[CERTIFIED FOR PARTIAL PUBLICATION * ]
Trade secret protection "`promotes the sharing of knowledge, and the efficient operation of industry,'" by "`permit[ting] the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it.' [Citation.]" (DVD Copy Control Assn., Inc. v. Bunner (2003) 31 Cal.4th 864, 878 [4 Cal.Rptr.3d 69, 75 P.3d 1] (DVD Copy Control).) Trade secret law allows the inventor to disclose an idea in confidential commercial negotiations certain that the other side will not appropriate it without compensation. "[T]he holder of the secret ... [may] disclose information he would otherwise have been unwilling to share, and [this] permits business negotiations that can lead to commercialization of the invention or sale of the idea, serving both the disclosure and incentive functions of [intellectual property] law." (Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights (2008) 61 Stan. L.Rev. 311, 336-337, fns. omitted.)
Appellant and defendant Konica Minolta Systems Laboratory, Inc. (KMSL), is a research and development subsidiary of a multinational corporation that, among other things, manufactures multifunction printers (also known as multifunction peripherals) (MFP's) and other devices with printing, scanning, and copying functionalities. Respondent and plaintiff Altavion, Inc. (Altavion), is a small company that invented a process for creating self-authenticating documents through the use of barcodes that contain encrypted data about the contents of the original documents. The trial court concluded that KMSL misappropriated trade secrets disclosed by Altavion during negotiations aimed at exploiting Altavion's technology. The negotiations were subject to a nondisclosure agreement and centered around the possibility of embedding Altavion's invention in one of KMSL's MFP's. During the negotiations, the invention was described as Altavion's "digital stamping technology" (DST). After the negotiations failed, Altavion discovered KMSL had filed for patents encompassing Altavion's DST. Altavion brought suit and, following a bench trial, the trial court found KMSL misappropriated Altavion's trade secrets — both Altavion's DST concept as a whole and specific DST design concepts. The court awarded Altavion damages, prejudgment interest, and attorney fees.
On appeal, KMSL contends it was improper for the trial court to base its ruling on misappropriation of Altavion's DST concept as a whole, and any other trade secrets the court found misappropriated were not adequately identified in the court's decision. KMSL further contends Altavion's DST was not protectable as a trade secret, either as a combination secret or as particular design concepts, because ideas and design concepts are not protectable trade secrets. Moreover, KMSL contends Altavion did not show the ideas
From the voluminous record in the present case we set forth only those facts relevant to resolution of the issues on appeal. We recite the facts in the manner most favorable to the judgment and resolve all conflicts and draw all inferences in favor of respondent Altavion. (SCI California Funeral Services, Inc. v. Five Bridges Foundation (2012) 203 Cal.App.4th 549, 552-553 [137 Cal.Rptr.3d 693]; see Pool v. City of Oakland (1986) 42 Cal.3d 1051, 1056, fn. 1 [232 Cal.Rptr. 528, 728 P.2d 1163].) Conflicts in the evidence are noted only where pertinent to the issues on appeal. (Pool, at p. 1056, fn. 1; SCI California Funeral Services, Inc., at p. 553.)
Dr. Ali Moussa is the president and founder of Altavion. He founded Altavion in 2000 with the goal of developing DST to enable the self-authentication of digital and paper documents.
Altavion's DST was designed to encode the content of an original document into a small (maximum one inch by one inch) barcode (also called a "stamp") printed on the document. In order to create the barcode, a scanned
Altavion's barcode, and especially its color barcode, could contain far more data in a small space than existing barcodes. Grayscale or color barcodes, as compared to black-and-white barcodes, represent data with higher density, enabling more data to be represented in a given area. However, the development of a color barcode presented a distinct technical challenge because over time the colors on a printed barcode are subject to degradation, which can inhibit read back of the data contained in the barcode. Altavion resolved this problem by using "color reference cells" to aid in reconstruction of the encoded data. The company's implementation of the approach was unique, in that Altavion's barcode employed multiple reference cells for each color, and by an averaging process a range of values could be determined to represent each color.
Altavion's Relationship with KMSL
KMSL is a research and development company that develops technologies for its parent company, Konica Minolta Business Technologies, Inc., which, among other things, manufactures products including MFP's that can copy,
Altavion was introduced to KMSL through William Zivic, a salesman employed at the time by Minolta Business Solutions. Although the terms of the agreement are unclear, in July 2003 Altavion and KMSL entered into a nondisclosure agreement (NDA), in which the companies agreed that any confidential information disclosed during their subsequent negotiations would be kept confidential.
KMSL's interest in Altavion's DST was in developing technology for authenticating printed documents, rather than for documents that remain only in a digital environment. For a variety of reasons, it is more difficult to authenticate printed documents than electronic documents (an issue known as the "closed loop problem"). For example, an expert for KMSL at trial explained that problems can arise in the printing, storage, and scanning processes that make it more difficult to authenticate a paper document with a stamp.
In a December 15, 2003 letter to Moussa, Tomita wrote, "At [KMSL] we are studying using your unique technology for digital stamping for possible use in multiple applications in current and future products and for jointly developing it further for even better utilization." The parties sought to
KMSL consultant Cattrone assessed evaluation software provided by Altavion and authored a report entitled "Altavion Digital Stamping Software Evaluation." The report concluded, "Altavion is the first available solution for creating a machine readable authentication barcode which can be later used to not only authenticate the document, but on false authenticity locate the areas within the document where tampering or alteration has occurred." In reporting the testing results, the report stated, "In all cases, the verification software was able to successfully authenticate unaltered digital documents. For most cases, when a document was found to be altered and not authentic, the software was able to successfully identify the areas within the document — graphic or text — which had been tampered with." The report also identified further areas for evaluation and stated that Altavion's technology "does contain a number of problems and functional anomalies in its current implementation in both the stamp creation and integrity checking software components."
