Dr. Canfeng Lai worked at Applied Technology (Applied) for fifteen years as an engineer and then as its Electrical Engineering Director. He, along with 17 other high-level employees, was wooed and “poached” by Mattson Technology, Inc. (Mattson), a rival Chinese semiconductor chip manufacturer. Before Lai left, he was accused of photocopying designs and other classified trade secrets, mailing them to himself, and taking them with him to his new job. The case, according to Bloomberg News, “highlight(s) the growing concerns over China’s efforts to circumvent US sanctions and develop its own world-class chip industry.”

In Mattson Technology v. Applied Materials, Applied sued Mattson and Lai for industrial espionage and misappropriation in violation of the Uniform Trade Secrets Act (UTSA) and asked for a temporary restraining order. The company also sued Lai for breach of his employment agreement. UTSA, published by the Uniform Law Commission, strives for uniformity among all state laws that govern trade secrets.

To settle the lawsuit, Lai asked the court to compel arbitration per his employment contract with Applied. The trial court granted his request. But co-defendant Mattson also asked to be covered by arbitration. Mattson’s request was denied by Alameda Superior Court Judge Evelio M. Grillo. In a unanimous 3-0 ruling by a panel in District Five of California’s First District Court of Appeal, authored by Associate Justice George V. Burns, the appellate court ruled on November 3 that since Mattson was a “nonparty” to Lai’s employment contract, it could not compel arbitration.

Mattson also filed a motion to stay the litigation against it until Lai’s arbitration was conducted. Burns wrote that the trial court erred when it declined to stay the litigation, but it did issue a preliminary injunction to protect Applied’s trade secrets during all court proceedings.

Mattson, based in Fremont, California, is a “core subsidiary” of the Beijing E-Town Dragon Semiconductor Industry Investment Center of China. It is a direct competitor of Applied. Right after Lai accepted Mattson’s job offer, he “accessed proprietary information from Applied’s cloud-based storage system,” and sent it to his personal e-mail accounts. These actions took place despite his assurances, under penalty of perjury, that he “had not retained any Applied information.”

He said he just wanted to keep the information as “souvenirs,” even though some of the materials had nothing to do with his job at Applied but did “relate to his new position at Mattson.” However, as soon as he learned of the lawsuit he “immediately deleted the e-mails he sent to his Yahoo account.”

Burns’ opinion begins with the declaration that Mattson could not compel arbitration because it was not a party to the Lai-Applied arbitration agreement. He wrote, “Generally, only signatories to a contract are bound by or may invoke its arbitration clause.” In response to Mattson’s request for collateral estoppel, he explained that although collateral estoppel could provide a limited exception to avoid double jeopardy in criminal cases, it does not apply here because the “complaint’s allegation that Mattson knew or had reason to know that the stolen information was subject to ongoing confidentiality obligations” were not covered by Lai’s contract with Applied.

Next, the opinion explained why Judge Grillo’s decision to grant a preliminary injunction prohibiting Mattson from accessing any confidential information Lai took from Applied was correct. Mattson argued that the preliminary injunction, by itself, “wrongfully causes harm to its reputation: because it implies that “some evidence exists that it engaged in wrongdoing.” Burns was not persuaded, saying that Mattson’s point was “so broad it would apply equally any time a court temporarily enjoins any potential misappropriation pending trade secret litigation.

In addition, when Lai copied and sent trade secrets to himself, he provided the court with enough evidence so that the court’s finding that Applied could “successfully establish Mattson was involved in at least threatened misappropriation neither exceeded the bounds of reason nor contravened uncontradicted evidence.”

Burns then changed course and granted Mattson’s request to “stay the litigation against it pending the outcome of the arbitration. Citing the Code of Civil Procedure §1281.4, he explained that issues raised during court-ordered arbitration “shall…stay the action…until an arbitration is had in accordance with the order to arbitrate.” He emphasized that the “word shall is mandatory.”

With concurrences from Justices Teri L. Jackson and Mark B. Simons, the appellate court affirmed all the trial court’s motions except Mattson’s motion for a stay pending arbitration.