Arizona trade secret law | Vondran Legal

ATTORNEY STEVE® TRADE SECRETS LAW – ARIZONA (“AUTSA”). GENERAL OVERVIEW!

Most states have a law that protects trade secrets. California, for example, has CUTSA (California Uniform Trade Secret Act). Arizona has the Arizona Uniform Trade Secrets Act (“AUTSA”) found in chapter 4 of title 44 of the Arizona Revised Statutes.

The Arizona Legislature enacted AUTSA in 1990 and adopted most of the provisions of the Uniform Trade Secrets Act, “which codifies the basic principles of common-law tradesecret protection, to govern the resolution of tradesecret issues.” Enter. Leasing Co. of Phx. v. Ehmke, 197 Ariz. 144, 148 ¶ 12, 3 P.3d 1064, 1068 (App. 1999).

AUTSA

AUTSA is largely identical to the Uniform Trade Secrets Act. This blog discusses some of the basics to know about this important law that can help protect a company’s trade secrets from improper misappropriation.

“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that both:

(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Information is a trade secret if it “[d]erives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use” and reasonable efforts are made to maintain secrecy. A.R.S. § 44-401(4). Thus, the two-part test under the AUTSA “focuses on: first, whether the subject matter of the information is secret; and second, whether reasonable efforts have been taken to keep the information secret.” Id. at 106, ¶ 15.

Whether information qualifies as a trade secret is a mixed question of law and fact.

Pricing information

Arizona law does not provide clear answers, making it necessary to look to other jurisdictions for guidance. Courts have routinely held that pricing information qualifies as a trade secret where its economic value depends on secrecy. See PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1270 (7th Cir. 1995)(Pepsi’s marketing, pricing and distribution information found to be a trade secret); Black, Sivalls & Bryson, Inc. v. Keystone Steel Fabrication, Inc., 584 F.2d 946, 952 (10th Cir. 1978)(“confidential data regarding operating and pricing policies can also qualify as trade secrets”); Brocade Comm. Sys. V. A10 Networks, Inc., 873 F. Supp.2d 1192, 1214 (N.D. Cal. 2012)(pricing guidelines “routinely given trade secret protection”). In Sw. Stainless, LP v. Sappington, 582 F.3d 1176, 1189 (10th Cir. 2009), the court found that, under Oklahoma’s trade secret act, pricing information was a trade secret. The Oklahoma legislator’s version of UTSA is identical to the Arizona Act in how it defines trade secrets. Okla. Stat. tit. 78, § 85. The same rubric applies to pricing information as to all other categories of trade secrets. Courts look to see if the information itself actually gives its holder a competitive edge and derives value from not being generally known. When a business has its competitor’s confidential pricing information the business can anticipate the competitor’s moves and project bids. Pepsi Co, Inc., 54 F.3d at 1265; Keystone Steel Fabrication, Inc., 584 F.2d at 952. This court finds other courts’ reasoning persuasive. Accordingly, the court will apply the same standards to pricing information as it does to all other categories of trade secrets. See T K C Aero. Inc. v. Phoenix Heliparts Inc., 2015 Ariz. Super. LEXIS 981, *55-56.

Customer Lists

“A customer list may be entitled to trade secret protection when it represents a selective accumulation of detailed, valuable information about customers — such as their particular needs, preferences, or characteristics — that naturally ‘would not occur to persons in the trade or business.'” Calisi, 232 Ariz. at 106, ¶ 16 (quoting Enter. Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 149, ¶¶ 15-16, 3 P.3d 1064 (App. 1999)). Customer lists also may be protectable trade secrets when a business “compiled the list by expending substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information.” Id. at 107, ¶ 17. Courts also consider whether a customer list gives its owner “a demonstrable competitive advantage over others in the industry” and whether a business has divulged its customer list only to employees or has shared it with outsiders. Id. at ¶ 18-19. See Diazteca Co. v. Palenque Foods Int’l LLC, 2018 Ariz. App. Unpub. LEXIS 663, *10

Pricing information may have particular value when coupled with a confidential customer list. See Calisi, 232 Ariz. at 106-07, ¶ 16 (citing, inter alia, Allen v. Johar, Inc., 308 Ark. 45, 823 S.W.2d 824, 827 (Ark. 1992), and Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 66 Cal.Rptr.2d 731, 735 (App. 1997) (customer lists containing pricing information were trade secrets)). Diazteca Co. v. Palenque Foods Int’l LLC, 2018 Ariz. App. Unpub. LEXIS 663, *11.

A secret that gives “a demonstrable competitive advantage” may be considered a trade secret. Ehmke, 197 Ariz. at 150, ¶ 20. Confidential financial information used to affect pricing and sales decisions can be a trade secret. Id. at ¶ 21. Confidential information regarding pricing policies can qualify as trade secrets. Black, Sivalls & Bryson, Inc. v. Keystone Steel Fabrication, Inc., 584 F.2d 946, 952 (10th Cir. 1978); see also Steinberg Moorad & Dunn Inc. v. Dunn, 136 Fed App’x 6, 13 (9th Cir. 2005). “[T]he ability to predict a competitor’s bid with reasonable accuracy would give a distinct advantage to the possessor of that information.” Black, Sivalls, 584 F.2d at 952. Even out-of-date pricing information could be advantageous to a competitor. Id. See Powers Steel & Wire Prods. v. Walsh, 2021 Ariz. Super. LEXIS 325, *43

“Misappropriation” means either:

(a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.

(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:

(i) Used improper means to acquire knowledge of the trade secret.

(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.

