Marini Skin Research v. Allure Cosmetic USA

Filed 5/24/07 Marini Skin Research v. Allure Cosmetic USA CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

These consolidated appeals arise out of a dispute regarding the use of formulas for skin-care products. Allure Cosmetic USA, Inc., (Allure) manufactured products for Jan Marini Skin Research, Inc. (JMSR). Allure sued Gurpreet S. Sangha, a former partner in Allure, and G. S. Cosmeceutical USA, Inc. (GSC), the company Sangha formed after leaving Allure, alleging Sangha recruited Allures clients, denigrated the company, and stole company secrets. In another action, JMSR sued Allure, its owner Sam Dhatt, Stephen Kohler (a former employee of JMSR), and several companies related to Allure, contending they had improperly appropriated and used the formulas for JMSRs products to make products for other clients. Allure and Dhatt cross-complained against, among others, JMSR and Sangha. The actions were consolidated for trial. Kohler, Dhatt, Allure, and the related companies appeal the judgments entered against them in JMSRs action. Sangha and GSC appeal the judgment against them in Allures and Dhatts actions. We affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND

A. JMSRs Business and Dealings with Allure

Jan Marini founded JMSR in 1994, and acts as its chief operating officer and president. Nancy Felker is its executive vice-president. The company manufactures nonprescription skin-care products and sells them to the professional market, including physicians and spas. Their products include the bioglycolic line, which includes glycolic and other acids for acne, lines and wrinkles, discoloration, and rosacea; the C‑ESTA line, a product for lines and wrinkles; the Transformation or TGF Beta-1 line, which is used for skin rejuvenation; benzoyl peroxide products for acne; sunscreens; products for aging skin; and products with retinol, which are used for lines, wrinkles, acne, and discoloration. Marini had developed various formulas for skin-care products during the 1980s and began marketing them through an earlier company she had owned, Janadyne Consulting, Inc. (Janadyne).

JMSR developed its customer list in part from the database that had been developed by Janadyne. After JMSR was formed, it hired a sales team and advertised in publications; representatives of JMSR also went to medical conferences and to aesthetician trade shows. JMSRs database included information on the name of each customer, the contact person, the address and telephone number, billing arrangements, every item purchased, and the dates of the purchases. Access to the database was limited and required passwords, and some departments could only read the information, but not print it out or change it. Sales representatives who were assigned to geographic territories had access to information only about the customers in their territories. Each representative was required to sign an agreement providing that the customer lists were confidential and would not be disclosed to anyone outside the company.

Most of JMSRs products were originally manufactured to its specifications by a contract manufacturer known as Columbia Cosmetics. Sam Dhatt was Columbia Cosmetics chemist at the time. Dhatt met with Marini when she first discussed the products she wanted Columbia Cosmetics to manufacture.[1] Marini provided samples of some products and a list of ingredients and their amounts. During the time Columbia Cosmetics made products for JMSR, Marini asked Dhatt to duplicate other companies products.

Dhatt left Columbia Cosmetics in 1994 or 1995; he and Sangha, along with a third silent partner, formed Allure. Early in 1995, Allure began making products for JMSR, initially using formulas that had been used to manufacture them at Columbia Cosmetics. By late 1995, Allure was making most of JMSRs products. JMSR provided between 70 and 95 percent of Allures business from 1995 to 1997.

Marini asked Allure to sign a Supplier Proprietary Information Agreement. Allure raised no objections, and Sangha signed the agreement on behalf of the company in January 1996 (the 1996 agreement). The 1996 agreement recited that JMSR is in the business of developing and distributing skin-care products; that JMSR has developed and will be developing proprietary skin-care products; and that Allure along with any affiliates, Dhatt, and Sangha (referred to as the Allure parties) are manufacturing skin-care products for JMSR and assisting JMSR in the formulation of such products. Under the agreement, the Allure parties acknowledged that JMSR had specified the principal ingredients and their proportions in the skin-care products manufactured by the Allure Parties for JMSR. They also acknowledged that JMSRs C-ESTA and TGF Beta skin-care products are unique and proprietary to JMSR. They agreed to refrain from manufacturing or formulating for any other customer a skin-care product which (a) uses the same formula as a skin-care product that the Allure Parties manufacture or have manufactured in the past, present, or future for JMSR, or (b) contains ascorbyl palmitate (the primary ingredient of the C-ESTA line) or Transforming Growth Factor Beta-1 (TGF Beta-1 the key ingredient of the TGF Beta line). The agreement defined as confidential information the identity of the supplier of TGF Beta-1 for the TGF Beta product line, formulas of the JMSR skin-care products, and JMSRs marketing and business plans, product sales data, strategies, forecasts[,] unannounced new products, and the identity, purchasing habits, and contact information of JMSRs customers. Under the agreement, the Allure parties agreed not to divulge any confidential information to anyone but JMSR and its affiliates and agents who needed to know the information, and not to use the confidential information except on behalf of JMSR. These restrictions would remain in effect perpetually.

Under the 1996 agreement, the Allure parties also agreed to contact JMSR and obtain its written consent before manufacturing skin-care products for anyone they knew to be a former JMSR employee or a company represented by a former JMSR employee, and not to solicit or sell skin-care products to anyone they knew to be a customer of JMSR. The restrictions on doing business with former JMSR employees or customers would remain in effect for two years after JMSR stopped buying skin-care products from Allure. The 1996 agreement contained both an attorney fee provision and an integration clause providing that it constituted the entire agreement between JMSR and the Allure parties, that any written or oral agreements on the same subject matter were cancelled, and that any modification to the agreement must be in writing.