A February 27, 2004 KMSL project development planning report (February 2004 planning report) articulated KMSL's project development strategy employing Altavion's DST. It stated, "This project will develop a Digital Stamping solution for use as a Konica-Minolta document authentication security technology. The solution will be built as two SDKs — Digital Stamp Creation SDK and Digital Stamp Authentication & Integrity Check SDK.[
The February 2004 planning report distinguished Altavion's digital stamping process from a process patented by a competitor, Canon Inc., stating "The amount of data required to authenticate and verify integrity with the Altavion method is their key differentiating technology. Where as the Canon patent reduces the original document size in its approach to embed 2D barcodes, the Altavion solution does not apply any transformation to the original document as the stamp can be generated as small as ½" × ½"." The February 2004 planning report also included a "[p]atent application plan," indicating that "a patent could be filed which describes an Altavion technology based method for creating self-authentic[ating] with embedded integrity data documents which can be authenticated from digital or print form."
In an April 1, 2004 e-mail, KMSL proposed to pay Altavion a fee for development of an SDK for a KMSL machine and further development of Altavion's grayscale and color barcodes. In e-mail communications on April 21 and 22, KMSL and Altavion discussed the possibility of a $400,000 fee, although it was contingent on an evaluation of Altavion's software. On April 27 and May 11, KMSL paid a total of $50,000 to Altavion for new evaluation software. The new software addressed some of the issues raised and enhancements requested in Cattrone's evaluation of the previous version of the software.
On August 31, 2004, KMSL and Altavion executed a memorandum of understanding (MOU), which stated that KMSL "will continue to recognize that Altavion's unique implementation of [DST] is Altavion's own intellectual property and will continue to protect [it]." Unbeknownst to Altavion, even before execution of the MOU, KMSL had already begun filing a series of patent applications encompassing Altavion's DST.
The trial court ultimately found that KMSL "had no idea, interest or information about DST ... or use of bar codes prior to their dealings with" Altavion. Among other things, the trial court rejected as unreliable the meager evidence that Tomita and Ming independently developed the DST concepts reflected in KMSL's patents. KMSL does not dispute those findings on appeal.
In September 2004, shortly after execution of the MOU, KMSL hired software engineer Pathak to work on the digital stamping project and, specifically, to develop "closed loop technologies." Pathak had access to the evaluation software provided by Altavion. In a September 17 e-mail to Tomita, Cattrone said he had "asked [Pathak] to analyze the Altavion software and think about ways in which we can achieve similar results with the focus on a closed loop digital stamp." He also wrote, "[Pathak] understands and knows well that there are many ways to achieve similar Altavion'esque results within the digital domain." The e-mail also asserted there were problems in the relationship with Altavion. For example, Cattrone opined, "It is unlikely that we will get a digital stamping SDK from Altavion in the near future — our signing of the MOU meant nothing to [Moussa]."
KMSL and Altavion reached an impasse in their negotiations in the fall of 2004. The parties were unable to agree on the terms for KMSL's payment of a development fee to Altavion, or the scope of an SDK to be provided to KMSL.
The Present Lawsuit
In October 2006, Moussa learned about KMSL's patent filings. In November 2007, Altavion filed the present lawsuit. In the second amended and operative complaint (Complaint), Altavion sued KMSL, Cattrone, and four other Konica Minolta entities (see fn. 4, ante). Altavion alleged causes of action for trade secret misappropriation, breach of the NDA, and a variety of other torts. KMSL filed a cross-complaint alleging (among other things) fraud based on Moussa's false statements that he had applied for patents.
By the time of trial, the only remaining Altavion causes of action were for breach of the NDA and for misappropriation of Altavion's trade secrets. The trial court issued a tentative statement of decision in July 2011 and a final statement of decision (FSOD) in November. The court ruled in favor of
The court found in favor of Altavion and against KMSL (but not against the other Konica Minolta defendants) on Altavion's misappropriation claim. The trial court awarded damages of $1 million and prejudgment interest of $513,400, for a total of $1,513,400. After further proceedings, the trial court awarded attorney fees to Altavion in the amount of $3,297,102.50, as well as amounts for expert fees and costs. The court also awarded costs to three of the Konica Minolta companies that had not been found liable for misappropriation.
I. Summary of Trade Secret Law
In 1984, the Legislature "adopted without significant change" the Uniform Trade Secrets Act (UTSA) (Civ. Code, § 3426 et seq.).
II. Standard of Review
We review for substantial evidence the trial court's finding that KMSL misappropriated Altavion's trade secrets. (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514,
We review the trial court's damages award for substantial evidence. (Morlife, supra, 56 Cal.App.4th at p. 1528.) The trial court's attorney fee award "will not be overturned in the absence of a manifest abuse of discretion, a prejudicial error of law, or necessary findings not supported by substantial evidence." (Yield Dynamics, supra, 154 Cal.App.4th at p. 577.)
