In a decision handed down September 6, 2016, the Ninth Circuit revived the notion, long presumed dead, that an implied confidential relationship can arise from the context of a business communication or relationship. While the Ninth Circuit declined to rule on the basis of an implied confidential relationship, it did open the door to future rulings.
Electronic Arts (EA) contracted with Direct Technology (DT) to produce a prototype of a USB flash drive shaped like an object from EA’s game The Sims. Once DT provided EA with its prototype, EA contracted with a third-party manufacturer to produce the flash drive at a lower price. DT subsequently sued EA, alleging copyright and trade secret claims. EA moved for summary judgment on each claim. The district court granted EA’s motion, and DT appealed.
As to the trade secret claim, the district court ruled that no reasonable jury could find that DT “took reasonable efforts to maintain the secrecy of its prototype” as required under California’s trade secret statute California Civil Code Section 3426.1(d)(2). The Ninth Circuit affirmed the lower court’s summary judgment grant as to the trade secret claim under a different rationale that DT had “not presented any evidence that there was value in the secrecy of its design.” Notably, whereas the district court ruled that “no reasonable jury could find that DT took reasonable efforts to maintain the secrecy of its prototype,” the Ninth Circuit questioned that ruling.
The Ninth Circuit mused that DT arguably had fulfilled its duty to maintain the secrecy of its prototype because it “reasonably relied on implicit business expectations that” its prototype would be kept secret. The Ninth Circuit cited decades-old authority Pachmayr Gun Works, Inc. v. Olin Mathieson Chem. Corp. (1974) and Cloud v. Standard Packaging Corp. (1967) to conclude that a determination of confidentiality is a factually intensive determination, and suggested that such a conclusion can be implied. EA argued that California’s trade secret statute effectively overruled Pachmayr, since the statute was passed after the decision, and that the statute required plaintiffs to affirmatively prove that “it made affirmative efforts to maintain the secrecy of its purported trade secret.” The Ninth Circuit disagreed, however, and stressed that plaintiff’s efforts must be reasonable under the circumstances.
The Ninth Circuit stopped short of holding that DT’s actions constituted reasonable efforts to maintain its secrecy, but instead used the facts in Pachmayr to highlight an example of facts that were reasonable: “disclosure to a prospective purchaser to enable him to appraise the value of the secret.” Perhaps ironically, the Ninth Circuit has now impliedly revived the argument that a plaintiff’s efforts to maintain the secrecy of its trade secrets may be inferred from relevant facts.
Going forward, companies should be careful to spell out the nature of information exchanges. This is perhaps especially necessary for industries – such as the video game industry at issue in this case – where joint development is common. Even without a formal confidentiality agreement, the Ninth Circuit is poised to find a confidential relationship where it would make sense for such a relationship to be confidential, even if no formal agreement establishes the confidentiality of the relationship. For instance, if two entities are considering a joint business venture, Direct Technology v. Electronic Arts suggests that any information shared, especially for the purpose of evaluating the favorability of the contemplated venture, would be protected by implied confidentiality. Companies should also note that using shared information, even if it is not the subject of implied or express confidentiality, may lead to copyright infringement, especially under a joint authorship theory. Ultimately, companies should insist on written agreements that clearly delineate the nature of the prospective relationship and the shared information.