Marini asked Allure to sign an updated supplier proprietary information agreement in 1998 (the 1998 agreement), and Dhatt and Sangha did so. The 1998 agreement was virtually identical to the 1996 agreement, but included JMSRs Bioclear skin-care products in the products that were protected as proprietary to JMSR, and prohibited Allure from manufacturing or formulating for any other client products that contained a combination of salicylic acid, azelaic acid, and glycolic acid, the key combination of ingredients in Bioclear products.

B. Kohler and Skin Therapy

Kohler worked for JMSR from approximately 1994 or 1995 until 1997, carrying out duties in international marketing and managing the sales force. When he left JMSR in 1997, he signed a severance agreement in which he agreed to refrain from copying or removing from JMSRs premises proprietary information, and agreed to keep confidential JMSRs trade secrets and confidential information, including knowledge of ongoing sales activity. The severance agreement provided that in the event of a breach of the agreement, the prevailing party would be entitled to attorney fees.

After leaving JMSR, Kohler tried to develop a line of skin-care products that would be manufactured by Columbia Cosmetics. When that effort failed, he contacted Dhatt in October 1997 and asked him for bulk pricing on various products. The letter he sent contained a list of the type of product that he was looking for, and mentioned several JMSR products, including C-ESTA cream and TGF products, sunscreen, and acne gel. Dhatt gave price quotes to Kohler.[2]

Dhatt asked Sangha to take the ingredient listings for various JMSR products, change some of the ingredients, and remove JMSRs name and formula numbers and replace them with the name Skin Therapy. Sangha did so, believing Skin Therapy was a JMSR private label venture. In late 1997, however, Sangha realized Kohler, not JMSR, owned the Skin Therapy line. He reminded Dhatt that Allure could not do business with a former employee of JMSR, and asked Dhatt to tell Marini of Allures dealings with Kohler. Dhatt met with Marini, and at her request sent a letter to Kohler, telling him Allure would not be able to do business with him, and notifying him that Allure had a proprietary arrangement with JMSR and that [c]opying patented ingredients and formulas would place both Allure and you in a position of legal liability.

In late 1998 or early 1999, Dhatt and Kohler once again began discussing doing business together, and agreed that Allure would manufacture products for the Skin Therapy brand.[3] Allure began supplying products to Skin Therapy Inc. in early 1999. At first, Allure filled Skin Therapy Inc.s orders by using products that had been made for JMSR. Soon afterward, Allure started making separate batches for Skin Therapy Inc. using a copy of master formulas for JMSR products with JMSRs name whit[ed] out and the new clients name inserted in its place, on Dhatts instructions. On other occasions, Allure duplicated or modified formulas for JMSRs products to create products or formulas for other clients, or put excess JMSR products in other customers containers.[4] Skin Therapy Inc. collected and used customer lists from its new sales representatives, including lists of JMSR customers, and the names of the customers were entered into Allures computer system.[5] On at least one occasion, a Skin Therapy Inc. employee contacted a current JMSR salesperson to ask for her customer list.

A meeting took place in Allures offices in April or May of 1999 to discuss Skin Therapy Inc. products and strategies for marketing them. Among the participants were Dhatt, Kohler, and several former JMSR employees who were working as sales managers for Skin Therapy Inc. Before and after the meeting, Dhatt and Kohler said they did not care if they had to compete with Marini, go after her clients, harm her financially or emotionally, ruin her reputation, or put her out of business. Dhatt said Marini would become a nobody in the business. Kohler and Dhatt said the Skin Therapy Inc. sales managers were to tell JMSRs clients that they used to work for JMSR; that Skin Therapy Inc.s products were the same as JMSRs, or improved versions of the same products; that they were using the same chemist that JMSR had used; and that Skin Therapy Inc.s products were cheaper than JMSRs.

In June 1999, after Marini heard Dhatt was copying the JMSR product line, she sent Dhatt a letter designating JMSR products covered under the supplier proprietary information agreement. Marini and Dhatt had a conversation in which Marini told Dhatt she knew he and Kohler were hiring JMSRs sales representatives and using their customer lists to solicit JMSRs customers and to denigrate its products. Dhatt told her his actions were none of her business and that if she did not like the situation, she could sue him.

Dhatt stopped operating Allure around the end of 1999 because its debts made it difficult to get loans and credit lines, and began operating his business under the auspices of a new corporation, Allure Cosmetic, Inc.

In 1999 or 2000, after JMSRs lawsuit was filed, Dhatt destroyed approximately 45 laboratory notebooks, which according to a former employee would have revealed whether the original formulations of the products Allure made were the same as those of JMSRs products.

C. Sangha Leaves Allure and Forms GSC

The relationship between Sangha and Dhatt soured in 1998, and Dhatts wife began noticing that Sangha was spending more time than usual away from the office; he was seeing vendors or contractors in the production area of Allures facility; he was receiving telephone calls from commercial real estate agents; he was making telephone calls to Marini during evening and nighttime hours from a company line installed in his home; and JMSR had begun asking for Sangha, rather than Dhatt, when calling Allure. She also noticed that an unusual number of copies had been made on the company photocopy machine. In the last week of March 1998, Sangha told an employee of another cosmetic company, Amritpal Gill, that he intended to begin his own company, and asked Gill if he would like to work for him. Sangha told Gill he expected to open his business soon, and that he was only waiting for a commitment from Marini. When Gill asked how Sangha expected to get customers, Sangha replied that everything had been planned, that once the company was registered, the business would be there, and that he was already talking with Felker. Sangha spoke with Gill regularly about his plans over the next several weeks, and in late April urged Gill to resign his job and prepare to work for him.

