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Trade Secrets, Bankruptcy and “Standing”

Posted in Trade Secrets

By James Kachmar

In today’s economic environment, bankruptcy is often the only viable option for struggling businesses. In Jasmine Networks, Inc. v. Superior Court (Santa Clara County), the Court faced the issue of whether a bankrupt company could maintain an action for trade secret misappropriation when that company had sold its “trade secrets” in connection with the bankruptcy. The Court concluded that a plaintiff did not have to be the present owner of trade secrets in order to pursue an action for trade secret misappropriation. 

Jasmine developed “applications specific integrated circuits” (ASIC’s) and packet fabric switching. In April 2001, it entered into negotiations with defendant Marvell Semiconductor, Inc. for Marvell to use this technology. Marvell later offered to buy Jasmine’s entire ASIC development group for $40 million. Jasmine claimed that as the negotiations were proceeding, Marvell proceeded to acquire much of its technology through wrongful means, including from Jasmine employees and information that had been provided under a nondisclosure agreement. In late August 2001, Marvell offered only $15 million for Jasmine’s ASIC group.

In September 2001, Jasmine filed an action that, by the time it reached trial, included claims for trade secret misappropriation, breach of fiduciary duty, breach of contract, breach of implied covenant of good faith and fair dealing, tortious interference with economic advantage and unfair business practices. Approximately one year later Jasmine filed Chapter 11 bankruptcy and during the course of the bankruptcy proceedings, proposed to sell all of its assets, including the sale of its ASIC products for $300,000. No one (including Marvell) objected to this sale and it was approved in December 2002. In connection with the sale of its trade secrets, Jasmine specifically reserved its rights to pursue actions for trade secret misappropriation that had commenced prior to the transfer date. On the eve of trial, Marvell raised the issue of “standing” and argued that Jasmine could not proceed with its trade secret misappropriation claim since it was no longer the owner of the alleged trade secrets. The trial court agreed with Marvell and dismissed Jasmine’s complaint with prejudice. Jasmine petitioned the appellate court for a writ of mandate and requested a stay of the trial court’s order. 

The appellate court began by looking at the issue of standing as framed by Marvell. The Court noted that standing under California law differs substantially from Article 3 standing under the U.S. Constitution that is typically at issue in federal courts. Under California law, “every action `must be prosecuted in the name of the real party in interest.’” (Citing Code of Civil Procedure §367.) The Court noted that, unlike federal law, section 367 merely required the action to be maintained in the name of the person who has the right to sue under substantive law. The Court concluded that rather than presenting an issue of “standing;” the issue presented by Marvell was one of substantive law, i.e., “Does the owner of an alleged trade secret lose the right to bring an action for its misappropriation if, after the alleged misappropriation occurs, he sells his remaining interest in the secret to a third party?”

The Court began by noting that in other property-related actions, “one whose property has been wrongfully damaged by another does not lose the right to recover for that damage merely because he has sold the property at the time of suit.” The Court analogized to a typical car accident and concluded that the proposition proposed by Marvell would require the owner of a car involved in a collision to hold onto the damaged car until trial rather than disposing of it at some earlier time. After reviewing similar cases, the Court concluded that there was no dispute under California law that a cause of action for damaged property does not dissipate by the transfer of the property to another.

The Court noted that there was the risk of multiple lawsuits or liability in that both the former and current owner of property, such as trade secrets, could maintain an action for misappropriation. The Court reasoned, however, that the law provides mechanisms to address these concerns, such as the right to joinder or intervention and even in certain cases, interpleader. The Court ruled that “[i]n general then, a former owner who suffered damage to the property while he owned it is a real party in interest for purposes of maintaining an action for damages, and may do so subject to any specific substantive limitations that may be triggered by the circumstances of his claim.”   For instance, a plaintiff is still required to prove damages and the fact that he sold the property alleged to be damaged for the same amount as if it had not been damaged would operate to defeat his claim for damages.

Marvell argued that trade secrets were different from other property and that their sale divests “the seller not only of his property rights in them, but also of any right of action he had as a result of their misappropriation while they were his.” The Court noted that Marvell failed to identify any direct or persuasive authority for this proposition. Rather, Marvell argued that the California jury instructions provided that the first element requires the plaintiff to be either the owner or the licensee of the trade secret. The Court noted, however, that there was a follow up jury instruction that “requires the plaintiff to prove that he `owned’ or `was a licensee of’ the trade secrets at issue.” The Court ruled that the language in the instructions makes clear that  “past ownership – i.e., ownership at the time of the alleged misappropriation – is sufficient to establish this element.” The court reasoned that “the use of the past tense [in this jury instruction] is far more plausibly explained by supporting that its drafters expected the right to recovery to depend on the plaintiff’s relationship to the trade secret at the time of the accrual of the cause of action.”

Marvell also argued that a current ownership requirement in trade secrets case was supported by looking to trademark, patent or copyright cases. The Court rejected these arguments, finding that the substantive law in each of these cases recognized the rights of former or current owners of intellectual property to pursue any necessary action for their infringement. For instance, the Court recognized that a plaintiff could bring an action for patent infringement as long as the action was “maintained by the person who owned the patent when the infringement occurred.” The Court found similar language in relation to copyright infringement cases. In conclusion, the Court found that “so far as we can tell, there simply is no `current ownership rule’ in this or apparently any jurisdiction in trade secret law or apparently in any other field of intellectual property.” 

The Court issued a peremptory writ of mandate directing the trial court to set aside its order dismissing Jasmine’s claims. Thus, under California law, the fact that a plaintiff has sold the trade secrets at issue does not negate that party’s ability to pursue an action for misappropriation as long as the plaintiff owned the alleged trade secrets at the time of the alleged misappropriation.