Your General Counsel receives a “cease and desist” letter from a competitor, alleging that the company’s new hire from that competitor has taken trade secrets and accusing the company of misappropriation. Your company has no need for those trade secrets and wants to compete fairly. What steps can be taken to forestall litigation?

A recent ruling from the Northen District of California, Apple v. Rivos,2023 WL 5183034, at *11 (N.D. Cal. Aug. 11, 2023),provides valuable insights for companies facing potential trade secrets lawsuits even where the claims made may appear troubling on the surface and instructs that the best practices begin before a lawsuit is even threatened.

Factual Allegations of Apple v. Rivos

After nearly 50 former Apple engineers working on System-on-a-Chip (SoC) development joined Rivos within a few months,Apple filed a lawsuit alleging misappropriation of its trade secrets related to SoC designs, among other claims. Specifically, the lawsuit made claims for trade secret misappropriation under federal law (the Defend Trade Secret Act) and breach of contract against Rivos and former employees. Rivos and the ex-employees counterclaimed against Apple, claiming it violated California’s Business and Professions Code (Section 17200) by intimidating employees who were considering leaving.

Apple alleged that several of the departing employees took significant amounts of confidential information, including large files related to unreleased products, sensitive data transferred to personal devices and even entire backups of work computers. Apple also alleged that Rivos advised employees on how to handle confidential information when leaving, potentially encouraging them to take information or turning a blind eye to the alleged misappropriation. Apple contended that its trade secrets, if used by Rivos, could significantly harm its competitive advantage in the SoC market. Despite these allegations, and the fact that the court was compelled to accept these factual allegations as true, the Court granted Rivos’ and several of the individual employee’s motions to dismiss Apple’s claims.

Key Aspects of the Ruling in Apple v. Rivos

In reviewing the court’s decision, the following stand out as the most important lessons to be learned from the court’s rationale in granting the motions to dismiss:

• Circumstantial Evidence of Misappropriation Requires More than Mere Possession: Apple accused Rivos of misappropriation by actively encouraging the departing employees to bring confidential information with them and by ratifying the employees’ actions after hiring them. These types of facts are often asserted in these types of cases, but this court dismissed the claim, highlighting that claims of trade secret misappropriation by a hiring company required additional evidence beyond the fact that the Apple employees allegedly had confidential information in their possession:  “Mere possession of trade secrets does not amount to misappropriation.” Thus, simply being aware that employees had confidential information from their previous employer in this case was not sufficient to state a claim against Rivos.
• Explicit Policies Against Taking Trade Secrets from Former Employees Are Powerful: Here, contrary to Apple’s allegations, Rivos had clearly advised new employees not to bring confidential information from prior employers; this was a decisive factor in this case. Specifically, the court found that Rivos’ CEO explicitly discouraged former Apple employees from bringing confidential information with them, and this significantly weakened Apple’s case against Rivos. At the same time, the court found nothing wrong with the fact that Rivos also counseled the employees on what to say to their old managers at the time of their departure from Apple.
• Limits on Imposing Liability Against a New Employer Through Alleged Ratification: Apple attempted to argue that Rivos ratified the employees’ prior improper actions in obtaining trade secrets while they were employed at Apple. However, the court clarified that ratification of employees’ misconduct typically applies to actions taken during employment. Accusing a company of ratifying employees’ actions taken before they begin employment (as opposed to while they were employees at Rivos) requires additional facts, which were neither present in this case nor pled in the Complaint.

Takeaways for Companies to Guide Trade Secrets Policies and Practices

The ruling in the Apple v. Rivos case offers important lessons for companies acting in good faith to avoid claims of misappropriation when hiring employees from competitors. Best practices should include:

• Issue clear instructions to employees as part of the hiring process not to bring confidential information from previous companies.
• Have robust employee agreements, including offer letters and Confidentiality Agreements, that unequivocally require new hires to attest that they have not and will not bring any confidential information from their prior employer with them, that they have conducted a search of their documents and electronic devices to ensure they do not have such information in their possession and state that the company may seek indemnity from them if the company is brought into a lawsuit by their former employer alleging misappropriation.
• Use caution when hiring multiple employees from the same competitor in a short time frame as even the best practices cannot shield you from a meritless case, which may very well be prompted by a mass hiring from another company.
• Do your own investigation into the allegations set out in the cease and desist letter. Document your efforts to ensure the employee accused of misappropriating trade secrets has not done so, and seek additional assurances in writing from the employee that they have not and will not use any trade secrets from their former employer in their work for you.
• Proactively counsel the departing employees as to how to handle exit interview and other questions from the former employer or former managers. The counsel should, of course, always comply with the law and instruct the departing employee to be truthful.
• Contact legal counsel to help devise the best strategy for responding to the allegations before a lawsuit is filed.