In April 1998, after Dhatt bought the third partners interest in Allure, Sangha resigned from the board of directors of the company. Dhatt told Marini and Felker that Sangha would be leaving Allure. In response to their inquiry about what Sangha would be doing and their indication that they enjoyed working with Sangha, Dhatt suggested that JMSR divide its business between Allure and Sanghas new company.

After Sangha left Allure, he formed GSC. Marini decided to have both Allure and GSC manufacture products for JMSR, thinking it would be to JMSRs benefit to have two suppliers nearby.[6] JMSR stopped doing business with Allure in early 1999, however, after Dhatt became difficult to work with and less responsive to JMSRs needs, and after Marini and Felker heard that Allure was offering JMSRs products to other customers.[7]

Before leaving Allure, Sangha also met over dinner with Lee Tennigkeit, the owner of Penny Island Products, another customer for which Allure manufactured products. Tennigkeit was looking for a new manufacturer because he believed that Allure was not including a special oat product in the products it manufactured for him. He had also seen Dhatt deliberately use the wrong ingredient for another customer. Sangha told Tennigkeit he planned to leave Allure and start his own business. Sangha empathized with Tennigkeits concerns about Dhatt, told him other customers were not happy, and did not assure Tennigkeit that Allure would not substitute ingredients in his products. During the dinner, Tennigkeit and Sangha agreed that Sanghas new company would manufacture products for Penny Island, but Tennigkeit did not recall whether he or Sangha made the initial suggestion. Tennigkeit transferred his business to GSC and did not use Allure again, despite being offered a 30 percent discount from Allure.

D. Skinquest and Dermaquest

In May or June 1999, Dhatt and his wife formed a company called Skinquest, Inc. Kohler left Skin Therapy Inc. in September 1999, and Skinquest took over its operations. For approximately a month, Skinquest bought Skin Therapy Inc. products from Allure and sold them to the aesthetician and physician market. Dhatt and his wife then formed another company called Dermaquest, Inc., which took over the operations of Skinquest.

E. The Lawsuits

Allure brought an action against Sangha and GSC (collectively the Sangha defendants) in May 1998, alleging the Sangha defendants had violated the Uniform Trade Secrets Act (UTSA) (Civ. Code, 3426 et seq.) (Allure Cosmetics USA, Inc. v. Sangha (Super. Ct. Contra Costa County, 2004, No. C99-01609 (the Allure action).) The first amended complaint in the Allure action alleged causes of action for misappropriation of trade secrets, slander, conversion, interference with contractual relations, unfair trade practices, breach of fiduciary duty, fraud, and conspiracy.

JMSR filed an action in June 1999 (Jan Marini Skin Research, Inc. v. Skintherapy Co. (Super. Ct. Santa Clara County, 2004, No. CV782476 (the JMSR action)), naming as defendants Kohler, Allure, Dhatt, and others, alleging causes of action for misappropriation of trade secrets, unfair competition, trade libel, false representation and false designation of origin, breach of contract, inducing breach of contract, and intentional interference with economic advantage. JMSR later amended its complaint to name as defendants Skinquest, Dermaquest, and Allure Cosmetic, Inc.[8] Allure, Dhatt, Skin Therapy Inc., and Kohler cross-complained against JMSR, Marini, Sangha, and the owner of Columbia Cosmetics alleging causes of action for unfair competition and misappropriation of trade secrets for removing master formulas and other documents from Allures premises, interference with economic relations, libel, trade libel, conversion, restraint of trade, and conspiracy.[9]

The Allure action and the JMSR action were consolidated for trial. At trial, citing the parol evidence rule, the court on January 5, 2004, precluded the parties from introducing evidence that would add to, change, explain, contradict or interpret the terms of the 1996 or 1998 agreements. The court supplemented that ruling on February 2, 2004, to preclude the Allure parties from introducing evidence that they owned the formulas for the skin-care products they manufactured for [JMSR] or that the Allure Parties owned [JMSR] product formulas under some industry custom and practice or that the parties intended either the 1996 or the 1998 Agreement to have any meaning other than that set forth by its express terms. According to the February 2, 2004, order, [e]vidence of course of dealing or usage of trade or of the circumstances under which the agreement was made that contradicts [JMSR] ownership of all of the formula [sic] to its skin-care products is irrelevant and precluded.[10] In reaching this conclusion, the trial court interpreted the 1998 agreement to mean that the parties had agreed that JMSR owned all of the formulas to its skin-care products.

F. Verdicts and Attorney Fees

Marini and JMSR moved for a directed verdict on the cross-complaints cause of action for misappropriation of trade secrets, based on the trial courts rejection of the Allure parties claim of ownership of the master formulas pursuant to the 1998 agreement. The Sangha defendants similarly moved for a directed verdict on the misappropriation claims. The trial court granted these motions.

The jury returned verdicts in favor of JMSR and against Dhatt on JMSRs claims for misappropriation of trade secrets, breach of contract, and intentional interference with prospective economic advantage. The jury awarded JMSR $40,000 for breach of contract, and $59,000 for misappropriation of trade secrets and/or intentional interference with prospective economic advantage. It found by clear and convincing evidence that Dhatt had acted with malice, oppression, or fraud. The jury found in favor of Dhatt on JMSRs claim for inducing breach of contract.

