A federal court in Los Angeles dismissed the plaintiff’s trade secrets claims in Aqua Connection Inc. v. Code Rebel, LLC [pdf], despite the fact that the plaintiff (Aqua Connect) alleged that its trade secrets were improperly obtained through reverse engineering in violation of a user agreement. 

In this lawsuit, Aqua Connect alleged that the defendants downloaded a trial version of the plaintiff’s Aqua Connect Terminal Server software (ACTS) and subsequently reverse engineered ACTS in violation of the End User License Agreement (EULA), which prohibited the user from reverse engineering the software in order to obtain the underlying code.  Aqua Connect claimed that the defendants used the trial version of the ACTS software to obtain the code and then created and distributed a competing software product, which Aqua Connect claimed violated California’s Uniform Trade Secrets Act.

The court disagreed and granted the defendants’ motion to dismiss the trade secrets claim. The court noted that under California law: “to state a cause of action for misappropriation of a trade secret . . . 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).”  The court explained that “[i]mproper 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.” Civ. Code. § 3426.1(a); Sargent Fletcher, Inc. v. Able Corp., 110 Cal. App. 4th 1658, 1666 (Ct. App. 2003).  

Aqua Connect argued that the EULA form contract and its alleged breach by the defendants should legally convert the alleged reverse engineering into an “improper means” of acquiring Aqua Connect’s trade secret.  However, the court again disagreed, observing that “Justice Moreno in his concurrence to a California Supreme Court decision, states that ‘nowhere has it been recognized that a party wishing to protect proprietary information may employ a consumer form contract to, in effect, change the statutory definition of ‘improper means’ under trade secret law to include reverse engineering, so that an alleged trade secret holder may bring an action.’” DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal. 4th 864, 901 n.5 (2003)(Moreno, J., concurring).

California’s trade secrets statute expressly contemplates the lawfulness of deriving a trade secret through “by a fair and honest means, such as purchase of the item on the open market for reverse engineering.”  Civil Code § 3426.1 (Legislative Committee Comment).  However, in this case, the court found that, despite the defendants’ alleged breach of a license agreement that prohibited them from reverse engineering the software, they nevertheless obtained the trade secret “by a fair and honest means.”  Given the internal contradiction of such a conclusion, it is likely that this ruling will be revisited in future cases.