III. Were Altavion's Trade Secrets Adequately Identified?
As explained in Computer Economics, Inc. v. Gartner Group, Inc., supra, 50 F.Supp.2d at page 985, the rule requiring a plaintiff to describe its trade secrets before the commencement of discovery serves several purposes: it discourages the filing of meritless claims, prevents plaintiffs from using the discovery process to uncover the defendant's trade secrets, assists the trial court in framing the scope of discovery, and "enables defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges." (Accord, Perlan Therapeutics, Inc. v. Superior Court (2009) 178 Cal.App.4th 1333, 1343 [101 Cal.Rptr.3d 211]; Brescia v. Angelin, supra, 172 Cal.App.4th at p. 144; Advanced Modular Sputtering, Inc. v. Superior Court, supra, 132 Cal.App.4th at pp. 834, 836.)
KMSL contends the trial court's judgment must be reversed because both Altavion and the court failed to identify with sufficient particularity the trade secrets KMSL misappropriated. Each claim must be analyzed separately.
A. Altavion Did Not Fail to Adequately Identify Its Trade Secrets.
The cases discussed above and the cases KMSL relies upon on appeal relate to a plaintiff's obligation to identify the allegedly misappropriated trade secrets with sufficient particularity for purposes of discovery and trial. (See Silvaco, supra, 184 Cal.App.4th at pp. 221-222; Perlan Therapeutics, Inc. v. Superior Court, supra, 178 Cal.App.4th at pp. 1343-1352; Advanced Modular Sputtering, Inc. v. Superior Court, supra, 132 Cal.App.4th at pp. 834-836; Diodes, supra, 260 Cal.App.2d at p. 253; Imax Corp. v. Cinema Technologies, Inc., supra, 152 F.3d at pp. 1164-1167; Agency Solutions.Com, LLC v. TriZetto Group, Inc. (E.D.Cal. 2011) 819 F.Supp.2d 1001, 1017-1018; Bunnell v. Motion Picture Assn. of America (C.D.Cal. 2007) 567 F.Supp.2d 1148, 1155; IDX Systems Corp. v. Epic Systems Corp. (W.D.Wis. 2001) 165 F.Supp.2d 812, 816-817.) In the present case, Altavion identified the allegedly misappropriated trade secrets pursuant to Code of Civil Procedure section 2019.210 in a third amended identification (Amended Identification) dated May 20, 2009. On August 27, 2010, Altavion served KMSL with an "Outline of Trade
On appeal, KMSL asserts "no trade secret was sufficiently identified to permit [KMSL] to present a meaningful defense." However, KMSL presents no reasoned argument with citations to authority (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785 [79 Cal.Rptr.2d 273]) that Altavion's Amended Identification or Outline were overly vague or otherwise failed to describe the allegedly misappropriated information with "sufficient particularity" to separate it from matters of general knowledge and to permit KMSL to ascertain "at least the boundaries within which the secret lies." (Diodes, supra, 260 Cal.App.2d at p. 253; see Advanced Modular Sputtering, Inc. v. Superior Court, supra, 132 Cal.App.4th at pp. 835-836.) Instead, KMSL argues the trade secrets identified by Altavion were not the same as the trade secrets the trial court found misappropriated in the FSOD. In particular, KMSL focuses on the fact that, in identifying its trade secrets, Altavion largely did not use the phrase that was used by the trial court — DST — and specifically did not use the phrase in any of the numbered trade secrets still at issue at the conclusion of the trial. KMSL asserts, "[i]nstead, the lists described a multitude of specific algorithms and process steps that Altavion claimed could be used to create barcodes or authenticate documents and which were allegedly implemented in its software." Arguing the trade secrets as described in the FSOD differ from those identified by Altavion is not, however, a claim that Altavion failed to comply with its statutory obligation to adequately identify its trade secrets either before or during trial. KMSL has not shown any error in that respect.
B. The Trial Court Did Not Err in Its Identification of the Misappropriated Trade Secrets.
The heart of KMSL's claim on appeal is that it was improper for the trial court to base its ruling on misappropriation of Altavion's "DST," and that, otherwise, the trial court failed to adequately identify the trade secrets it found had been misappropriated.
1. The Trial Court's Analysis
In the FSOD the trial court frequently used the umbrella term DST to refer to the whole of Altavion's barcode technology. The court explained Altavion's DST was a method of creating "a self-authenticating paper document, through the use of a digital stamp (which is also self-authenticating). It is `unique,' according to [Altavion], in that it could detect alterations as well as show where the alterations had occurred in the document." The court further explained: "A digital stamp is a type of bar code. DST is data represented as an image. [¶] [Altavion's] bar code is not a miniature image of the entire document nor does it digitize all data in an entire document, called `compression.' Rather, it is the `thumbprint' of the document, a form of essential data, which can be used to self-authenticate the document as a true and correct copy of the original document. Part of this process is that the technology `grids' the subject document into squares, and then selects reference information to create the barcode. [¶] According to Moussa, [Altavion's] bar code has three main components: (1) Textual Data, which is the text in the bar code; (2) Statistical Data, which keeps the bar code within one inch by one inch in size ..., and (3) Reference Data. [¶] [Altavion's] technology allegedly does two things: (1) Authentication, i.e., Has the document been altered? and (2) Integrity, i.e., Where has the document been altered?" The court also explained that, in 2002, Altavion created grayscale and color barcodes, which could hold more information than black-and-white barcodes at the same size. Altavion sought to partner with KMSL to embed Altavion's DST in one of KMSL's MFP's.