Similarly, the jury found in favor of JMSR and against Allure on JMSRs claims for misappropriation of trade secrets, breach of contract, and intentional interference with prospective economic advantage, and in favor of Allure in JMSRs claim for inducing breach of contract. Damages to JMSR were $40,000 for breach of contract and $39,000 for misappropriation of trade secrets and/or intentional interference with prospective economic advantage. The jury found by clear and convincing evidence that Allure had acted with malice, oppression, or fraud.

On JMSRs claims against Allure Cosmetic, Inc., the jury found in favor of JMSR on its claims for misappropriation of trade secrets and intentional interference with prospective economic advantage, and in favor of Allure Cosmetic, Inc., on JMSRs claim for inducing breach of contract, and awarded JMSR $269,000 in damages. By clear and convincing evidence, the jury found Allure Cosmetic, Inc., to have acted with malice, oppression, or fraud.

Dermaquest was found liable on JMSRs claims for misappropriation of trade secrets and intentional interference with prospective economic advantage, and not liable on the claim for inducing breach of contract. The jury awarded JMSR $439,000 in damages, and found Dermaquest had not acted with malice, oppression, or fraud.

The jury found in favor of JMSR on its claims against Kohler for misappropriation of trade secrets, breach of contract, inducing breach of contract, and intentional interference with prospective economic advantage. The jury awarded JMSR $40,000 for the contract claim and $76,000 for the other claims, and found Kohler had not acted with malice, oppression, or fraud.

On Allures claims against Sangha, the jury found in favor of Sangha on the claims for conversion and fraud, and in favor of Allure on the claims for breach of fiduciary duty and intentional interference with prospective economic advantage. The jury awarded Allure damages of $427,000, and found by clear and convincing evidence that Sangha had acted with malice, oppression, or fraud.[11] The jury found for GSC on Allures claim for conversion and awarded no damages, but found GSC had acted with malice, oppression, or fraud.

The jury awarded JMSR $1 million in punitive damages for Dhatts conduct, and no punitive damages for the conduct of Allure and Allure Cosmetic, Inc. It awarded Allure $210,000 in punitive damages for Sanghas conduct, and no punitive damages for GSCs conduct.

On JMSRs motion for attorney fees, the trial court determined that JMSR was the prevailing party and should recover from Dhatt, Allure, and Skin Therapy Inc., jointly and severally, attorney fees in the amount of $3,001,268.50; and from Kohler a one-third portion of that amount, in the amount of $1,000,422.80. The court also awarded JMSR $211,679.58 in costs from Dhatt, Allure, Allure Cosmetics, Inc., Dermaquest, Skin Therapy Inc., and Skinquest; and $201,444.60 from Kohler.

G. Findings Against Skinquest

Skinquest was treated as a party during most of the trial. On March 17, 2004, however, after the close of evidence, JMSR informed the court that Skinquests corporate status had been suspended. The following day, counsel for Allure requested a continuance, informing the court that Allures attorneys had been unaware that Skinquests corporate status was suspended and that Skinquest was in the process of obtaining a revivor, which was expected within a day. JMSRs attorney told the court she had received the certificate of suspension before trial began, and asked the court to treat Skinquest as a nonappearing defendant and enter judgment against it under Code of Civil Procedure section 594. The trial court denied the request for a continuance, concluding Skinquest had not been diligent in seeking a revivor of its corporate status, and took under submission Allures motion for judgment. The jury did not consider the claims against Skinquest.

On March 19, 2004, the day after the request for a continuance, a certificate of revivor was filed with the trial court, indicating that the Franchise Tax Board had relieved Skinquest of its suspension.

The trial court heard JMSRs motion for judgment on June 30, 2004. On August 30, 2004, the court denied the motion and treated Skinquests revivor as effective on March 19, 2004. However, the court ruled that, due to its inactivity during the trial, Skinquest must accept the procedural posture of the case as of the date of the ruling, and deemed Skinquest to have waived trial by jury and the right to present further evidence. Accordingly, the trial court acted as the trier of fact on the claims against Skinquest, relying on the evidence that had been presented at trial. On the merits of JMSRs claims against Skinquest, the court ruled in JMSRs favor. The court awarded JMSR $2,120,779, finding that Skinquest had joined an ongoing conspiracy among the other defendants in or about September or October 1999, and was therefore liable for all damages flowing from the acts of its coconspirators.

H. Injunctive Relief

JMSR requested permanent injunctive relief, and the trial court granted an injunction against defendants Dhatt, Allure, Allure Cosmetic, Inc., Skinquest, Dermaquest, Skin Therapy Inc., and Kohler.[12] The injunction prohibited them from: (1) using the formulas or the derivations of the formulas of any of a variety of JMSR skin-care products; (2) disclosing nonpublic information about the ingredients, components, ingredient combinations, proportions, or other formulation details of the JMSR products; (3) doing business with any customer whose identity or other information was obtained from the customer list or database of JMSR or Janadyne or from any current or former JMSR employee or sales representative; (4) doing business with any current or former JMSR customer whom the defendants had in the past solicited for the purpose of doing business; (5) doing business with any JMSR customer whose identity or other information was contained in JMSR or Janadynes customer list or database as of the date of entry of the judgment; and (6) soliciting any current or former sales representative of JMSR to leave or accept any position with defendants or their business entities or affiliates.

