Wednesday, February 22, 2012

CA District Court: Reverse engineering is not trade secret misappropriation

Earlier this month, the US District Court for the Central District of California held in Aqua Connect, Inc. v. Code Rebel LLC that when a customer reverse engineers software that is legally accessed, this by itself does not constitute trade secret misappropriation under the California Trade Secrets Act (CTSA).

In Aqua Connect, the plaintiff software company’s clickwrap End User License Agreement (EULA) specifically prohibited reverse engineering. Defendant Code Rebel downloaded the trial version of software, allegedly reverse engineered it and started offering its own software, which plaintiff claims was modeled on the plaintiff's original version. The court held that a software company's form EULA could not alter the "improper means" requirement for misappropriation under the CTSA.

The law

To state a cause of action for misappropriation of a trade secret under California law, a plaintiff must plead that (1) the plaintiff owned a trade secret, (2) the defendant acquired, disclosed, or used the plaintiff's trade secret through improper means, and (3) the defendant's actions damaged the plaintiff. Civ. Code § 3426.1; Cytodyn, Inc. v. Amerimmune Pharm., Inc., 160 Cal. App. 4th 288, 297 (Ct. App. 2008). "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means," but "[r]everse engineering or independent derivation alone shall not be considered improper means." Cal. Civ. Code. § 3426.1(a); Sargent Fletcher, Inc. v. Able Corp., 110 Cal. App. 4th 1658, 1666 (Ct. App. 2003).

So what?

California software companies should be aware that the decision makes it clear that a breach of anti-reverse engineering clause cannot by itself constitute “improper means” for purposes of trade secret misappropriation under the CTSA. Nevertheless, software companies may still be able to bring a breach of contract claim for reverse engineering or prove “improper means” with other evidence. For a comparative analysis of law on clickwraps and reverse engineering clauses in US, Europe and Japan click here.