Prior to analyzing the evidence of misappropriation, the trial court acknowledged the parties had different purposes in developing DST. It explained that Altavion's "focus is a self-authenticating bar code that takes `thumbprint' details from a document for purposes of double-checking document integrity and showing where (if anywhere) the document has been
The trial court ultimately found KMSL misappropriated Altavion's DST, especially through KMSL's patents. The court stated KMSL "used one or more trade secrets of [Altavion] in attempting to create [KMSL's] own DST. Further the Court finds that, at the very least, [11 specified patents and patent applications] disclose or use a trade secret (or component part of a trade secret) of Altavion." The trial court described the secret information provided by Altavion to KMSL as "information ... regarding its DST technology." In addition to finding KMSL misappropriated Altavion's DST concept as a whole, it is also clear, as detailed below, the trial court found KMSL misappropriated particular design concepts identified in Altavion's Amended Identification and Outline, especially aspects of trade secrets 1B, 1C, 2, and 12.
2. Misappropriation of Altavion's DST as a Combination of Design Concepts
As explained above, the trial court found KMSL misappropriated Altavion's DST concept as a whole, both by using Altavion's DST in developing KMSL's own DST and by disclosing aspects of Altavion's DST in 11 of KMSL's patents and patent applications.
KMSL's primary argument on this point is that DST "was never identified [by Altavion] as a misappropriated trade secret" and the trial court's finding that KMSL misappropriated Altavion's DST means the court found "[KMSL] misappropriated something else that wasn't on the trial list." The thrust of the argument is that the trial court's finding of misappropriation of Altavion's DST was not "fair" and frustrated KMSL's right to "mount a defense." It is true Altavion's Amended Identification and Outline did not identify "DST" as a combination trade secret, but it is disingenuous for KMSL to suggest it was unaware what the trial court meant in referring to Altavion's DST. As we noted earlier (fn. 2, ante), the parties regularly used the term "DST" during negotiations and during the litigation to describe the technology KMSL sought to obtain from Altavion. The Complaint alleges, in paragraph 13 of the general allegations, that Altavion "has created and perfected a novel set of digital document security platform technologies, which are the first of their kind to provide the dual functionality of document authentication via the use of novel stamp embedding techniques and document integrity assessment via novel tamper detection techniques. [Altavion's] proprietary digital document security platform technologies are collectively referred to as Digital Stamping Technology (`DST' or `DST Platform')." Paragraphs 48 and 49 of the misappropriation cause of action explained that Altavion's "DST Platform" and "DST Solutions Suite" were "collectively referred to as `Trade Secrets,'" and alleged the defendants "misappropriated portions of [Altavion's] DST
Although the Amended Identification and the Outline did not list "DST" as a misappropriated trade secret, KMSL does not explain in what ways the concepts the court identified as Altavion's DST differ from the trade secret concepts identified by Altavion that were the subject of the proceedings in the case. KMSL does not show "Altavion's DST" as described in the FSOD differs from the digital stamping concepts described in Altavion's Complaint, Amended Identification, or Outline. Neither does KMSL show "Altavion's DST" as described in the FSOD differs from the digital stamping concepts that were the subject of evidence and argument presented at trial.
KMSL denies this is "a debate about semantics." However, absent a failure of proof supporting the trial court's findings, and absent legal authority and reasoned analysis why the trial court's findings deprived KMSL of a fair trial, KMSL has failed to show the trial court's determination it misappropriated
3. Misappropriation of Particular Design Concepts Underlying Altavion's DST
In any event, the trial court adequately identified the particular DST design concepts misappropriated by KMSL. KMSL asserts the FSOD "does not find — and given the absence of any evidence could not have found — that any alleged trade secret on Altavion's trial list meets the statutory definition of a `trade secret.'" KMSL is mistaken. Although the FSOD does not analyze each aspect of trade secrets 1B, 1C, 2, 4, 12, and 15 and identify whether each of those aspects was misappropriated by KMSL, the FSOD does identify specific aspects of the identified trade secrets that were misappropriated by KMSL.
In the FSOD, the trial court described KMSL's patent applications and patents and then found, "at the very least ... Patent '769 (and related Patent Application '224), Patent '855 (and related Patent Application '229), Patent '865 (and related Patent Application '563), Patent Application '608, Patent Application '621, Patent Application '035, and Patent Application '138 disclose or use a trade secret (or component part of a trade secret) of Altavion."
The FSOD describes Patent Application '608 as a method to preserve the integrity of barcode colors through the use of color reference cells, demonstrating the trial court found KMSL misappropriated Altavion's idea for using color reference cells to preserve the integrity of the colors of the barcode.
The trial court's findings also reflect its determination that KMSL's patent applications and patents misappropriated other aspects of Altavion's DST design, including at least the process steps of scanning a page to locate blank space available to locate a barcode (Patent '769 and related Patent Application `224; Patent Application '035); partitioning the image of a document into a grid of cells (Patent '865 and related Patent Application '563); using compression to encode data representing a document's contents in a digital stamp (Patent Application '035; Patent '769 and related Patent Application `224; and Patent '855 and related Patent Application '229); and, in detail, using a barcode to authenticate a document by detecting alterations and indicating the locations of the alterations (Patent Application '621 and Patent Application '035).
