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Cannabis Trade Secrets in California: Protecting Your Intellectual Property

Trade secrets are valuable business assets that many cannabis companies have, perhaps without knowing that they are trade secrets.  For example, a cultivator may have developed proprietary cloning and tissue culture techniques, or proprietary growing methods, or proprietary drying and curing processes, blissfully unaware that California law may provide meaningful protection to valuable intellectual property so long as it is not generally known to the public and reasonable efforts are made to maintain its secrecy.

Critically, the confidentiality of a trade secret must be protected in order to maintain its value. The State of California actually defines a trade secret as information that: (1) has economic value; (2) is not generally known to the public; and (3) subject to reasonable efforts to maintain its secrecy.

Trade secrets are granted legal protection because they are valuable assets; indeed, the technological innovations of the modern era would not exist if the law did not recognize trade secrets, as there would be no incentive for organizations to pour tremendous resources into research and development if the law failed to provide sufficient protection.

That is not to say that trade secrets cannot be shared with anyone—part of the value inherent in a trade secret is the ability to license its use to others for a fee or royalty. That said, care must be taken in all situations where a trade secret is made available to individuals or entities other than the secret’s owner if trade secret status is to be preserved.  Even accidental disclosures of trade secret information can destroy the “trade secret status” of that information.

Trade secret status is important because it allows a company to take legal action in the event someone wrongfully gains access to its trade secrets. Moreover, some information does not qualify for any other form of intellectual property protection and is thus only protectable as a trade secret – for example, recipes (including “recipes” for soils, compost teas, fertilizers, etc.). Under the California Uniform Trade Secrets Act (“UTSA”), the owner of a trade secret that has been misappropriated can obtain an injunction (the right to stop the opposing party from taking certain actions, such as using a particular trade secret or from sharing such secret further) as well as monetary damages. While monetary damages are generally limited to the amount a party has actually suffered, in trade secret cases the court has discretion to award treble damages (i.e. an amount up to three times higher than the actual damages incurred). Attorneys’ fees and costs are also generally available to the prevailing party, including reasonable fees for independent experts. In certain cases, imprisonment or fines may also be imposed on the trade secret misappropriator. While cannabis companies tend to prefer state court, for obvious reasons, trade secrets are also actionable under federal law. For cases that arise after May 11, 2016, the Defend Trade Secrets Act (“DTSA”) is a federal statute that provides damages and injunctive relief comparable to California’s UTSA.

While trade secrets are protectable, many businesses struggle with the requirement of treating the information as secret. A certain amount of disclosure is inevitable when using information as part of a business – especially to employees, but also when attracting potential investors – yet if a business fails to take reasonable steps to protect the information, the remedies outlined above will not be available. Thus, companies that have developed valuable information should also develop a trade secret plan for protecting that information. Having a written trade secret plan not only enables the company to better protect its secrets, but also acts as evidence in and of itself that reasonable efforts to protect the information have been implemented. (Merely having a trade secret plan will not be dispositive; the plan should, of course, be implemented and adhered to).

Noted attorney James Pooley, author of the legal treatise “Trade Secrets”, has written that a trade secret protection plan should be based on four principles: inventory, simplicity, responsibility, and review.
• Inventory – a company must, at the onset, know what it is the company wants to protect in sufficient detail to identify threats to its secrecy as well as establish its value.
• Simplicity – an effective trade secret plan must not be complicated or overly burdensome, otherwise the plan is likely to be ignored by ownership and employees alike.
• Responsibility – Pooley recommends that a specified individual or individuals be responsible for implementing every aspect of the trade secret protection program, including audits for effectiveness.
• Review – as noted above, trade secret plans should be audited and reviewed to ensure that the plan is being consistently implemented and the trade secrets actually protected.

An effective trade secret plan identifies the manner in which trade secrets are most likely to be compromised and creates protection policies accordingly. Consider the following situations and whether the proprietary information is adequately protected:

• Employee Mobility – Non-competition clauses are not enforceable in the State of California; thus, one’s employees are generally free to leave one’s employment and work for a direct competitor at any time. Do employees know what information in their possession is considered confidential, proprietary, and/or a trade secret? Do they know what they are and are not allowed to do with that information when they leave your employment? If you have established a duty of confidentiality, both during and after employment, was it in writing?
• Site Visitors (especially investors) – Potential investors, as well as other visitors, are also threats to a trade secret. When giving tours and explaining how your facility maintains a competitive edge, do you unwittingly reveal your processes? Are novel inventions capable of being observed during site visits by outsiders? Giving a facility tour without requiring Non Disclosure Agreements (NDA’s) presents a grave risk to successfully asserting the confidentiality of a trade secret in the future.
• Lack of Document Security – Many businesses write out trade secrets during development and following so that they can be accessed, reviewed, and perfected; such may even be a necessity. Think of supplier lists, fertilizer recipes, customer lists, and so forth. Where do you store these documents containing trade secrets? Are they accessible by site visitors? Are they lying out in the open? Can all employees access them or only those employees who have a need to know the information? Are they stored in a locked area when not in use?
• Lack of Electronic Security – In the same manner that many individuals write out trade secret information on physical paper, many individuals prefer electronic documentation. If there is a computer at your business location containing such documents, is it password protected? If so, do all employees know that password and have access to that computer, or only those that need to know the information to perform their job duties?
• Government Submissions – Cannabis companies are required to submit a wealth of information about their business operations to both local and state governments in order to obtain a license for cannabis-related activities and portions of information requested by the government agency during an application process may well constitute a trade secret. Have you taken any steps during the application process to communicate to the government agency that you consider portions of the application to be a trade secret that needs to be protected from disclosure to non-regulators?

In sum, by taking reasonably appropriate steps to protect its valuable trade secrets, a California cannabis company can protect critical segments of its intellectual property portfolio.

The above information is provided as a public service. It is not intended as legal advice.

For answers to your legal questions or legal assistance, including with establishing and implementing a trade secrets protection plan, please contact the Law Offices of Omar Figueroa at (707) 829-0215 to schedule a confidential legal consultation.