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Project Files, Bids, Contractor Budgets Can Be Trade Secrets, California Court Holds
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September 29, 2008
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Howrey LLP
Richard Foust was a project manager for San Jose Construction, Inc. In early 2004, he was in charge of 18 projects in pre-construction stages and two projects under construction. In mid-March, Foust expressed his unhappiness at San Jose to the president of S.B.C.C., Inc., a competitor. Foust represented that he had clients who would follow him to S.B.C.C. Foust was offered a job as a senior project manager at S.B.C.C. at a salary higher than the normal range for project managers there.
Before leaving San Jose, Foust and an assistant came into its office after hours to copy documents relating to five prospective jobs on which San Jose had bid and downloaded to disks more than 200 documents relating to those projects. The documents included project budgets, proposals made to owners, correspondence between owners and architects, all subcontractor bids, cost estimates, requests for information by subcontractors and responses to the RFIs. As the court wrote, “Foust had everything he needed to begin work right away on at least three projects” for S.B.C.C.
On his last day at San Jose, Foust invited a number of contractors to meet with him the next day, his first at S.B.C.C. At the meeting, he told the subs that he had brought five projects with him and that he wanted the subs to participate. All but two did. One sub testified that he was not even asked for a new bid because “Rick Foust already had my numbers.” Some of Foust’s clients at San Jose followed him to S.B.C.C.
Subsequently, Foust returned all of the documents he had copied, but nothing was erased from the disks. S.B.C.C. proposals provided to owners shortly after Foust came to work there were in large part the same as those provided by San Jose a month before.
San Jose sued S.B.C.C., claiming that the information Foust took constituted trade secrets protected by California’s trade secret law (Civil Code §3426.1.); that Foust and S.B.C.C. misappropriated San Jose’s trade secrets, interfered with its economic advantage and interfered with its contracts; and that S.B.C.C. unfairly competed with San Jose. S.B.C.C. moved for summary judgment, and the trial court granted it. The Court of Appeal reversed and remanded. San Jose Construction, Inc. v. S.B.C.C., Inc., 155 Cal.App.4th 1528, 67 Cal.Rptr.3d 54 (2007).
The Court of Appeal noted that whether a trade secret exists ordinarily is a question for a jury to decide. However, the Court of Appeal did determine that San Jose had put forward enough evidence for the case to be presented to a jury.
San Jose alleged that the project files contained trade secrets and that the trade secrets has economic value because San Jose had invested substantial time and money in developing its customer relations and because the trade secrets enabled it to develop further business and provide services more effectively and economically than its competitors.
S.B.C.C. argued that the information Foust took from San Jose did not contain trade secrets because all of the documents contained in them had been generated by or disclosed to third parties, either project owners, architects or subcontractors. Because these documents originated from third parties and these third parties could share the documents with anyone they wished, the documents could not be trade secrets.
San Jose, the Court of Appeal reasoned, did not seek to protect individual documents or bits of information but rather the overall compilation of the documents copied and downloaded and San Jose’s analysis of that information. Accordingly, “we can infer… that the information contained in San Jose Construction’s project binders, viewed as a whole, derived economic value from being kept secret from competitors such as [S.B.C.C.].... [O]nly San Jose Construction had the completed puzzle for each project, contained in the Project Binders.... No third party had it. The subcontractors each had a piece, and the owners had a piece, but no one except San Jose Construction had it all.”
Although S.B.C.C. was correct that individual subcontractors and architects may have provided or had access to individual documents, the Court of Appeal noted that no one outside San Jose had access to the entire contents of any project file.
The Court of Appeal also held that the time-consuming nature of the bidding process undermined S.B.C.C.’s argument that the documents were not of independent economic value to San Jose. The court rejected S.B.C.C.’s argument that it could have calculated, or reverse engineered, its own bid proposal without the benefit of the San Jose project files within the time needed to satisfy the demands of all the five project owners, most of whom were expecting S.B.C.C. to begin construction shortly. The court noted that the compilation of information represented a determination that the projects could be completed for a profit at the price quoted. Thus, the court concluded, there was a triable issue of fact as to whether S.B.C.C. could have replicated the entire proposal for each project file Foust copied within the time available.
As to San Jose’s claims of intentional interference with prospective economic advantage and unfair competition, the Court of Appeal also found that there were triable issues of material fact. S.B.C.C. argued that once Foust left San Jose, there no longer existed any economic relationship between San Jose and the project owners with which S.B.C.C. would interfere. The Court of Appeal rejected this argument, citing evidence that certain project owners agreed to follow Foust to S.B.C.C. on condition that S.B.C.C. was able to complete the project without excessive delay. This was enough for the Court of Appeal to find an issue of material fact.
With regard to the unfair competition claim, the Court of Appeal found S.B.C.C. “disingenuous” for claiming that owner willingness to follow Foust regardless of where he worked precluded unfair competition and for claiming that once Foust worked for S.B.C.C., the two companies were not in competition. The Court of Appeal held there was a triable issue of fact to whether S.B.C.C. would have been able to start the projects on time but for Foust’s copying of the files.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2008 Howrey LLP
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