4. Conclusion Regarding Adequacy of the FSOD
IV. Did Altavion's DST Design Concepts Constitute Protectable Trade Secrets?
As noted previously, the UTSA defines a "`[t]rade secret'" as "information, including a formula, pattern, compilation, program, device, method,
A. Ideas Are Protectable as Trade Secrets.
As explained below (pt. IV.B., post), the trade secret information at issue in the present case is principally comprised of the design concepts underlying Altavion's DST. In the words of the trial court, "the issue is whether [KMSL's] ideas set forth in the patents and patent applications are founded upon and disclose any trade secret `ideas' [it] learned from [Altavion]." Because the trade secret information at issue in this case is a set of ideas rather than a set of products or specific formulae, it is important to address KMSL's assertion in its brief on appeal that "[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets."
Although KMSL fails to provide a citation for that assertion, KMSL proceeds to quote language in Silvaco drawing a distinction between patent law and trade secret law. Silvaco explained, "The sine qua non of a trade secret ... is the plaintiff's possession of information of a type that can, at the possessor's option, be made known to others, or withheld from them, i.e., kept secret. This is the fundamental difference between a trade secret and a patent. A patent protects an idea, i.e., an invention, against appropriation by others. Trade secret law does not protect ideas as such. Indeed a trade secret may consist of something we would not ordinarily consider an idea (a conceptual datum) at all, but more a fact (an empirical datum), such as a customer's preferences, or the location of a mineral deposit. In either case,
B. Design Concepts Underlying Altavion's DST Constitute Protectable "Information."
As explained in greater detail post, the information at issue in the present case can readily be divided into three tiers of specificity and secrecy. The least specific and least secret level of information is Altavion's general idea for a barcode allowing for self-authentication of documents with identification of alterations. This level of information is not a protectable trade secret because the general idea was disclosed to other companies without the benefit of an NDA. At the other extreme, the most specific and secret level of information includes Altavion's algorithms and source code that execute Altavion's DST.
The middle tier of information is comprised of the design concepts that underlie Altavion's DST, many of which might be evident to a software end user. There is no evidence such information was disclosed to anyone other than KMSL, pursuant to an NDA, and, thus, misappropriation of these secret design concepts (separately and in combination) provides a basis for Altavion's claim.
1. Altavion's General DST Idea Was Not Secret.
The first disclosure of Altavion's general DST concept involved a demonstration by Altavion of its black-and-white barcode in Saudi Arabia to the Saudi Chamber of Commerce in September 2002. Altavion did not have an NDA with that group. Moussa testified he demonstrated document authorization with a black-and-white stamp as embodied in trade secret 1A. Trade secret 1A, which is a method for "captur[ing] document text as it is being created in real-time and encod[ing] it into a barcode," was not one of the secrets for which Altavion claimed misappropriation at trial. Moreover, Moussa testified he demonstrated the creation of a barcode using this method, but he never explained how it was done or "the details of doing it."
The second disclosure of Altavion's general DST concept involved a June 2003 demonstration by Altavion to KMSL of "paper stamp software" embodying trade secrets 1C, 4, and 12. Altavion and KMSL had not yet executed an NDA. But Moussa explained that the software demonstration showed the results of the process, but not the steps or details of how to make the stamp. He explained it "was just to show to them results rather than to explain details.... And that is needed when you sell something, otherwise you will continue to keep it for yourself and not being [sic] able to sell
The third disclosure of Altavion's general DST concept occurred when a salesperson named Phil Thoren made a presentation to testing company Harcourt Educational Measurement regarding Altavion's DST, apparently without an NDA. Moussa admitted the presentation was based on information obtained from Altavion, but he denied authorizing the presentation. The presentation to Harcourt stated that "Document Stamping is a mechanism to bind the content, physical and digital signatures and user authentication in both electronic file and paper form." The presentation described the size of the stamp; that the stamp contains a time stamp, image metadata, and a digital signature; and that the stamp "Detects any change" with "Single Pixel resolution @ 8 bit grayscale color depth." As noted previously, there is no indication the trial court found that KMSL misappropriated trade secret 4, which related to the application of DST to test forms. (See fn. 18, ante.)
In the fourth disclosure of Altavion's general DST concept, Moussa, in June 2005, sent Microsoft a presentation about Altavion's DST without the protection of an NDA. The presentation described Altavion's process for producing "[s]elf-[a]uthenticated [d]ocuments" with the ability to detect and identify alterations. A page captioned "What is Inside a Stamp?" contained an image of an Altavion barcode on a document, a blownup image of the barcode, and an indication that the barcode contained "[d]ocument metadata" and "[a]dministrative [d]ata," with examples of types of administrative data, such as a time stamp or an account number.
Finally, in May 2006, Moussa e-mailed a presentation regarding Altavion's DST to Wachovia Bank without the protection of an NDA. Moussa testified the presentation showed images of Altavion's barcode on documents, and a "[g]lobal view of what the barcode will contain." The presentation also asserted the barcode would permit alterations to be detected and identified.
