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self-study / Intellectual Property

Do you have to disclose trade secrets to protect them?

Yu samuel web

Samuel Yu

Partner, Kahana & Feld LLP

2603 Main Street, Suite 350
Irvine , CA 92614

Email: syu@kahanafeld.com

Shutterstock

What specific trade secrets were stolen, and why should they be given any protection? These seem to be fair questions to ask a plaintiff who files a trade secret complaint. Otherwise, a competitor could bring a meritless lawsuit and use the broad rules of discovery to gain a competitive advantage by conducting a fishing expedition to uncover information that it otherwise is not entitled to have.

To address this concern, California Code of Civil Procedure Section 2019.210 states that in any action alleging misappropriation of trade secrets under the California Uniform Trade Secrets Act, "before commencing discovery relating to the trade secret[s], the party alleging misappropriation shall identify the trade secret[s] with reasonable particularity." (Emphasis added.)

This requirement serves four important and interrelated goals: (1) to promote well investigated claims and to dissuade the filing of meritless trade secret complaints; (2) to prevent plaintiff from using the discovery process to obtain the defendants' trade secrets; (3) to assist the court in framing the scope of discovery; and (4) to enable defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secret misappropriation. Perlan Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333, 1343 (2009).

To meet the reasonable particularity requirement, the plaintiff must go beyond a list of high-level, generic categories in which its alleged secrets are said to reside. Id. at 1343-44. Rather, the disclosures must be detailed enough to permit the defendants to ascertain whether and in what way the information is distinguished from matters already known and permit the court to fashion appropriate discovery. Brescia v. Angelin, 172 Cal. App. 4th 133, 143 (2009).

As a result, courts have rejected trade secret descriptions that contain "broad, catch-all language as a tactic to preserve an unrestricted, unilateral right to subsequently amend [a] trade secret statement." Perlan, 178 Cal. App. 4th at 1350. It is also insufficient for a party to identify alleged trade secrets by citing to voluminous documents. Brescia, 172 Cal. App. 4th at 140.

If a competitor brings a trade secret complaint, the defendant has no obligation to comply with any of the rules of discovery until the plaintiff discloses with "reasonable particularity" the trade secrets that are at issue. If the plaintiff fails to do so but still seeks discovery, then the defendant can bring a motion for a protective order to stop the plaintiff from seeking discovery until it first complies with its trade secret disclosure requirement. This provides a huge benefit to the defendant because the defendant can proceed with its discovery and obtain vital information before having to disclose anything to the other side.

Thus, before filing a trade secret complaint, plaintiffs must have a grasp of the trade secrets that are entitled to protection and be ready to provide its trade secret disclosure at the outset of the case. Otherwise, the defendant will be able to draw first blood in discovery and gain the advantage in the litigation. On the other hand, a defendant in a trade secret lawsuit can hold its opponent's feet to the fire and insist on receiving the trade secret disclosure before complying with discovery. By forcing the other side to show its hand, the defendant can narrow the scope of discovery and prevent a fishing expedition that escalates the costs of litigation.

Does this mean that plaintiffs need to disclose the very trade secrets that they are trying to protect? Not necessarily. "Reasonable particularity" does not require the plaintiff to "define every minute detail of its claimed trade secret at the outset of the litigation" and does not require a "discovery referee or trial court to conduct a miniature trial on the merits of a misappropriation claim before discovery may commence." Advanced Modular Sputtering, Inc. v. Superior Court, 132 Cal. App. 4th 826, 835-36 (2005).

Instead, the purpose of the trade secret disclosure is to identify the universe of trade secrets that are subject to the lawsuit, and the plaintiff is not required to divulge the trade secrets actually misappropriated by the defendants. Ultimately, the "reasonable particularity" mandate is purposefully vague to provide the trial court flexibility to exercise its discretion to control the scope of discovery.

Identification of Trade Secrets Under the Defend Trade Secrets Act of 2016

To avoid the "reasonable particularity" mandate under the CUTSA, a plaintiff may want to pursue its claims in federal court under the Defend Trade Secrets Act of 2016. The DTSA applies to trade secrets that are "related to a product or service used in, or intended for use in, interstate or foreign commerce," and it is largely similar to the CUTSA with one notable exception. Unlike the CUTSA, the DTSA does not require the plaintiff to identify the trade secrets with particularity prior to commencing discovery. This gives the plaintiff a major advantage because it can limit the disclosure of its trade secrets without being handcuffed on discovery.

However, the DTSA does not exactly relieve the plaintiff's requirement to identify its trade secrets. Even under the DTSA, the plaintiff must allege that: "(1) the plaintiff owned a trade secret; (2) the defendant misappropriated the trade secret; and (3) the defendant's actions damaged the plaintiff." AlterG, Inc. v. Boost Treadmills LLC, 388 F. Supp. 3d 1133, 1144 (N.D. Cal. 2019) (citing Alta Devices, Inc. v. LG Elecs., Inc., 343 F. Supp. 3d 868, 877 (N.D. Cal. 2018)). While the plaintiff does not need to "spell out the details of the trade secret," it must "describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies." Id. (Emphasis added.)

In AlterG, a provider of impact reduction treadmills brought action against three former employees and the competing company they founded alleging the misappropriation of trade secrets. AlterG, 388 F. Supp. 3d at 1139-40. The plaintiff alleged that the defendants misappropriated "numerous learnings from AlterG's Low-Cost Platform Project," trade secrets "related to AlterG's development of anti-gravity rehabilitation products," and trade secret information "related to AlterG's design and development of its anti-gravity rehabilitation and training units." Id. at 1145. The court determined that such allegations consisted of improper "broad categories of information" rather than the requisite "specific descriptions" to identify trade secrets. Id. The court concluded that such allegations fail to describe the subject matter of the trade secret with "sufficient particularity" and granted the defendants' motion to dismiss. Id. at 1146.

Therefore, while the DTSA does not have the same "reasonable particularity" mandate as the CUTSA and does not preclude the plaintiff from conducting discovery prior to providing its trade secret disclosure, the plaintiff must still be ready to identify the universe of its trade secrets and identify its trade secrets with "sufficient particularity." Otherwise, the trade secret complaint can be subject to a motion to dismiss or motion for summary judgment. This begs the question, what good is conducting discovery if the trade secret complaint ultimately gets dismissed? To avoid this outcome, plaintiffs must consider the universe of its trade secrets and be ready to identify it regardless of whether the trade secret complaint is brought under the CUTSA or DTSA. 

#629

Ilan Isaacs

Associate Legal Editor (San Francisco Bay Area) and California Supreme Court reporter
ilan_isaacs@dailyjournal.com

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