II. DISCUSSION

A. Appeal in the JMSR Action

1. Exclusion of Parol Evidence

The Allure defendants contend the trial court erred in excluding evidence that Dhatt and Allure developed the formulas for JMSRs products and that JMSR did not own the formulas. They argue that the evidence does not contradict the terms of the 1998 agreement and that, even if it is inadmissible in the contract causes of action, it is nevertheless admissible to show the Allure defendants did not misappropriate JMSRs trade secrets.[13]

The parol evidence rule provides that evidence of a prior agreement or contemporaneous oral agreement may not be admitted to vary the terms of an integrated written contract. (Code Civ. Proc., 1856.) The parol evidence rule is not merely a rule of evidence, but  a rule of substantive law making the integrated written agreement of the parties their exclusive and binding contract no matter how persuasive the evidence of additional oral understandings. Such evidence is legally irrelevant and cannot support a judgment.  (Banco Do Brasil, S.A. v. Latian, Inc. (1991) 234 Cal.App.3d 973, 1000.)[14] As our Supreme Court has explained,  [t]he test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.  (City of Manhattan Beach v. Superior Court (1996) 13 Cal.4th 232, 246, quoting Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37; see also Software Design & Application, Ltd. v. Price Waterhouse (1996) 49 Cal.App.4th 464, 470.) If the evidence offered would not persuade a reasonable person that the agreement meant anything other than the ordinary meaning of its words, it is useless. (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 913.)

We first consider whether the 1998 agreement is reasonably susceptible to the interpretation that JMSR did not own the formulas to its products. The agreement provided that JMSR had developed proprietary skin-care products; that the Allure parties manufactured skin-care products for JMSR and assisted JMSR in their formulation; that JMSR ha[d] specified the principal ingredients and their proportions in the skin-care products manufactured by the Allure Parties for JMSR, and that certain products were unique and proprietary to JMSR. Moreover, the Allure parties agreed that certain information, including formulas of the JMSR skin-care products . . . and the identity, purchasing habits, and contact information of JMSRs customers constituted confidential information, the use of which could cause competitive injury to JMSR, and agreed not to divulge such confidential information except to JMSR, its employees, and its agents, and not to use the confidential information except on behalf of JMSR.

The trial court concluded the contractual language unambiguously meant that JMSR owned all of the formulas to its skin-care products. The Allure defendants dispute this conclusion, pointing out that the 1996 and 1998 agreements did not expressly state that JMSR owned the formulas and that no written agreement was in effect when Allure began making products for JMSR.[15] According to the Allure defendants, they would have shown that it is the custom and practice in the skin-care industry that the person who creates and develops a product formula owns the formula absent a contractual agreement stating otherwise.

Even bearing in mind the proffered evidence, we agree with the trial court that the contractual language cannot be reconciled with a conclusion that Allure owned the formulas to the products it manufactured for JMSR. It is impossible to understand the provisions that certain products were unique and proprietary to JMSR, and that the formulas were confidential information that Allure and Dhatt could not use on behalf of anyone but JMSR, as being reasonably susceptible to the interpretation that Dhatt or Allure, rather than JMSR, owned the formulas to those products. Whether or not it is the custom in the industry that the one who develops a formula owns it, the trial court properly excluded such evidence to construe or vary the terms of the 1998 agreement.

A more difficult question is presented, however, by the Allure defendants contention that even if extrinsic evidence was inadmissible to interpret the 1998 agreement, it should have been admitted for the limited purposes of considering the defenses to the noncontract causes of actionparticularly the claim for misappropriation of trade secretsand the claim for punitive damages.

The UTSA defines misappropriation as follows: (1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or [] (2) Disclosure or use of a trade secret of another without express or implied consent by a person who: [] (A) Used improper means to acquire knowledge of the trade secret; or [] (B) at the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was: [] (i) Derived from or through a person who had utilized improper means to acquire it; [] (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or [] (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or [] (C) Before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. (Civ. Code, 3426.1, subd. (b).)

The Allure defendants argue that the focus of this definition is their actions at the time they acquired the formulas; that at the time they did so, they had not yet entered into either the 1996 or the 1998 agreement; that they should have been allowed to present evidence that Dhatt developed the formulas independently; and that the industry practice was that the one who developed a formula owned it. They also argue that the excluded evidence was relevant to whether Dhatt used his own skill, experience, and knowledgerather than JMSR trade secretsto create formulas for other customers.

The Allure defendants rely for their position in particular on Futurecraft Corp. v. Clary Corp. (1962) 205 Cal.App.2d 279 (Futurecraft) and Rigging Internat. Maintenance Co. v. Gwin (1982) 128 Cal.App.3d 594 (Rigging International), which consider the right of a worker to continue to use his or her own expertise after leaving employment. These cases do not lead us to conclude that the trial court erred in excluding evidence that contradicted the 1998 agreement.

