Trade Secret Rulings May Guide on Disclosure in Litigation

Recent federal court decisions offer important lessons on when identification of a trade secret must occur in litigation, what level of particularity is required, and whether the disclosure can later be amended, even though those issues are far from settled under state or federal law, say Kirkland intellectual property partner Joseph Loy, and associates Elliot Scher and Kyle Friedland, in this article for Law360.

How long can trade secrets remain concealed in litigation? When a claim of misappropriation hinges on the identity of trade secrets, parties often clash, and courts disagree, on the timing of disclosure.

Some plaintiffs prefer to delay disclosing their trade secrets for as long as feasible in order to capture the full scope of the defendants' misappropriation and not to limit prematurely the scope of the misappropriation claim. Defendants, on the other hand, may prefer to limit discovery to keep the case narrowly focused and avoid spiraling discovery costs. Both sides may have legitimate concerns. 

And courts have struggled to unify an approach to this dilemma. Uncertainty remains with when and how plaintiffs must articulate the specific secrets. Recent cases offer practitioners important lessons in navigating the disclosure requirements.

First, venue matters. California and Massachusetts have enacted statutes requiring trade secret identification with reasonable particularity before commencing other discovery.[1] The remaining 48 states address the issue on a case-by-case basis, with common law that guides much of trade secret litigation nationally.[2]

The U.S. District Court for the Northern District of Georgia has catalogued the policies underlying the developing common law, and highlighted at least nine different approaches to whether trade secrets should be identified before defendants respond to discovery.[3] 

Many courts favor prediscovery identification of trade secrets.[4] But even within that group, some jurisdictions are less inclined to require early discovery of particularized trade secrets. As such, prior to filing suit, and in mounting a defense, practitioners should consider the particular court's viewpoint before choosing the venue or acting on a discovery impasse related to trade secret identification.

Practitioners in California and Massachusetts should further consider the potential differences between state and federal courts — and even differences between federal courts within a single state. Whether the federal court will recognize a state's reasonable particularity standard can be an unpredictable, venue-specific question.

Federal district courts in California have adopted various positions on whether to apply California Code of Civil Procedure Section 2019.210. This consideration is particularly important when assessing removal from state court as a litigation strategy. At the federal level, a practitioner should be prepared to argue whether the relevant state statute falls under the Erie doctrine.

Finally, the nature of the evidence underlying the trade secret may warrant early identification and disclosure of discovery. Judges have a legitimate interest in ensuring trade secret discovery is properly tailored to the facts and alleged theft at issue in each case. Therefore, considering the nature of the evidence is helpful in anticipating when trade secrets must be disclosed.

Location, location, location: Some jurisdictions reject early trade secret disclosure.

Some jurisdictions continue to disfavor early trade secret identification. For example, the U.S. District Court for the Eastern District of Pennsylvania allowed discovery to proceed before the identification of trade secrets in M.H. Eby Inc. v. Timpte Industries Inc.[5] There, the declaratory judgment plaintiff was a former dealer of the defendant's trailers for 40 years before terminating their agreement to manufacture and sell its own trailers. In turn, the defendant alleged misappropriation of its trade secrets.

The plaintiff moved to dismiss the defendant's trade secret counterclaims, arguing that vague terms such as defendant's "information and materials," "confidential designs, production systems, and product history," "confidential customer information and confidential pricing information," and "confidential production know-how" failed to identify the alleged trade secrets.

The Eastern District of Pennsylvania denied the motion, finding guidance from another recent, in-district case, which held that the specific trade secret information at issue would be gained through discovery.[6] Since then, a line of cases has developed in the Eastern District of Pennsylvania for waiting to identify trade secrets. Other jurisdictions may have similar approaches, and practitioners should confirm whether a specific jurisdiction has generally followed the early-disclosure cases or takes a different approach to requiring the identification of trade secrets before discovery.

Before filing a claim or seeking removal, consider venue.

Federal district courts within California and Massachusetts may not apply the reasonable particularity standard set forth in the state's statute. Analyzing California and Massachusetts cases may help navigate this uncertainty. Though Massachusetts courts have yet fully addressed its statute, having recently come into effect in October 2018, California courts have thoroughly analyzed the scope and applicability of CCP Section 2019.210.[7] Indeed, the U.S. District Court for the Central District of California recently addressed a split between the U.S. District Courts for the Southern and Northern Districts of California on whether federal courts should apply CCP Section 2019.210 under the Erie Doctrine.

The Northern District of California's position, discussed at length in Social Apps LLC v. Zynga Inc., is that CCP Section 2019.210 "does not conflict with any Federal Rule of Civil Procedure but rather assists the court and parties in defining the appropriate scope of discovery."[8]

In particular, the court noted that Section 2019.210 is consistent with Federal Rule of Civil Procedure 26 in its "requirements of early disclosure of evidence relevant to the claims at issue and the Court's authority to control the timing and sequence of discovery in the interests of justice."[9] Therefore, the Northern District held that the reasonable particularity standard is properly applied in California federal courts.[10]

By contrast, the Southern District of California disagreed with the above reasoning in Freeman Investment Management Co. LLC v. Frank Russell Co. In Freeman, the court found that CCP Section 2019.210 imposed burdens on discovery that conflicted with the liberal discovery scheme of Federal Rule of Civil Procedure 26.[11]

In particular, the court noted that:

Rule 26(d) of the Federal Rules of Civil Procedure contains some limitations on initiating discovery. … [but] Compliance with the California Code of Civil Procedure is not among the authorized reasons for delaying discovery here.[12] 

