In a comprehensive analysis of the California Uniform Trade Secrets Act (Civil Code §3426 et seq.) (“CUTSA”), the California Court of Appeal recently determined that a seller’s unauthorized use of trade secrets in the creation of its product does not impose liability for misappropriation of the trade secrets on those who merely purchase and use the product, even if the purchasers were on notice of the alleged trade secret theft. Consequently, the court held that a purchaser of an executable version of a software product, created through the seller’s unauthorized use of a third party’s proprietary source code, was not liable for “use” of the third party’s trade secrets.

In Silvaco Data Systems v. Intel Corporation1, the alleged trade secret was Silvaco’s source code for computer applications used to design and simulate electronic circuits and systems. In prior litigation, Silvaco had obtained a judgment against Circuit Semantics, Inc. (“CSI”), a competitor that had misappropriated Silvaco’s source code and used it to create a competing software product. After obtaining its judgment against CSI, Silvaco filed additional trade secret misappropriation claims against CSI’s customers, including Intel, who merely purchased and used CSI’s software product.

Under CUTSA, misappropriation of a trade secret occurs when the defendant acquires, discloses or uses the proprietary information without the consent of the owner. It was undisputed that Intel never had physical possession of the trade secret source code. Nevertheless, Silvaco asserted that Intel’s “use” of the executable object code it obtained from Silvaco’s competitor was an illegal “use” of the trade secret source code because the source code was used to compile the executable software. Silvaco argued that Intel “used” its trade secrets when Intel executed a machine readable version of the code that was misappropriated. The trial court rejected Silvaco’s argument and granted summary judgment in favor of Intel on the CUTSA claim.

The Court of Appeal affirmed the summary judgment after holding that Intel neither acquired nor used Silvaco’s source code trade secrets when Intel purchased a machine-readable version of the software and ran it on Intel’s computers. The court employed a pie analogy to explain its reasoning:

One clearly engages in the “use” of a secret, in the ordinary sense, when one directly exploits it for his own advantage, e.g., by incorporating it into his own manufacturing technique or product. But “use” in the ordinary sense is not present when the conduct consists entirely of possessing, and taking advantage of, something that was made using the secret. One who bakes a pie from a recipe certainly engages in the “use” of the latter; but one who eats the pie does not, by virtue of that act alone, make “use” of the recipe in any ordinary sense, and this is true even if the baker is accused of stealing the recipe from a competitor, and the diner knows of that accusation.

The court agreed with Silvaco’s assertion that a defendant may not escape liability merely because it fails to comprehend the trade secrets it improperly possesses and uses. However, the court held that comprehension was not the issue. It found that Intel never acquired or used any Silvaco trade secrets in the first place.

The court explained that after source code is compiled into machine readable (executable) code the text is not readily intelligible to human beings. Hence, source code for most commercial software products can remain a trade secret despite widespread distribution of the executable code. The court concluded that imposing liability upon those who merely purchased the executable software product – but never saw the source code – was beyond what was intended by the legislature:

Strong considerations of public policy reinforce the common-sense conclusion that using a product does not constitute a “use” of trade secrets employed in its manufacture. If merely running finished software constituted a use of the source code from which it was compiled, then every purchaser of software would be exposed to liability if it were later alleged that the software was based in part upon purloined source code. This risk could be expected to inhibit software sales and discourage innovation to an extent far beyond the intentions and purpose of CUTSA.

Conclusion and Application: The Silvaco decision provides an important safe harbor for customers of companies that may be embroiled in upstream disputes under the Uniform Trade Secrets Act – in California and, presumably, in other states as well. Although customer liability still exists for the acquisition, disclosure or use of the trade secret itself, the Court of Appeal has determined that downstream customers are not liable if they merely purchased a product that a supplier created through use of the trade secret.