Thus, the evidence in the record demonstrates that, although Altavion disclosed to several entities its general concept for implementation of DST, it did not provide details about the design concepts underlying its DST, much less provide demonstration software as it did to KMSL. Accordingly, although Altavion could not base its misappropriation claim on its general DST
2. Design Concepts Underlying Altavion's DST Are Protectable.
KMSL argues Altavion's DST design concepts are not protectable trade secrets, characterizing Silvaco, supra, 184 Cal.App.4th at pages 221-222, as standing for the proposition that "although a finished product might have distinctive characteristics resulting from a specific design, those characteristics cannot constitute trade secrets." KMSL is mistaken. Silvaco merely held that the design of a software program is not a trade secret to the extent the design elements are disclosed and evident to the end user. The plaintiff in that case, Silvaco, was the developer of software used to design electronic circuits and systems. (Id. at p. 216.) Silvaco filed suit against the defendant, Intel, alleging Intel had misappropriated certain trade secrets used by Silvaco in its software. (Ibid.) "The primary gist of the claims was that Intel had used software acquired from another software concern with knowledge that Silvaco had accused that concern of incorporating source code, stolen from Silvaco, in its products." (Id. at pp. 215-216.) The main issue in the case was whether Intel could be liable for misappropriation of Silvaco's source code where it never had access to the actual source code. (Id. at p. 220.) As relevant to the present case, Silvaco also held that one category of purported trade secrets — described as "various features, functions, and characteristics of the design and operation of Silvaco's software products" — did not include trade secrets at all. (Id. at p. 221.) That was because those software design concepts ceased to be protectable trade secrets to the extent the finished
Thus, Silvaco makes a distinction between source code and software design concepts, concluding design concepts are not protected by trade secret law where they can be ascertained by the end software user. A California federal district court summarized Silvaco on this issue as follows: "Plans, flows, inputs, outputs, rules of operation, priorities of operation, and the like are not trade secrets to the extent they are manifest in the way a program works. [Citation.] In other words, background information comprising, for example, the features and functions, the business requirements and the high level design specifications that are incorporated into software and are evident in the operation of the software are not trade secrets. While source code is undoubtedly a trade secret, the way the source code works when compiled and run is not." (Agency Solutions.Com, LLC v. TriZetto Group, Inc., supra, 819 F.Supp.2d at p. 1017; see id. at pp. 1019-1021 [following Silvaco in rejecting claims that software workflow processes that would be apparent to users are trade secrets]; IDX Systems Corp. v. Epic Systems Corp., supra, 285 F.3d at p. 584 ["details that ordinary users of the software could observe" are not trade secrets]; LinkCo, Inc. v. Fujitsu Ltd. (S.D.N.Y. 2002) 230 F.Supp.2d 492, 499 [holding, as a matter of law, that the plaintiff had not established the existence of a trade secret where the alleged secret was only the "software architecture," which "cannot remain secret once it is marketed"].)
Similarly, in Burroughs Payment Systems, Inc. v. Symco Group, Inc., supra, 2012 WL 1670163, the claims involved the plaintiff's check processing business and "password protected diagnostic software that is stored on scanning equipment provided by" the plaintiff to customers. (Id. at p. *1.) The plaintiff alleged the defendant, a competitor, had used the diagnostic software in servicing the plaintiff's customers' equipment. (Ibid.) Applying California's UTSA, the federal district court held the plaintiff had properly alleged the existence of a trade secret because "the trade secrets at issue are not by necessity available to the public once the software (or the equipment containing it) is placed on the market; rather they can only be accessed by authorized individuals by entering a password." (Burroughs, at p. *15, italics omitted.) The court characterized the alleged trade secrets as the improperly accessed "materials and screen images ... rather than the source code." (Id. at p. *16; see Rivendell Forest Products v. Georgia-Pacific, supra, 28 F.3d at p. 1046 [extending trade secret protection to "combination of concepts and ideas" implementing the plaintiff's customer service software system]; AirWatch LLC v. Mobile Iron, Inc. (N.D.Ga., Sept. 4, 2013, No. 1:12-cv-3571-JEC) 2013 WL 4757491, pp. *3-*4 [distinguishing Silvaco, rejecting contention that only underlying "source code" protectable, and concluding that software functions and specifications were potentially protectable where the plaintiff allegedly required licensees to sign confidentiality agreements]; Dickerman Associates v. Tiverton Bottled Gas (D.Mass. 1984) 594 F.Supp. 30, 35 ["[T]he particular combination of procedures used in [the] plaintiff's [computer] system, and the particular features within the system ... are neither obvious nor easily duplicated. They constitute a trade secret."].)
In the present case, although the trial court extended trade secret protection to design concepts analogous to those at issue in Silvaco, we conclude Silvaco does not preclude Altavion's misappropriation claim because the evidence shows that Altavion did not disclose its DST design concepts to anyone other than KMSL, and the disclosure to KMSL was subject to an NDA.
C. Substantial Evidence Supports the Trial Court's Finding Altavion's DST Design Concepts Had Independent Economic Value.