In view of this conflict, the Southern District held that California's reasonable particularity standard is not appropriately applied at the federal level.[13]

The Central District of California declined to choose a side in M/A-COM Technology Solutions Inc. v. Litrinium Inc. After noting that the U.S. Court of Appeals for the Ninth Circuit has yet to address the issue, and acknowledging several cases on both sides, the court "decline[d] to reach the issue of whether Section 2019.210 is a procedural or substantive matter of state law under Erie," but still found that "under the particular facts of this case, the procedural requirements of Section 2019.210 are warranted and appropriate to assist in the orderly and expeditious handling of discovery."[14]

Clients interested in filing in state versus federal court, or removing a case to federal court, should consider in which district the case will reside. Further, practitioners should be prepared to argue whether the state statute is consistent with the Federal Rules of Civil Procedure. Such an argument may be particularly warranted in Massachusetts courts, which have not yet addressed this issue. Indeed, Massachusetts litigators may benefit from reviewing California's cases to identify helpful arguments for their clients.

Oral evidence may be expected upfront.

Even in jurisdictions that require early identification of trade secrets, there can at times be uncertainty surrounding the level of disclosure required. Because these determinations are particularly fact-intensive, a uniform approach may be unattainable. However, the nature of the evidence underlying a given trade secret may hint at the court's likely approach. 

The nature of the evidence was determinative on this issue in Coda Development SRO v. Goodyear Tire & Rubber Co in the U.S. District Court for the Northern District of Ohio. There, the plaintiff attended two meetings with Goodyear in 2009, during which they allegedly discussed Coda's secret self-inflating tire technology and demonstrated a functional prototype.[15] After a joint development project failed to materialize, Goodyear began obtaining patents on self-inflating tire technologies.[16] Coda then sued Goodyear for trade secret misappropriation.[17]

In considering Goodyear's motion to compel Coda to identify its trade secrets, the court focused on the oral nature of Coda's evidence underlying Goodyear's access to the alleged trade secrets.[18] Indeed, Coda's only evidence of Goodyear's access were the oral communications shared during the two alleged meetings.[19] In view of this, the court was particularly concerned that Coda may mold its trade secret claims based upon the discovery it receives.[20] Therefore, the district court compelled Coda to provide a closed response to Goodyear's interrogatories concerning trade secret identification, indicating what was communicated during their meetings.[21]

Though Coda represents an example in which all of the relevant evidence underlying communication of the trade secret was oral, its holding is instructive. Practitioners should consider the proportion and weight of oral evidence underlying a trade secret claim. Where oral evidence substantially forms the basis of a trade secret claim, courts may be more likely to require explanations of what information was shared orally.

Conclusion

The doctrine requiring identification of trade secrets has been adopted by some courts and not others. Because every trade secret presents unique questions regarding the level of disclosure required, a case-by-case, fact-intensive analysis is likely to remain the norm. But one thing is no secret: Plaintiffs will have to disclose their trade secrets sooner or later.


Joseph Loy is a partner, and Elliot Scher and Kyle Friedland are associates, at Kirkland & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See Cal. Code Civ. Proc. § 2019.210; Mass. Gen. Laws Ann. 93 § 42D employs slightly different language ("Before commencing discovery relating to an alleged trade secret, the party alleging misappropriation shall identify the trade secret with sufficient particularity under the circumstances of the case to allow the court to determine the appropriate parameters of discovery and to enable reasonably other parties to prepare their defense.") (emphasis added).

[2] DeRubeis v. Witten Technologies , 244 F.R.D. 676, 680-681 (N.D. Ga. 2007) (listing the polices in support of allowing the plaintiff to take discovery prior to identifying the trade secrets at issue versus approaches like CCP 2019.210 requiring pre-discovery disclosure).

[3] Id. at 681.

[4] See JJ Planck Comp., LLC v. Bowman,  No. 3:18-CV-00798, 2018 WL 3545319, at *3 (W.D. La. July 23, 2018) (noting that "pre-discovery identification seems to be the predominate trend").

[5] M.H. Eby, Inc. v. Timpte Industries, Inc. , No. 19-386, 2019 WL 6910153 at *1 (E.D. Pa. Dec. 19, 2019).

[6] Id. at 8 (citing PDC Machs. Inc. v. Nel Hydrogen A/S , No. 17-5399, 2018 WL 3008531 (E.D. Pa. June 15, 2018).

[7] The language of CCP 2019.210 has been codified in California since 1984. See Comput. Elects., Inc. v. Gartner Grp., Inc. , 50 F. Supp. 2d 980, 984-985 (S.D. Cal. 1999) (detailing the origins of CCP 2019.210).

[8] Social Apps, LLC v. Zynga, Inc. , No. 4:11-CV-04910, 2012 WL 2203063, at *2 (N.D. Cal. June 14, 2012).

[9] Id.

[10] Id.

[11] Freeman Investment Management Co., LLC v. Frank Russell Company , No. 13-CV-2856, 2015 WL 13828591, at *2-3 (S.D. Cal. July 30, 2015).

[12] Id. at 3.

[13] Id.

[14] M/A-COM Technology Solutions, Inc. v. Litrinium, Inc. , No. 19-CV-00220, 2019 WL 4284523 at *2 (C.D. Cal. June 11, 2019).

[15] Coda Development SRO v. Goodyear Tire and Rubber Company , No. 5:15-cv-1572, 2019 WL 6219745 at *2 (N.D. Ohio Nov. 21, 2019).

[16] Id.

[17] Id. at 1.

[18] Id. at 4.

[19] Id.

[20] Id.

[21] Id.