The plaintiff corporation in Futurecraft, a manufacturer of valves and valve components for guided missiles and rockets, brought an unfair competition action against a former employee, Roderick Koutnik, and his new employer, Clary Corporation, for the wrongful use and disclosure of certain valve designs that the plaintiff claimed were trade secrets. Koutnik had been employed by Futurecraft to invent, design, and develop the valves and components, and had done so using knowledge and skills gained in large part while working for a previous employer. (Futurecraft, supra, 205 Cal.App.2d at pp. 281-282.) The Court of Appeal stated: A basis for the protection of trade secrets is that the recipient obtains through a confidential relationship something he did not previously know. [Citations.] [] . . . [] The court cannot compel a man who changes employers to wipe clean the slate of his memory. [Citations.] To grant plaintiff the relief prayed for would in effect restrain Koutnik from the pursuit of his profession. He would be deprived of the use of knowledge and skill which he gained which did not originate with plaintiff. [Citation.] If the foregoing is not soundly premised how could a former employee with Koutniks knowledge and skill obtain future employment? (Id. at p. 288.) The Court of Appeal affirmed the trial courts judgment in favor of the defendants, noting as it did so that Koutnik had no contractual obligation not to make competitive use of the valve designs. (Id. at pp. 291-292.)

Rigging International similarly considered the ability of a defendant to compete with a former employer. The respondent there, Steve Gwin, had worked for the plaintiff, Rigging International Maintenance Company (Rigging), which was in the business of providing repair and maintenance services for container cranes on shipping docks. At the time Gwin began working for Rigging, he had experience in crane maintenance. (Rigging International, supra, 128 Cal.App.3d at pp. 598, 599.) While he was working there, Rigging prepared a bid to take over maintenance work for four cranes at the facility of Marine Terminals Company (MTC), which had been Gwins former employer. Gwin was aware of the progress of the negotiations and helped estimate the cost of performing the work for MTC, but was not part of the negotiating team. (Id. at pp. 599-600, 609-610.) While the negotiations between Rigging and MTC were going on, Gwin signed an agreement not to disclose plaintiffs trade secrets, and providing that any inventions or improvements made by Gwin during his employment should be the property of the plaintiff and that Gwin would not use them without Riggings consent. (Id. at pp. 600-601.) Several months later, Gwin formed a new corporation and left Riggings employ. Shortly thereafter, MTC told Rigging it was not pleased with the negotiations for the maintenance contract and would seek other bids. The following month, Gwin told MTC he was interested in preparing a bid. (Id. at pp. 602, 610.) Rigging brought an action alleging interference with business relationship, unfair competition, and breach of confidential information agreement. (Id. at p. 598.)

The trial court ruled for Gwin, and the Court of Appeal affirmed, concluding the judgment was supported by substantial evidence. (Rigging International, supra, 128 Cal.App.3d at pp. 598, 614.) The Court of Appeal noted there was evidence that Gwin had only minimal connection with Riggings negotiations with MTC; that any confidential information Gwin might have used in his own negotiations with MTC was not helpful; and that the methods he used to figure his costs were different from those used by Rigging and were based on his own extensive experience. (Id. at pp. 610-612.) Moreover, there was evidence that Gwin learned the principles of a safety device for lifting shipping containers, which was included in his proposal, before his employment with Rigging, and the court found that Gwin did not acquire any additional knowledge relating to that device from Rigging. (Id. at pp. 602, 613-614.) The court noted that a basis for the protection of trade secrets is that the recipient obtains through a confidential relationship something he did not previously know  (id. at p. 613, quoting Futurecraft, supra, 205 Cal.App.2d at p. 288), and that an employee is said to have acquired information amounting to a trade secret from his employer if the information is acquired during the course of his employment (Rigging International, supra, 128 Cal.App.3d at p. 613). Since Gwin had learned nothing new about the safety system in the course of his employment, Rigging was not entitled to treat it as a trade secret in its action against him. (Id. at pp. 613-614.)

This case presents important differences from both Futurecraft and Rigging International. In Futurecraft, there was no contractual obligation not to disclose information developed in the course of the confidential relationship; here there was. And in Rigging International, there is no indication that the confidentiality agreement provided that the safety device was protected as Riggings proprietary information, leaving open to dispute whether Gwin had acquired any particularized knowledge in the course of his employment that was protected. Here, on the other hand, the agreement did spell out both the proprietary information to be protected and its source. There was, accordingly, no open question as to whether Dhatt and Allure had acquired protected information in the course of their confidential relationship. Under the circumstances, Futurecraft and Rigging International are not controlling.[16]

The Allure defendants also rely on Cadence Design Systems, Inc. v. Avant! Corp. (2002) 29 Cal.4th 215 (Cadence), to argue that the excluded evidence should have been admitted in connection with the misappropriation claim because the focus of such a claim is the relationship of the parties at the time of acquisition of the trade secret. Cadence does not support their position. The question in Cadence was when a claim for misappropriation arises for purposes of the statute of limitations. Our Supreme Court held that such a claim arises only once, when the trade secret is initially misappropriated, and that each subsequent use or disclosure of the secret augments the initial claim rather than arising as a separate claim. (Id. at p. 227.) In reaching this conclusion, the court stated: A misappropriation within the meaning of the UTSA occurs not only at the time of the initial acquisition of the trade secret by wrongful means, but also with each misuse or wrongful disclosure of the secret [italics added]. (Id. at p. 223.) Thus, it appears that our focus is not only on whether the Allure defendants were under a contractual obligation of confidentiality at the time they assisted in developing JMSRs formulas, but also on whether they made wrongful use of trade secrets. Here, the wrongful use took place well after the parties had entered into a confidentiality agreement.

