Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

By Joshua Salinas

As a follow-up to yesterday's blog entry about a new California trade secret designation decision, another important issue that trade secret litigators face is whether the pre-discovery trade secret identification requirements of California Code of Civil Procedure section 2019.210 apply in California federal court.  There is a split in authorities but recent cases suggest that California federal courts will require at a minimum an identification of trade secrets by the plaintiff as part of a trade secret plaintiff’s Rule 26 disclosure or during the infancy of discovery.

In Jardin v. DATAllegro, No. 10-CV-2552-IEG (WVG), 2011 WL 3299395 (S.D. Cal. July 29, 1011), the Honorable Magistrate Judge William Gallo “wholeheartedly” agreed that section 2019.210 did not apply in federal district court.  Yet despite refusing to directly apply the statute, Judge Gallo’s pre-discovery trade secret identification order mirrored the procedures and policies provided in section 2019.2010.  Jardin epitomizes the growing trend in which federal district courts will require parties to identify trade secrets with particularity before commencing discovery, without explicitly applying section 2019.210.

Section 2019.210 requires a plaintiff to identify allegedly misappropriated trade secrets before commencing discovery.  The requisite pre-discovery identification helps serve four purposes: (1) promotes well-investigated claims, (2) avoid abuses of the discovery process, (3) frames the appropriate scope of discovery, and (4) enables the formation of complete and well-reasoned defenses.  Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980, 985 (S.D. Cal. 1999).

Jardin involved a dispute over the inventorship of U.S. Patent Number 7,818,349 (“Ultra-shared-nothing parallel database”).  Plaintiff Jardin had previously filed a related suit two years earlier against Defendant DATAllegro regarding the infringement of a different patent. Consequently, discovery in the prior case allegedly provided Jardin with access to DATAllegro’s confidential information.  Additionally, a protective order entered in the previous case limited the use of the produced protected information.  DATAllegro brought this issue to Judge Gallo, concerned that Jardin would improperly use confidential information from the prior case.

Judge Gallo found DATAllegro’s confidentiality concerns legitimate. Despite his explicit rejection of section 2019.210, Judge Gallo ordered that no discovery would take place until Jardin identified the allegedly misappropriated information.  In fact, Judge Gallo’s orders and underlying policy considerations mirrored section 2019.210.

Jardin objected to Judge Gallo’s order.

The Honorable Chief Judge Irma Gonzales upheld Judge Gallo’s order, finding nothing erroneous in his refusal to apply section 2019.210. Judge Gonzales noted that the Ninth Circuit has not decided whether section 2019.210 applies in federal court and California district courts continue to reach conflicting conclusions.  However, she stated that Federal Rule of Civil Procedure 26 provides district courts with broad discretion to control discovery. Thus, Judge Gallo could properly fashion his order after section 2019.210 without necessarily applying section 2019.210.

This case is significant because it illustrates the court's movement toward applying the procedures and policies behind section 2019.210 while retaining their “inherent discretion to manage discovery.”

The Southern District court in Computer Economics, Inc. v. Gartner Group, Inc., 50 F. Supp. 2d 980 (1999) was one of the first federal courts to directly apply section 2019.  That court recognized that the statute codified the holding in Diodes, Inc v. Franzen, 260 Cal. App. 2d 244 (1968), that pre-discovery trade secret identification is necessary to provide reasonable notice of the issues at trial and reasonable guidance in ascertaining the scope of appropriate discovery.  The Northern District in Neothermia Corp. v. Rubicor Medical, Inc., 345 F. Supp. 2d 1042 (N.D. Cal. Nov. 14, 2004) followed Computer Economics and directly applied section 2019.210.

The Eastern District in Funcat Leisure Craft, Inc. v. Johnson Outdoors, Inc., No. S-06-0533 GEB (GGH), 2007 WL 273949 (E.D. Cal. Jan. 29, 2007) was the first federal court to reject the direct application of section 2019.210.  That court found the statute to be a procedural rule that conflicted with the Federal Rules.

