Takeaway: A company that allegedly received trade secrets from a new employee and was sued by the employee’s former employer could not compel the claims to arbitration because the company was not a party to the arbitration agreement between the employee and his former employer, and the doctrine of equitable estoppel did not apply because the claims were statutory, not based on the employment contract that contained the arbitration clause.
A Silicon Valley company that allegedly received trade secrets from a new employee and was sued by the employee’s former employer could not compel the claims to arbitration, a California appeals court recently ruled.
The Fremont, Calif.-based company, which makes equipment used in the semiconductor industry, was not a party to the arbitration agreement between the employee and his former employer. Further, the doctrine of equitable estoppel did not allow the new employer to rely on the arbitration clause because the claims against it were based on a statute—the Uniform Trade Secrets Act—and not on the employment contract that contained the arbitration clause, the appeals court concluded on Nov. 1.
The employee worked for his former employer from 1997 until 2012, and then again from September 2018 to February 2022. His group worked on products used for manufacturing semiconductor chips. His position gave him access to many of his former employer’s trade secrets, such as scientific and experimentation data and 3D renderings of semiconductor manufacturing tools. He also participated in highly confidential meetings with his team, company executives and other company engineering groups.
The new employer is a direct competitor of the employee’s former employer. It also produces equipment for making semiconductor chips.
Over a 14-month period starting in January 2021, the new employer recruited 17 of the former employer’s employees. Many were highly placed executives or engineers. Ten were from the employee’s work group.
Upon leaving their old company, most did not tell their former employer they were going to a competitor. Some even lied about their new employer’s identity.
In early February 2022, the employee accepted a job offer from the new employer. A week later, he told his former employer he was leaving, but like others before him, refused to identify his new employer at that time.
Before his last day at his old job, the employee accessed proprietary information from the company’s cloud-based storage system. Using his laptop, he sent a dozen emails with highly confidential documents to his two personal email accounts. Then, in his final days at his former employer, he accessed scores of additional highly sensitive files.
Nonetheless, he signed a separation certificate, stating he had not retained any company information and confirmed this in two separate exit interviews. After starting his new job, the employee logged into both of his personal email accounts on his computer at his new workplace.
The employee admitted this conduct, and that he had not been “forthcoming” about it during his exit process. He had taken the documents, he explained, “principally to keep souvenirs” of his accomplishments at the company, not to use or disclose any confidential information in his new job. Later, however, he admitted some of those “souvenirs” had nothing to do with his work at his old job but did relate to his new position.
Both the employee and his new employer consistently maintained that the employee never disclosed any confidential information to the new employer. The new employer denied any knowledge of or involvement in the employee’s actions.
Legal Action
The former employer sued the employee and his new employer for misappropriation of trade secrets and sued the employee for breach of his employment agreement.
Shortly afterward, the new employer put the employee on leave and had a forensic computer examiner cut off his access to both of his personal email accounts and his work phone and computer.
Both the new employer and the employee moved to compel arbitration based on the arbitration clause in the employee’s employment contract with his former employer. The court granted the motion to compel as to the action against the employee but denied it as to the new employer. The new employer appealed.
Equitable Estoppel Argument
The new employer is not a party to the arbitration agreement between the employee and his former employer. It contended, however, that principles of equitable estoppel required the former employer to arbitrate its misappropriation claims against the company.
Generally, only signatories to a contract are bound by its arbitration clause, the court first noted. Arbitration is a matter of contract, and the threshold question for a court is whether an agreement between the parties exists.
Equitable estoppel provides a limited exception to this general rule, the court explained. When a signatory to a contract asserts claims against a nonsignatory that rely upon, or are inextricably bound up with, the contract terms, the nonsignatory may invoke an arbitration clause in the same contract.
It is not enough that a complaint simply refers to a contract; the claims must be founded on the contract. Nor is it sufficient that a complaint alleges collusion between a signatory and nonsignatory defendant, or that the controversy would not have occurred but for the existence of the contract, provided the contract is not the basis for the claims against the nonsignatory.
Here, the former employer alleged that the new employer violated the Uniform Trade Secrets Act by knowingly misappropriating its confidential information. Those statutory claims exist without regard to the employee’s contractual obligations to his former employer, the court noted.
The complaint refers to the former employer’s employment contracts to demonstrate its efforts to maintain secrecy, but the claims against the new employer do not rely on the contracts, the court said. The appeals court affirmed the lower court’s ruling refusing to order arbitration.
Mattson Technology Inc. v. Applied Materials Inc., Calif. Ct. App., No. A165378 (Nov. 1, 2023).
Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.