KMSL also argues there was no evidence supporting the trial court's finding that Altavion's DST had potential economic value. Revealingly, KMSL does not make any serious effort to argue that advancements in DST in general, or Altavion's advancements in particular, lack inherent economic value. Any such contention would be belied by the serious interest KMSL showed in Altavion's DST and the effort KMSL put into obtaining patents covering Altavion's DST. On this issue, the trial court stated, "That it has at least `potential' `economic value' is demonstrated by the fact that [KMSL] engaged in filing multiple patent applications on bar code technology after learning from [Altavion]." (See Enterprise Manufacturing Co. v. Shakespeare Co. (6th Cir. 1944) 141 F.2d 916, 920 ["The argument of appellee that the improvement disclosed in the patent under consideration was without value, or of only nominal value, was rightly rejected. The appellee, by infringing use, has paid tribute to the utility of the device infringed."].) We agree this is relevant circumstantial evidence of value, and KMSL cites to no contrary
Furthermore, there is evidence Altavion invested substantial time and effort in developing its DST. In particular, Moussa testified Altavion's eight to 10 software engineers developed the black-and-white document authentication barcode over a period of four or five months, starting in February 2002, and the company finished development of the color barcode in December 2002 or January 2003. There was also evidence KMSL paid Altavion $50,000 for evaluation software; invested staff time in trying to develop a deal with Altavion; and devoted resources to analyzing the Altavion software in order to develop its own DST that would, in the words of Cattrone, achieve "Altavion'esque" results. All of these investments of resources support the court's finding. (See Courtesy Temporary Service, Inc. v. Camacho (1990) 222 Cal.App.3d 1278, 1287 [272 Cal.Rptr. 352] [holding that "a customer list procured by substantial time, effort, and expense is a protectable trade secret"]; accord, ReadyLink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, 1020 [24 Cal.Rptr.3d 720]; see also Mattel, Inc. v. MGA Entertainment, Inc. (C.D.Cal. 2010) 782 F.Supp.2d 911, 972 ["[i]ndependent economic value can be evidenced by `circumstantial evidence of the resources invested in producing the information'"]; cf. Learning Curve, supra, 342 F.3d at p. 728 [although "significant expenditure of time and/or money in the production of information may provide evidence of value ...," it is not required].) Finally, Moussa's secrecy (see pt. IV.B., ante) regarding the details of Altavion's DST reflects Moussa's own assessment of the information's value, which further supports the trial court's finding. (See Morlife, supra, 56 Cal.App.4th at p. 1522 [a company's effort to maintain the secrecy of information is "an important factor in establishing the value which was placed on the information and that it could not be readily derived from publicly available sources"].)
Finally, there was evidence before the trial court that, if successfully implemented, DST could be very lucrative because of potential applications in many different industries. A June 2005 marketing consultant's report prepared for KMSL emphasized the worldwide impacts of document fraud and discussed the potential to apply document authentication methods in trade, national security, immigration, government documentation, pharmaceutical, casino, and a range of other industries and contexts. It stated there was a need to develop "new methods of document authenticity" to address the problem of easy digital manipulation of documents. Former Minolta Business Solutions salesman Zivic testified he thought the "pay-per-scan" concept
All of the above analysis on the independent economic value element is applicable to both Altavion's DST viewed as a protectable combination of elements and to the previously identified specific design concepts underlying Altavion's DST. (See pt. III.B., ante.) Regarding the misappropriated design concepts, because those concepts represented the heart of Altavion's DST concept as a whole, it was reasonable for the trial court to infer that the potential economic value was ascribable to those elements. Substantial evidence supports the court's finding that Altavion showed its alleged trade secrets had independent economic value.
D. Conclusion Regarding Merits of Misappropriation Claim
V. Trial Court's Damages Award
Altavion conceded during its opening statement that it could not prove it had actual damages, and the trial court found Altavion had not proven any actual loss. The court reasoned, "The evidence that [Altavion] would have a working software product embedded in [KMSL's] hardware machines, and successfully sold for years at a profit, under the circumstances, is highly speculative and uncertain, and the revenue projections are unreliable."
The trial court then acknowledged the next step was to determine whether a reasonable royalties award was appropriate, quoting Ajaxo, supra, 187 Cal.App.4th 1295, for the propositions that "where the defendant does not make any profit, reasonable royalties could be awarded" (id. at p. 1312) and "[w]hen calculating a monetary remedy for the past use of a misappropriated trade secret, a court `may order' reasonable royalties `[i]f neither damages [for actual loss] nor unjust enrichment caused by misappropriation are provable'" (id. at p. 1308). The court then quoted extensively from Ajaxo and other authorities regarding the standards for determining the amount of a reasonable royalty.
Ultimately, the court found, "whether properly characterized as unjust enrichment or (because [KMSL] made no profit and the exact amount of the value or benefit to [KMSL] is not easily subject to calculation) as reasonable royalties, the [c]ourt would award the same amount of damages." The court proceeded to list a number of circumstances that it had considered, "including but not limited to the fact that [KMSL has] not used the trade secrets in any product; [KMSL does] not presently have any viable software to produce a DST for Closed Loop or for self-authentication; [KMSL] attempted to obtain the trade secrets of [Altavion] without having to pay for them ... and when this did not occur [KMSL] attempted to create its own DST technology by piggy-backing upon all of the DST knowledge and information [KMSL] had received from [Altavion]; that [KMSL] expended [its] own resources thereafter to try and develop the DST technology ... but were unable to actually achieve Closed Loop results or achieve DST matching that of [Altavion]; that [Altavion] spent years developing its technology at its own expense; that the parties discussed development of an SDK or other means by which [Altavion] would further develop its DST technology to be used for Closed Loop, at a price range of $400,000 to $500,000, and then potentially entered into a commercial agreement to sell a product together with revenue sharing of some sort; that [KMSL's] expert opined that the R&D costs incurred by [Altavion] for the DST were approximately $660,000, and would be approximately $1.2 million if it included the unpaid `salary' of Moussa; that the unpaid `salary' of Moussa was ... not an amount negotiated at arm's length; that the Altavion records internally regarding financials and technology and externally regarding the communications and transactions between the parties are not reliable or are incomplete; that [Altavion] still retains its core trade secret(s); and that there is presently no market for [Altavion's] technology or for [KMSL's] patented DST ideas." The court awarded Altavion damages of $1 million, "as the equitable value of the trade secrets misappropriated at the
Furthermore, although KMSL asserts "there is no basis for a royalty award," KMSL does not actually provide any reasoned argument on that issue with citations to the record and supporting authority. (Badie v. Bank of America, supra, 67 Cal.App.4th at pp. 784-785.) That is, KMSL does not address the specific evidence cited by the trial court in justifying its damages award and explain why that evidence was insufficient to support the award under the reasonable royalties measure of damages. KMSL has failed to establish a basis to reverse the trial court's damages award.