(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

To establish a claim for misappropriation, the plaintiff must prove it has a legally protectable trade secret. Calisi v. Unified Financial Services, LLC, 232 Ariz. 103, 106, ¶ 14 (App. 2013). Not all confidential information is a trade secret. Id. at 109, ¶ 26. See Powers Steel & Wire Prods. v. Walsh, 2021 Ariz. Super. LEXIS 325, *39

The misappropriation of trade secrets claim requires proof of actual loss or unjust enrichment caused by the misappropriation. A.R.S. § 44-403(A); W.L Gore & Assocs., Inc. v. GI Dynamics, Inc., 872 F. Supp. 2d 883, 888 (D. Ariz. 2012) (“Damages are “an essential element of … [a] misappropriation of trade secret … claim[ ],” and a claim fails as a matter of law without a cognizable theory of proximately caused damages.”). Proof of causal damages is also an essential element of the tort claims. See Piner v. Superior Court, 192 Ariz. 182, 185, ¶ 11 (1998).

To cause damage, the wrongdoing “must be ‘a substantial factor in bringing about the harm.‘” Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 32 (App. 1996). Summary judgment is appropriate if no reasonable juror could conclude that the damages were proximately caused by defendants’ conduct. Gipson v. Kasey, 214 Ariz. 141, 143, ¶ 9 n.1 (2007). Damages must not be speculative, remote or uncertain. See Coury Bros. Ranches, Inc. v. Ellsworth, 103 Ariz. 515, 521 (1968). Powers Steel & Wire Prods. v. Walsh, 2021 Ariz. Super. LEXIS 325, *45-46

“Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.

“Person” means a natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency or any other legal or commercial entity.

For a successful Plaintiff, there are many potential remedies including injunctions, damages, and attorney fees in the right case.

Injunctions

44-402. Injunctive relief

A. Actual or threatened misappropriation may be enjoined. On application to the court, the court shall terminate an injunction if the trade secret has ceased to exist, but the court may continue the injunction for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.

B. In exceptional circumstances an injunction may condition future use on payment of a reasonable royalty for no longer than the period of time for which the use could have been prohibited. Exceptional circumstances include but are not limited to, a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.

C. In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.

Damages

44-403. Damages

A. Except to the extent that a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages may include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.

B. If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under subsection A.

Damages for misappropriation are “typically measured by any direct injury which a plaintiff can prove, as well as any lost profits which the plaintiff would have earned but for the infringement.” W.L. Gore, 872 F. Supp. 2d at 888 (quoting Lindy Pen Co., Inc. v. Bic Pen Corp., 982 F.2d 1400, 1407 (9th Cir.1993)). The AUSTA also allows for recovery for unjust enrichment “caused by misappropriation that is not taken into account in computing actual loss.” A.R.S. § 44-403(A). In lieu of damages, the statute also allows for recovery of a reasonable royalty. Id. A reasonable royalty is “based not on the infringer’s profit, but on the royalty to which a willing licensor and a willing licensee would have agreed” at the time of the misappropriation.” See W.L. Gore, 872 F. Supp. 2d at 888. See Powers Steel & Wire Prods. v. Walsh, 2021 Ariz. Super. LEXIS 325, *46

Attorney Fees

44-404. Attorney fees

The court may award reasonable attorney fees to the prevailing party for any of the following:

1. A claim of misappropriation made in bad faith.

2. A motion to terminate an injunction made or resisted in bad faith.

3. Willful and malicious misappropriation.

However, the court has sole discretion in determining the prevailing party for purposes of awarding attorneys’ fees. Id. at ¶ 31. Generally, “when a case ‘involve [es] [sic] multiple claims and varied success’ . . . the [superior] court may use a ‘percentage of success’ factor or a ‘totality of the litigation‘ rubric to determine which party prevailed.” Id. at 134, ¶ 36, 272 P.3d at 365 (first alteration in original) (quoting Berry v. 352 E. Va., L.L.C., 228 Ariz. 9, 13-14, ¶ 22, 261 P.3d 784, 788-89 (App. 2011) (citations omitted)).

For example, in Schwartz v. Farmers Insurance Co. of Arizona, 166 Ariz. 33, 800 P.2d 20 (App. 1990), the plaintiffs’ vehicle was destroyed in an accident. Id. at 34, 800 P.2d at 21. The plaintiffs’ insurer offered to reimburse the plaintiffs $11,000 for the vehicle, but the plaintiffs insisted on $14,000. Id. at 34-35, 800 P.2d at 21-22. Unable to reach an agreement, the plaintiffs sued the insurer for breach of contract and bad faith, id. at 35, 800 P.2d at 22, and requested punitive damages for the insurer’s alleged bad faith. Id. at 38, 800 P.2d at 25. The jury found in favor of the plaintiffs on the breach of contract claim and awarded them $12,000 for the vehicle, but found in favor of the insurer on the bad faith claim. Id. at 35, 800 P.2d at 22. Both parties requested attorneys’ fees pursuant to A.R.S. § 12-341.01(A).5 Id. The superior court, applying a “totality of the litigation standard, found the insurer was the successful party and thus entitled to a fee award. See Covid, Inc. v. Misencik, 2014 Ariz. App. Unpub. LEXIS 337, *21-22

44-406. Statute of limitations

An action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.

The main defenses to trade secret misappropriation in Arizona:

1. There was no trade secret

2. There was no misappropriation by improper means

3. Independent creation

4. Reverse engineering

5. Statute of limitations

6. The trade secret has no value

7. No reasonable steps were taken to keep the trade secret confidential

This is not an exclusive list.

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