stop using the product. Silvaco also began notifying third-party users and demanding they cease using DynaSpice. Silvaco first contacted Cypress in September 2003. When Cypress continued to use the source code, Silvaco filed suit in May 2004.

During the lower-court trial, Cypress raised a statute of limitations defense, arguing that Silvaco should have filed its suit against third-party licensors when it first suspected that those customers had acquired the SmartSpice trade secrets. Silvaco argued that Cypress did not know about the misappropriation until August 2003 and that the statute of limitations does not begin to run until the defendant has knowledge of its wrongdoing, among other criteria. The trial court agreed with Silvaco’s argument. Cypress appealed to the California Court of Appeal, which found the trial court had erred in determining the starting date of the statute of limitations.

In its ruling, the appeals court noted, “The question is: When did Silvaco first have any reason to suspect that a CSI customer had obtained or used DynaSpice knowing, or with reason to know, that the software contained Silvaco’s trade secrets?” Since that question could not be answered as a matter of law, the appeals court sent the case back to trial to allow a jury to consider Cypress’ statute of limitations defense. At press time, no trial date had been set.

Two-Sided Victory
Attorneys for both Silvaco and Cypress have found bright spots in the ruling.
Arturo J. Gonz??lez, a Morrison & Foerster partner who represented Cypress, points to the section of the ruling that found “… the failure of the trade-secrets owner to take prompt action to protect its trade secrets or to alert good-faith acquirers to the existence of its trade-secret claims can serve as a defense in the event the trade-secret owner eventually decides to pursue a misappropriation claim against the third party.”
“If it is a secret, and you know somebody has it, you in effect waive that right to consider it a secret,” he says.

However, Jill F. Kopeikin, a Dechert partner who represented Silvaco at trial, points out that the court also found the California statute in question, Section 3426.6, “imposes no duty upon the plaintiff in such a situation to notify the third party of its claim.”

According to Kopeikin, “There is no such duty [for the trade-secret holder] to give notice.” As for the third parties that end up using the trade secrets, she adds, “you can’t just let the lapse of time give you a free pass.”

That is an argument Silvaco may get to make in court more than once; besides Cypress, several other third-party users of DynaSpice are in litigation with Silvaco. Silvaco’s suit against one of those companies, Hewlett-Packard Co., was stayed until the California Court of Appeal could rule on this issue. According to Kopeikin, a trial date in that litigation had not been scheduled as of press time.