VI. Trial Court's Award of Prejudgment Interest
The trial court found $1 million was the value of the misappropriated trade secrets "at the time of the misappropriation commencing in late June 2004" and awarded "prejudgment simple interest of 7 [percent] per annum" from that date. KMSL contends the trial court erred in awarding prejudgment interest.
The trial court's award of prejudgment interest was not an abuse of discretion under Greater Westchester. Although, as the trial court acknowledged, it was difficult to measure Altavion's damages or KMSL's unjust enrichment, the trial court was able to determine a reasonable royalty for the misappropriated trade secrets. That royalty represented the "`"hypothetically agreed value of what [KMSL] wrongfully obtained from"'" Altavion, based on "`"what the parties would have agreed to as a fair licensing price at the time that the misappropriation occurred."'" (Ajaxo, supra, 187 Cal.App.4th at p. 1308.) Thus, the damages are for a pecuniary injury, the amount of the royalty is based on an objective assessment of the evidence rather than a subjective assessment of harm, and the award of prejudgment interest compensates Altavion for loss of the use of the royalty funds it should have received at the time of misappropriation. (See O2 Micro Internat. Ltd. v. Monolithic Power Systems (N.D.Cal. 2006) 420 F.Supp.2d 1070, 1077 [awarding § 3288 prejudgment interest on reasonable royalty damages award]; see also Canavin v. Pacific Southwest Airlines, supra, 148 Cal.App.3d at p. 527 [in wrongful death case, awarding prejudgment interest on "damages attributable to an ascertainable economic value"]; Harsany v. Cessna Aircraft Co. (1983) 148 Cal.App.3d 1139, 1144 [196 Cal.Rptr. 374] [proper to award interest where value of crashed plane was disputed, because "[t]his was a property loss, not the type of noneconomic loss for which prejudgment interest is denied"].) KMSL has not shown the trial court erred in identifying the date of loss, and, as noted in part V., ante, KMSL has not shown there is insufficient evidence to support the trial court's determination of the amount of a reasonable royalty. KMSL has not demonstrated an abuse of discretion.
VII. Trial Court's Attorney Fees Award
The trial court awarded Altavion attorney fees in the amount of $3,297,102.50 pursuant to section 3426.4. KMSL asserts several claims of error.
C. Hourly Rates
The trial court used $600 per hour as "the reasonable hourly rate prevailing in the community for similar work for" Attorneys Glenn Peterson and John Costello, and $350 per hour for Attorney Pamela Bertani's work. KMSL contends the court erred because those attorneys charge lower hourly rates in Sacramento, where they are based. KMSL argues it was error to base the attorney fees award on the higher attorney hourly rates in San Mateo County.
At bottom, KMSL argues the trial court was precluded as a matter of law from awarding fees based on local rates rather than Altavion's counsel's normal Sacramento rates. However, the hourly rate adopted by the court was consistent with the general rule: "The reasonable hourly rate is that prevailing in the community for similar work." (PLCM Group, supra, 22 Cal.4th at p. 1095.) The relevant "community" is that where the court is located. (Nichols v. City of Taft (2007) 155 Cal.App.4th 1233, 1242-1243 [66 Cal.Rptr.3d 680]; see Cordero-Sacks v. Housing Authority of City of Los Angeles (2011) 200 Cal.App.4th 1267, 1286 [134 Cal.Rptr.3d 883]; MBNA America Bank, N.A. v. Gorman (2006) 147 Cal.App.4th Supp. 1, 13 [54 Cal.Rptr.3d 724]
KMSL points to authority that attorneys practicing in other localities may be able to obtain an award based on their higher home hourly rates in some circumstances; KMSL argues there is an absence of authority supporting the specific result in this case — a fee award based on higher local rates. For example, the court in Horsford v. Board of Trustees of California State University (2005) 132 Cal.App.4th 359 [33 Cal.Rptr.3d 644], concluded the trial court had discretion to base its fee award on the plaintiff attorney's higher home hourly rate in the "unusual circumstance" that local counsel was unavailable. (Id. at p. 399; cf. Nichols v. City of Taft, supra, 155 Cal.App.4th at p. 1242 [trial court "erred when it used a multiplier enhancement to compensate for out-of-town counsel's higher fee rate, because no threshold showing was made that it was impracticable for plaintiff to hire local counsel"].) Although Horsford demonstrates there are circumstances where it is appropriate to base a fee award on nonlocal hourly rates, the case also supports the proposition that an award based on local rates is the default rule, from which the trial court may deviate in its discretion, where justified by the circumstances.
KMSL has not demonstrated the trial court abused its discretion in basing its fee award on local hourly rates; neither has KMSL shown the hourly rates employed by the trial court were unreasonable in light of the types of factors referenced in PLCM Group, supra, 22 Cal.4th at page 1096.
D. Altavion's Time Records
The trial court's judgment is affirmed. Costs on appeal are awarded to Altavion.
Jones, P.J., and Needham, J., concurred.