Morgan Miller Blair

A California Court of Appeal recently published a decision setting important limits on the scope of trade secret protection for software source code, analogizing the source code to pie.  The court held that an end user who only receives machine-readable (or executable) code cannot be liable for “misappropriating” the underlying, undecipherable source code even though the source code was originally stolen by a third party.  The court analogized that the person who eats a pie is not liable for misappropriation, even if the baker used a misappropriated recipe to bake the pie.

In Silvaco Data Systems v. Intel Corporation, the California Court of Appeal, Sixth District (San Jose) held that an end user of stolen source code is not liable for misappropriation if it did not participate in the misappropriation and could not access the trade secret. 

Silvaco, Circuit Semantics and Intel

Silvaco develops software applications for the electronic design automation field.  Among Silvaco’s software products is SmartSpice, a circuit simulator allowing designers to create a virtual model of a proposed circuit that can be tested before incurring the expense of manufacturing an actual prototype.

In 2000, Silvaco sued Circuit Semantics, Inc., a competitor, alleging that Circuit Semantics (with the help of two former Silvaco employees) had stolen trade secrets used in SmartSpice, and had incorporated them into its own competing product, DynaSpice.  Silvaco won, obtaining a judgment against Circuit Semantics including an injunction against the continued use of Silvaco’s source code.

Silvaco then sued Circuit Semantics’ customers, including Intel.  Intel is a major developer and manufacturer of integrated circuits that uses electronic design automation software, including Circuit Semantic’s DynaSpice. 

The Trial Court Ruling

In its lawsuit, Silvaco claimed that Intel, by using the Circuit Semantics software, had misappropriated Silvaco’s trade secret source code contained within the software.  Intel filed a motion for summary judgment, arguing that Silvaco could not prove “misappropriation” (as defined in the California Uniform Trade Secrets Act) because Intel never had actual knowledge of Silvaco’s source code – the product delivered by Circuit Semantics contained only executable (or machine-readable) code, from which the underlying source code was undecipherable.  The trial court granted Intel’s motion and dismissed the action.  Silvaco appealed.

The Court of Appeal’s Decision

The court of appeal affirmed the trial court’s ruling.  The court stated the issue as: “whether a defendant can be liable for misappropriation of a trade secret which is admittedly embodied in source code, based upon the act of executing, on his own computer, executable code allegedly tainted by the incorporation of design features wrongfully derived from the plaintiff’s source code.”  The court answered this question in the negative, holding that the executable code run by Intel could not reveal the underlying source code.  “It could not, in short, impart knowledge of the trade secret.”

Under the Trade Secrets Act, misappropriation of a trade secret may be shown by three types of conduct: acquisition, disclosure, or use.  The court held that Intel’s passive receipt of Silvaco’s embedded trade secret source code could not amount to wrongful “acquisition” or “disclosure.”  Further, the court ruled that Intel did not “use” Silvaco’s trade secrets by simply running the software that it bought from Circuit Semantics.  “Use” is not proved “when the conduct consists entirely of possessing, and taking advantage of, something that was made using the secret.”  In short, Intel never had access to the source code, and had no way of using or disclosing it. 

The court used a “pie” analogy to make its point: 

One who bakes a pie from a recipe certainly engages in the ‘use’ of the latter; but one who eats the pie does not, by virtue of that act alone, make ‘use’ of the recipe in any ordinary sense, and this is true even if the baker is accused of stealing the recipe from a competitor, and the diner knows of that accusation.  Yet this is substantially the same situation as when one runs software that was compiled from allegedly stolen source code.  The source code is the recipe from which the pie (executable program) is baked (compiled).

Public policy considerations also influenced the court’s decision.  “If merely running finished software constituted a use of the source code from which it was compiled, then every purchaser of software would be exposed to liability if it were later alleged that the software was based in part upon purloined source code.”  The court observed that the rule urged by Silvaco would encourage litigation against not only trade secret thief competitors, but also customers, which would “suppress competition and technological development.”

The Aftermath

Silvaco has commented that the court of appeal’s decision “motivates software stealing,” and has vowed to seek review by the California Supreme Court.  Unless and until the Supreme Court agrees to review the case (which is statistically unlikely), the court of appeal’s decision will remain good law in California.

Under the holding of the Silvaco case, end users of software containing embedded source code that was stolen (by someone else) can now confidently defend against a trade secret misappropriation action – as long as the source code was truly undecipherable, or at least undeciphered.  Software producers whose source code has been stolen should focus their litigation efforts primarily against the thief.  Suing customers (or potential customers) is always risky business, and should be reserved for cases where the evidence demonstrates that the customer knowingly acquired, used or disclosed the trade secret.