Letter from AmeriKat I - Trade Secrets and Pie

This past weekend the AmeriKat escaped the chaotically twirling streets of London to the south coast. Besides the golden sun warming her whiskers, the rise of temperatures indicated that summer is finally here and with it will bring a variety of monumental events, including the end of her two-year LPC slog. (picutre, left - the AmeriKat finally taking a break in the sun) But to the AmeriKat, the most important of the summer events is her trip back to the mother land in July. The AmeriKat is already anticipating the very American activities that will be preoccupying her first holiday this year, not least relinquishing her daily work meals of cup o' soups for proper sustenance. She is already salivating over the green chile rellenos to be devoured in New Mexico, the cheesecake to be savoured in New York, and the most American of all the desserts - apple pie in Nebraska. Mmm...pie....

Trade Secrets à la Mode

Pie has also been on the mind of a Californian appeals court, but this time in the form of trade secrets. At the end of April, a district appeals court ruled that that the customers of one company who misappropriated trade secrets from another company are not themsleves liable for that misappropriation.

The case was brought by Silvaco Data Systmes, a software company that develops and manufactures computer applications for electronic design automation (EDA), against Intel alleging that Intel had misappropriated its trade secrets. How? Silvaco's arguement went like this. In 2000, Silvaco filed a lawsuit against rival competitor, Circuit Semantics, Inc ("CSI") alleging that with the assistance of two former Silvaco employees, CSI misappropriated trade secrets in one of their products, SmartSpice, which CSI used in their own product, DynaSpice. Silvaco subsequently won the case against CSI and an accompanying injunction which prohibited the continued use of the technology. Silvaco then brought actions against the purchasers of CSI's software including Intel, claiming that by using CSI's software, these end-users had misappropriated the trade secrets under the California Uniform Trade Secrets Act (UTSA) and other miscellaneous provisions under the Civil Code. Under UTSA misappropriation of a trade secret occurs when a person when a person knows or has reason to know that the trade secret was acquired by improper means and uses that trade secret. Intel argued that running the software only executed the source code and did not therefore 'use' the trade secrets embodied in the source code, nor did executing the source code mean that Intel had acquired knowledge of any trade secrets embodied in the source code.

Before turning to what the court decided, the AmeriKat would like to refer all readers to footnote 2 of the judgment. Herself a keen observer of all things civil procedure, footnote 2 is an almost page-long tirade of the misuse and abuse of replicated court documents. Although the majority of "the case was decided largely on the pleadings" the court stated, "it somehow generated an appendix over 8,000 pages in length. So seldom have so many trees died for so little." The tirade amusingly continues as such which had the AmeriKat giggling on the train all the way to Winchester.

Despite the civil procedure tirade, the three-judge Court of Appeal for the state of California's Sixth Appellate District affirmed the lower court's ruling which affirmed Intel's arguments that executing the software did not constitute misappropriation of any trade secrets in the source code; they themselves could not 'use' an 'invisible' source code when they ran the progam. Because Intel did not therefore 'use' the trade secrets under UTSA, it therefore followed that they could not be liable for misappropriation. In explaining this, the court invoked the pie simile:

"One who bakes a pie from a recipe certainly engages in the "use" of the latter; but one who eats the pies 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. Yet this is substantially the same situation as when one runs software that was compiled form allegedly stolen source code. the source code is the recipe from which the pie (executable program) is baked (compiled)."

The court also held that under UTSA misappropriation required the defendant to acquire "knowedge of the trade secret." Intel did not possess that knowledge because they never had access to the source code, only the product that executed the source code. Pie simile ever at the ready, the court explained:

"Intel appears to have been in substantially the same position as the customer of the pie shop who is accuse of stealing the secret recipe because he bought a pie with the knowledge that a rival baker had accused the seller of using the rival's stolen recipe. The customer does not, by buying or eating the pie, gain knowledge of the recipe used to make it."

A strong factor in the court coming to this decision was the public policy consideration that consumers who use a product cannot be held to 'use' the trade secrets in its composition. Otherwise, every innocent software purchaser (that means you!) would face misappropriation claims which would obviously constitute a chilling effect on innovation.

Christopher Ottenweller, a partner who lead the team representing Intel stated that he thought

"the court drew a very important line that is intended to promote competition by
limiting misappropriation to those entities that are involved in the
misappropriation - not commerical customers who purchase products on the open
market."

Pie and trade secrets never tasted so good....