The Allure defendants argue, however, that the excluded evidence was relevant to whether the disputed formulas were readily ascertainable by someone in their line of work. They rely on American Paper & Packaging Products, Inc. v. Kirgan (1986) 183 Cal.App.3d 1318, which considered whether the plaintiffs customer lists were trade secrets that former salespeople could be enjoined from using. The Court of Appeal noted that the employee agreement provided that the lists were confidential, but stated that an agreement defining a trade secret may not be decisive in determining whether the court will so regard it. (Id. at p. 1325.)[17] The court affirmed the judgment in the defendants favor, ruling that the evidence supported a conclusion there was no protectable trade secret because, although the information in question might not be generally known to the public, it was known or readily ascertainable to other persons in the shipping business. The compilation process in this case is neither sophisticated nor difficult nor particularly time consuming. (American Paper, at pp. 1326-1327.)

The court in ABBA Rubber Co. v. Seaquist (1991) 235 Cal.App.3d 1, 21, disagreed with American Paper to the extent it suggested that information was not protectable if it was readily ascertainable, concluding that readily ascertainable information can be a trade secret so long as it has not yet been ascertained by others in the industry. However, the court went on to note that  the assertion that a matter is readily ascertainable by proper means remains available as a defense to a claim of misappropriation. (Legis. committee com., Wests Ann. Civ. Code, 3426.1 (1991 pocket supp.) p. 111.) (Id. at p. 21, fn. 9.) The question in ABBA was whether a former employee and his new employer were properly enjoined from soliciting the customers of the employees former employer, a manufacturer of rubber rollers. (Id. at p. 7.) The Court of Appeal stated the defendants could establish a defense to the misappropriation claim by convincing the fact finder it was a  virtual certainty  that anyone who manufactured certain types of products used rubber rollers; that the manufacturers of those products were easily identifiable; and that the defendants knowledge of the plaintiffs customers resulted from that identification process, rather than from the plaintiffs records. That defense, however, would be based on an absence of misappropriation rather than the absence of a trade secret. (Id. at pp. 21-22, fn. 9.)

The Allure defendants argue Dhatts development of products for his customers falls within this rule. They point to evidence that chemists tend to develop a habit of using their own style in developing different products, and that Dhatt developed both JMSR and Skin Therapy products through trial and error. The question here, however, is not whether Dhatt had a particular style in developing products, it is whether he violated his agreement to keep confidential the formulas for JMSRs products. We see no error in the trial courts findings that the trade formulas were not generally known to the public or to other persons, that Dhatt and Allure had promised to keep them confidential, and that the confidentiality of the formulas gave them economic value and gave JMSR a commercial advantage in the skin-care market. (See Civ. Code, 3426.1, subd. (d).)[18] Moreover, the trial courts ruling did not preclude the Allure defendants from presenting evidence that the Skin Therapy products were formulated independently, and were not based on JMSRs productsalthough such evidence might have been difficult to produce after Dhatt destroyed the laboratory notebooks that could have revealed the origin of the products Allure made.[19] In the circumstances, we agree the trial court properly excluded evidence that Dhatt had developed or owned the formulas to JMSRs products.

We likewise reject the Allure defendants contention that the excluded evidence should have been admitted in the punitive damages phase to show that Dhatts behavior was not reprehensible because he believed in good faith that he could properly use the formulas in question for other customers. In their trial brief regarding punitive and exemplary damages, the Allure defendants argued that the parol evidence rule and Evidence Code section 622 should not apply to the punitive damages phase of the trial. They contended they should be allowed to introduce evidence that Dhatt developed the formulas for JMSRs products, that Marini asked him to copy competitors products, that she did not provide him with any more input than any other customer, that Dhatt believed he owned the formulas because the industry standard and custom was that the chemist developing formulas in that manner owned them, that he believed the agreement with JMSR did not convey an ownership interest to JMSR, that he believed JMSR failed to fulfill its promises to continue to buy products from Allure, that Dhatt believed he had fulfilled his contract, and that the industry standard was that the chemist who created a product owned the formula. The trial court refused to allow the evidence, ruling that the parol evidence rule applied in the punitive damages phase.

We agree with the trial court that the same standards for the admissibility of evidence introduced to contradict the recitals in an integrated contract apply in the punitive damages phase of a trial as in the liability phase of the trial. All of the evidence the Allure defendants sought to introduce was designed to show that the 1998 agreement did not mean what we have already concluded it unambiguously saidthat the formulas for JMSRs products belonged to JMSR. Whatever the usual custom and practice in the skin-care industry, the parties overrode it through their contracts. The evidence was properly excluded.

2. Restraint of Trade

The Allure defendants contend the 1998 agreement is void under Business and Professions Code section 16600 (section 16600), which provides: Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. They point to several provisions of the agreement that they contend violate this provision: the prohibitions on the Allure parties manufacturing or formulating for other customers products that contain ascorbyl palmitate, TGF Beta-1, or the combination of salicylic acid, azelaic acid, and glycolic acid; the prohibition on soliciting JMSRs employees; and the bar on doing business with JMSR customers and former employees. JMSR defends the restrictions, arguing that they were necessary to protect trade secrets and that they left available to the Allure defendants a significant portion of the market for skin-care products.

