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 Trade Secret-Penal Code section 499c(a)(9)

  Statutory definition Penal Code section 499c(a)(9)

 Statutory definition of a “trade secret” that is set forth in Penal Code section 499c, subdivision (a)(9).

 “Every person is guilty of theft who, with intent to deprive or withhold the control of a trade secret from its owner, or with an intent to appropriate a trade secret to his or her own use or to the use of another,  . . . [s]teals, takes, carries away, or uses without authorization, a trade secret.”  (Pen. Code, § 499c, subd. (b).)  “‘Trade secret’ means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:  [¶]  (A) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [¶]  (B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  (Pen. Code, § 499c, subd. (a)(9).) 

We are concerned here solely with part (A) of the statutory definition of a “trade secret” that is set forth in Penal Code section 499c, subdivision (a)(9).  We will hereafter refer to this as “part (A)” or the “independent economic value” factor.  Although no published case has yet construed the language of the “independent economic value” factor in Penal Code section 499c (which was added to the statute in 1996), the identical language has appeared in California’s Uniform Trade Secrets Act since 1985 as part of the definition of a trade secret (Civ. Code, § 3426.1, subd. (d)(1)) and has been generally interpreted to require “that the secrecy of this information provides a business with a ‘substantial business advantage.’”  (Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1522.) 

We apply settled rules of statutory construction in construing Penal Code section 499c’s “independent economic value” factor.  “When construing a statute, we must ascertain the intent of the Legislature so as to effectuate the purpose of the law.  [W]e begin with the words of a statute and give these words their ordinary meaning.  If the statutory language is clear and unambiguous, then we need go no further.  If, however, the language supports more than one reasonable construction, we may consider a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.  Using these extrinsic aids, we select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences.”  (People v. Sinohui (2002) 28 Cal.4th 205, 211-212, citations and internal quotation marks omitted.)  “Where reasonably possible, we avoid statutory constructions that render particular provisions superfluous or unnecessary.”  (Dix v. Superior Court (1991) 53 Cal.3d 442, 459.) 

            The language of the “independent economic value” factor contains two ambiguities.  Information may qualify as a trade secret under part (A) only if it “[d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use.”  The first ambiguity is whether “who can obtain economic value from its disclosure or use” qualifies only “other persons” or qualifies both “the public” and “other persons.”  While the language of part (A) is facially susceptible of an interpretation that qualifies both “the public” and “other persons” with the clause “who can obtain economic value from its disclosure or use,” such a construction must be rejected because it would render superfluous the words “the public or to.”  Part (A)’s distinction between “the public” and “other persons” must be given meaning, and the only possible meaning it could have is to distinguish between the general public, who may be able to utilize non-technical information, and competitors in the industry, who may have the ability to utilize technical information.[5] 

            A particular piece of technical or non-technical information may be “not . . . generally known” to “the public” even though the information is “generally known” within an industry and therefore “generally known” to competitors.  Obviously, such information could not constitute a trade secret since it would not provide its owner with any competitive advantage.  Similarly, if a particular piece of non-technical information is generally known to the public, it is not possible that this same non-technical information could be not “generally known” to competitors.  Again, such information could not possibly qualify as a trade secret since no competitive advantage would exist for the trade secret holder.  Thus, an interpretation qualifying both “the public” and “other persons”  with the clause “who can obtain economic value from its disclosure or use” would deprive the words “the public or to” of any meaning.  It follows that we must adopt a construction that applies that clause only to “other persons” and not also to “the public” in order to avoid rendering a portion of the language of part (A) superfluous.   

            The second ambiguity is that the language of part (A) could be construed to require that the information derive independent economic value from “not being generally known to” both “the public” and “other persons who can obtain economic value from its disclosure or use” or, alternatively, it could be construed to require only that the information derive independent economic value from not being generally known to one or the other of these two groups.  Because this aspect of the language of part (A) is ambiguous and can only be resolved by learning the Legislature’s intent, we turn to the legislative history of the statute. 

            In this case, we are fortunate to have an express statement by the Legislature of its intent regarding the definition of trade secret in Civil Code section 3426.1, from which Penal Code section 499c was derived.  The following comment makes it clear that the Legislature intended that information qualify as a trade secret only if it derives independent economic value from not being generally known to the public and “other persons who can obtain economic value from its disclosure or use.”  “The language ‘not being generally known to the public or to other persons’ does not require that information be generally known to the public for trade secret rights to be lost.  If the principal person who can obtain economic benefit from information is aware of it, there is no trade secret.  A method of casting metal, for example, may be unknown to the general public but readily known within the foundry industry.  [¶]  The phrase ‘and not being readily ascertainable by proper means by’ was included in this section as originally proposed by the National Conference of Commissioners on Uniform State Laws.  It was removed from the section in favor of the phrase ‘the public or to.’  This change was made because the original language was viewed as ambiguous in the definition of a trade secret.  However, the assertion that a matter is readily ascertainable by proper means remains available as a defense to a claim of misappropriation.”[6]  (Sen. Leg. Comm. Comment to Civ. Code, § 3426.1.)

