Ninth Circuit Develops New Particularity Requirement in Trade Secrets Decision
The particularized identification of the trade secrets alleged to have been misappropriated by a defendant, and when that particularized identification must be made, is an issue that is often litigated in trade secret cases. The issue most often arises in the context of motions to dismiss the complaint, in discovery motions, and at summary judgment. Unsurprisingly, there are diametrically opposed interests at play – plaintiffs want to delay the particularized identification as long as possible in the hope that discovery might permit them to expand their claims while, on the other hand, defendants push for early identification in the hope that doing so might limit the scope of permissible discovery and avoid proverbial “fishing expeditions.”
A recent Ninth Circuit decision, InteliClear, LLC v. ETC Glob. Holdings, Inc., No. 19-55862, 2020 WL 6072880 (9th Cir. Oct. 15, 2020), reversed a summary judgment ruling holding that plaintiff had failed to identify its asserted trade secrets with particularity. While this opinion is favorable to trade secret plaintiffs and provides important guidance on the issue, it also appears to create a conflict with established precedent (especially in California) requiring plaintiffs to make the identification before being allowed to conduct discovery.
Between 2004 and 2006, InteliClear developed a comprehensive electronic system to manage stock brokerage firm accounting, securities clearance and settlement services. In 2008 ETC’s predecessor attained a license of InteliClear’s system and signed a corresponding confidentiality agreement. Almost a decade later, ETC terminated the Software License Agreement, certifying the system had been destroyed. In 2018, InteliClear system’s architect noticed stark similarities between ETC’s system and the system previously licensed by InteliClear. After a forensic report determined the systems were almost identical InteliClear commenced action against ETC.
InteliClear asserted claims for trade secret misappropriations under the federal Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA). In an unusual procedural move, on the day after discovery opened under the court’s scheduling order, ETC moved for summary judgment arguing that InteliClear failed to identify its trade secrets with sufficient particularity or prove the system was a trade secret and that ETC had access to the system’s source code. The district court granted ETC’s motion, concluding that InteliClear had not identified which elements of its system constituted trade secrets.
Ninth Circuit Decision
The Ninth Circuit reversed the district court’s summary judgment ruling. Since the elements of DTSA and the CUTSA claims are similar, the court analyzed these together and relied on the DTSA’s sufficient particularity standard in making its decision. The opinion discussed the importance of a trade secret owner’s requirement to describe a trade secret with sufficient particularity to show that the trade secret is not a matter of general knowledge to the public and to allow proper rebuttal from the defendant.
Unlike the DTSA, the CUTSA states “the party alleging the misappropriation shall identify the trade secret with reasonable particularity” before commencing discovery. In the opinion, the Ninth Circuit acknowledged that federal courts have applied the California provision in federal cases. When ETC filed its motion for summary judgment, discovery had just begun. Relying on the language provided in the CUTSA and previous caselaw, the district court granted ETC’s motion, ruling that InteliClear failed to identify asserted trade secrets with particularity and that discovery would not settle InteliClear’s deficiencies. Although InteliClear identified some of its trade secrets in a sealed declaration, the court found that to be problematic and insufficient. It held that describing of “some of the features” in the system leaves the possibility that InteliClear might later argue that other “unnamed elements of the InteliClear’s system” are also trade secrets.
Contrary to the district court’s ruling, the Court held that InteliClear was not required to identify all possible trade secrets at the outset of litigation. The Court found that InteliClear’s identification of a single trade secret with sufficient particularity created a triable issue and held that plaintiffs in trade secret suits are less likely to provide specificity at the outset to avoid tipping off the same secret it is trying to protect from business rivals. As support for reversing the motion for summary judgement, the court cited Imax Corp. v. Cinema Technologies, Inc., a leading case on what particularity means in the identification of trade secrets. The Court also distinguished the case the district court relied on when granting ETC’s motion.
In both cases, the plaintiffs were able to enter the discovery phase. Based on the information provided by the respective plaintiffs during discovery, the courts then decided that the plaintiffs failed to provide their trade secret with sufficient particularity. The Court concluded that granting summary judgement before discovery was precipitous, premature and did not fairly permit development of the issues for resolution.
The Ninth Circuit also addressed the requirement that trade secret owners take reasonable measures to keep information secret. The district court found that no reasonable measures were taken because InteliClear’s system was not truly secret since it was not uncommon and the system is visible to users who are not bound by confidentially agreements. The Ninth Circuit reversed this decision as well, and in the process provided useful guidance on what may or may not rise to the level of reasonable measures.
First, the Court held that a declaration provided by the system’s architect properly demonstrated that its alleged trade secrets were not uncommon in other systems, but in conjunction, became unique in the industry. The declaration made it sufficiently clear the database components was unique despite expected overlap from tracking similar information. While the Ninth Circuit did not explicitly address so-called compilation trade secrets, the court’s analysis is helpful guidance for cases where an asserted trade secret is a unique compilation or collection of information otherwise in the public domain.
Secondly, ETC’s subsidiary entered into a confidentially agreement with InteliClear when it purchased the Software License Agreement, and the Ninth Circuit found that InteliClear’s confidentiality requirement in its licensing agreement constituted a reasonable measure to maintain secrecy. Lastly, InteliClear’s confidentiality requirement, coupled with its actions taken to encrypt and compile its source code, were also deemed to be reasonable measures under the circumstances to protect its trade secrets. In light of these steps taken by InteliClear, the Court held that a reasonable juror would find that parts of the system are not generally known or easily ascertainable to others, thus meeting the reasonable measure requirement.
While the Ninth Circuit’s analysis of Imax does not change the standard for what it means to identify asserted trade secrets with particularity, it does provide some guidance on when in the course of litigation this standard must be met. The Ninth Circuit’s decision appears to open the door to arguments that early identification is not required and that, contrary to the CUTSA’s clear statutory language, plaintiffs are permitted to conduct discovery before the requirement to identify with particularity kicks in.
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