Section 16600 expresses Californias policy in favor of open competition by providing that covenants not to compete are void. (Kelton v. Stravinski (2006) 138 Cal.App.4th 941, 946.) In enacting this provision, California rejected the rule that a restraint on trade is valid if reasonable. (Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288.) With the exception of certain statutory exceptions not at issue here, such agreements are void as unlawful  except where their enforcement is necessary to protect trade secrets  or other confidential or proprietary information. (Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429 (Thompson); see also Moss, Adams & Co. v. Shilling (1986) 179 Cal.App.3d 124, 130.) Put another way, contracts that restrain trade are unenforceable where the information sought to be protected is not a trade secret under the UTSA. (See Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 860-864 (Metro Traffic Control).) Thus, the focus of our inquiry is whether the restrictions on trade in the 1998 agreement were necessary to protect trade secrets.[20]

The test for trade secrets is whether the matter sought to be protected is information (1) which is valuable because it is unknown to others and (2) which the owner has attempted to keep secret. (Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1454 (Whyte).) Trade secrets can include customer information, as long as the party seeking to protect the information has expended time and effort identifying customers with particular needs or characteristics, the secrecy of the information provides a substantial business advantage, and reasonable steps were taken to keep the information secret. (Morlife, supra, 56 Cal.App.4th at pp. 1521-1523.) Whether information constitutes a trade secret is a question of fact, the resolution of which will be upheld on appeal if supported by substantial evidence. (Thompson, supra, 113 Cal.App.4th at p. 1430; In re Providian Credit Card Cases (2002) 96 Cal.App.4th 292, 300-301.)

The jury found in favor of JMSR on its causes of action for both misappropriation of trade secrets and breach of contract. Moreover, the trial court in its statement of decision found that JMSRs product formulas and customer information were trade secrets under California law. These findings were based on evidence that Allure had access to JMSRs confidential and proprietary formulas for the products it manufactured for JMSR; that JMSR owned the product formulas, as provided in the 1998 agreement; that JMSR owned by license the products in its C-ESTA line as well as other lines; that the product formulas were not generally known to the public or other persons; that Dhatt and Allure promised to keep the formulas confidential and not use them for anyone other than JMSR; that JMSR had developed a market for the products among skin-care professionals; that the confidentiality of its product formulas gave JMSR a commercial advantage, as demonstrated by the Allure parties use of the formulas to manufacture a successful line of competing products; that JMSR had maintained confidential customer databases and paper records of customer identities, contact information, purchasing histories, and other valuable sales information; that the substantial time, effort, and expense of building those customer relationships and maintaining sales information gave the customer records independent economic value; and that JMSR had made reasonable efforts to maintain the secrecy of its product formulas and customer information through the use of confidentiality and nondisclosure agreements, the restriction of access to formulas and customer information, and the requirement that departing salespeople return customer information. We agree the evidence supports the conclusion that JMSRs formulas and customer information were trade secrets.[21]

Some of the restrictions in the 1998 agreement, however, were not necessary to protect trade secrets. JMSR makes no attempt to argue that the ingredients ascorbyl palmitate, TGF Beta-1, or the combination of salicylic acid, azelaic acid, and glycolic acid were its trade secrets. Indeed, JMSRs own expert, Dr. Robert Saute, testified on cross-examination that the ingredients in JMSRs products were not trade secrets; that glycolic acid was not a trade secret; that TGF beta was not a trade secret; and that ascorbyl palmitate was not a trade secret. As Saute stated, when you put [an ingredient] on the label, its no longer a trade secret.

Rather than arguing the restrictions on Dhatt and Allures use of key ingredients fall within the trade secret exception to section 16600, JMSR contends the restrictions are permissible because they leave a substantial portion of the market available to the Allure parties, and hence do not restrain them from carrying on their trade. In support of this contention, JMSR cites evidence that not all chemists who manufacture skin-care products use the ingredients in question and that it would be possible to carry on a profitable business while complying with the restrictions.[22]

The cases JMSR cites do not support its position. In King v. Gerold (1952) 109 Cal.App.2d 316, the court considered a provision restricting a manufacturer from making certain house trailers. The plaintiff in King invented a particular trailer and licensed the defendant to manufacture it for six months. The agreement between them provided that if the license was not renewed, the defendant would no longer produce it. (Id. at p. 317.) When the contract expired, the defendant continued to manufacture substantially similar trailers. (Ibid.) The Court of Appeal concluded the restriction did not restrain trade in violation of section 16600, reasoning that the defendant was not prohibited from carrying on his lawful business of manufacturing trailers but is barred merely from manufacturing and selling trailers of the particular design and style invented by [the plaintiff] who in the first instance licensed [the defendant] to use such design for a limited time only. (King, at p. 318.) The restriction, then, was narrowly drawn to protect the plaintiffs invention. Here, on the other hand, there is no indication that JMSR was instrumental in devising the ingredients and ingredient combinations the Allure defendants were barred from using, and the restriction was broader than necessary to protect JMSRs formulas.

Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 similarly involved a narrowly drawn restraint on trade. The defendant there was contractually barred from using a parcel of land as a gasoline service station for approximately 20 years. (Id. at p. 190.) The Court of Appeal concluded the restriction did not violate section 16600, noting that it merely restricted the use of land for a limited period, and that the landowner was not prevented from operating a service station at any other place. (Boughton, at pp. 190-191.) The court also relied on King for the rule that a contract restraining only a small or limited portion of a business may be upheld as valid. (Boughton, at p. 192.) Thus, not only was the restriction in Boughton narrow, but it did not prevent the defendant from carrying on his legitimate business on other property.

JMSR also relies on General Commercial Packaging v. TPS Package (9th Cir. 1997) 126 F.3d 1131, 1132-1134, which concluded that under California law, a contract is valid unless it  completely restrain[s]  a party from carrying out a trade or business. Unlike the contract here, that at issue in General Commercial restrained the defendant not from carrying out portions of a particular business, but from soliciting or accepting business from pa