            Interestingly, though the California Legislature chose to modify the language of the Uniform Trade Secrets Act in this regard, the first paragraph of this comment adopted verbatim the Commissioners’ Comment to the Uniform Trade Secret Act.  The Uniform Trade Secrets Act (UTSA) defines a trade secret as “information . . . that . . . derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.”  It does not allow information to qualify as a trade secret if it derives economic value from not being generally known to the public if no one other than the trade secret holder can derive economic value from the disclosure or use of the information.  And the California Legislature’s comment reflects that the Legislature did not intend for its change in the language of part (A) to alter its meaning but instead intended only to avoid a perceived ambiguity in the UTSA’s language.[7]

            The remainder of the legislative history provides little additional information about the Legislature’s intent.  As originally introduced, the legislation mirrored the UTSA language.  The bill was subsequently amended at the urging of the State Bar to replace the language “, and not being readily ascertainable by proper means by,” with “the public or to.”[8]  The State Bar argued: “In order for there to be a trade secret under [the original language], information needs to be not generally known and not readily ascertainable by other persons ‘who can obtain economic value from its disclosure or use’.  This probably requires that the only persons qualified to test general knowledge or ready ascertainability are competitors.  This would seem to be an undue limitation since general knowledge, even if by others than competitors, should disqualify the trade secret.”  The State Bar believed that the then-existing Penal Code section 499c definition of a trade secret was better because it required both that the information not be generally available to the public and that the information provide “one who uses it an advantage over competitors who do not know of or use it.”[9]  The Legislature was urged by other parties to amend the language to simply state that a trade secret was “information . . . that . . . derives independent economic value, actual or potential, from not being generally known” and to delete the remainder of the proposed language, but the Legislature rejected these proposals. 

            Based on the Legislature’s express statement of its intent and the legislative history, we are persuaded that the Legislature intended to define a trade secret in such a way that information would qualify as a trade secret only if it derived independent economic value from both not being generally known to the public and not being generally known to those who can obtain economic value from its disclosure or use.  Furthermore, to the extent that the alternative constructions of the ambiguous language of the “independent economic value” factor are equally reasonable, we must construe this criminal statute in defendant’s favor in accord with the rule of lenity.  “When language which is susceptible of two constructions is used in a penal law, the policy of this state is to construe the statute as favorably to the defendant as its language and the circumstance of its application reasonably permit.  The defendant is entitled to the benefit of every reasonable doubt as to the true interpretation of words or the construction of a statute.”  (People v. Overstreet (1986) 42 Cal.3d 891, 896.) 

            Consequently, we construe Penal Code section 499c to require proof that the master key derived actual or potential “independent economic value” from “not being generally known to other persons who can obtain economic value from its disclosure or use.”  On this element, the prosecution’s proof was lacking.  Odeum was required by the master key license agreement to maintain the secrecy of the master key.  If Odeum failed to maintain the secrecy of the master key, the licensor had the power and right to deactivate the master key.  Deactivation of the master key would destroy any value that Odeum derived from the master key license.  Since Odeum had paid a sum of money for the master key license, and the deactivation of the master key would negate the master key’s value to Odeum, the secrecy of the master key was of at least potential economic value to Odeum. 

            However, there was no evidence that the master key derived “independent economic value” from not being generally known to “other persons who can obtain economic value from its disclosure or use” because there was no evidence or basis for an inference that anyone other than Odeum could have obtained economic value from the use of Odeum’s master key, and disclosure of the master key would have destroyed any value that it held for anyone.  The evidence presented at trial established that piracy would be impossible without the descrambling algorithm or some of the other keys.  Indeed, the Attorney General concedes that there was no evidence presented at trial that anyone had the means to put the master key by itself to use as a means to pirate DVD content.  Instead, the Attorney General asserts that the master key was of potential value to persons who were able to acquire the descrambling algorithm or other CSS keys so that they could pirate DVD content.  No evidence was presented at trial that any such persons existed.  Nor was there any evidence at trial that the master key had any other economic value outside of piracy.  No competitor of Odeum would have based a product on a purloined master key because, as soon as the licensor learned of the loss of secrecy of the master key, the licensor could deactivate that master key thereby dooming any product based thereon.  And any competitor could readily obtain a master key from the licensor for what was, in comparison to the cost of developing a product, a mere pittance. 

            On the record before us, the prosecution failed to produce substantial evidence that anyone other than Odeum could have obtained economic value from the disclosure or use of the master key.  Accordingly, the evidence is not sufficient to prove the “independent economic value” factor of the offense of theft of a trade secret.

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