Since Funcat many district courts have continued to apply section 2019.210 either directly or indirectly. The Northern District applied the statute directly in M.A. Mobile LTD. v. Indian Inst. of Tech. Kharagpur, No. C08-02658 RMW (HRL), 2010 WL 3490209 (N.D. Cal. Sept. 3, 2010). The Eastern District in Hilderman v. Enea Teksci, Inc., No. 05cv1049 BTM (AJB), 2010 WL 143440 (S.D. Cal. Jan. 8, 2010), rejected the direct application of section 2019.210, yet held that plaintiffs would be barred from presenting trade secret claims for failing to provide defendants with “fair notice.” Moreover, the court in Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., Ltd., No. C 07-5248 JW PVT, 2008 WL 183520 (N.D. Cal. Jan. 18, 2008), declined to rule on section 2019.210 applicability, but required the plaintiffs to disclose the allegedly misappropriated trade secrets.

Jardin signifies this recent departure from Funcat’s complete elimination of section 2019.210 from federal court.  Indeed, federal courts should not ignore the purposes behind the statute as articulated in Computer Economics.  It is interesting to note that Jardin is from the same Southern District of California as Computer Economics. While Jardin refused to directly apply section 2019.210, it indirectly applied the statute with the same reasoning set forth in Computer Economics.

The Ninth Circuit has yet to resolve the dispute. However, in nSight, Inc. v. PeopleSoft, Inc., 296 F. App'x 555, 560 (9th Cir. 2008) (unpublished), it upheld the dismissal of a trade secret misappropriation claim because the plaintiff failed to identify any trade secret with “reasonable particularly” per section 2019.210.  While unpublished, and thus nonbinding, nSight may foreshadow the Ninth Circuit’s views regarding section 2019.210 applicability.

Moreover, the Eastern District in N. Am. Lubricants v. Terry, 2011 U.S. Dist. LEXIS 133672 (E.D. Cal., Nov 18, 2011) recently applied the rationale from Computer Economics regarding trade secret identification.  N. Am Lubricants involved a motion to compel for the plaintiff’s failure to identify trade secrets with sufficient particularity in response to an Interrogatory requesting said information.  The court noted that although the dispute did not involve section 2019.210, the court found the rationale in Computer Economics persuasive regarding the need for reasonably specific identification of claimed trade secrets in response to interrogatories at the outset of litigation.  It is notable that the decision was from the same magistrate who decided the Funcat case.

Trade secret defendants who find themselves in California federal court should request from plaintiffs the identification of any allegedly misappropriated trade secrets.  While some federal courts may not directly apply section 2019.210, the growing trend is for those courts to fashion orders to ensure that the policies of both Rule 26 and section 2019.210 are achieved and that there is a trade secret identification disclosure either before the commencement of discovery or at the infancy of the discovery process.  Thus, federal courts are more willing to either directly or indirectly use section 2019.210 because it is a helpful guideline to give defendants proper notice of the claims, enable complete defenses, guide proper discovery, and eliminate disadvantageous surprises at trial.

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The trend of some recent judicial decisions seems to reflect an increasing concern by courts that, notwithstanding trade secret misappropriation plaintiffs’ understandable reluctance to disclose proprietary information in more detail than absolutely necessary, they must describe with considerable specificity whatever is alleged to have been purloined. For example, a California district court ruled recently that “Whatever [the plaintiff] wishes to claim as trade secrets that [the defendant] misappropriated, it must identify each particular composition, formula, technology and manufacturing techniques, application and manufacture of [the applicable product] without further delay.” Delphon Industries, LLC v. International Test Solutions, Inc., Case No. C 11-01338 PSG (N.D. Cal., Jan. 4, 2012).

Plaintiff Delphon develops and manufactures gel products used in safely transporting delicate technology devices within and between laboratories. The gels are polymers created using proprietary formulas consisting of mixtures, blends and balances of specific chemical elements. In response to an interrogatory from Defendant ITS seeking identification of the trade secrets that allegedly were misappropriated, Delphon stated that it “customizes the composition of its gel materials to its customers’ needs” and that the trade secrets are “The ‘recipe’ for its different gel materials - including the amount of each ingredient used, the process . . . [and] methods of combining the ingredients, the use of solvents with gel materials, and the blending, mixing and dispersion of additives into the gel material.” ITS told Magistrate Judge Paul Grewal that Delphon had not identified its trade secrets with the specificity required by Section 2019.210 of the California Code of Civil Procedure, and he agreed. 

Section 2019.210 provides that, before commencing discovery relating to a trade secret allegedly misappropriated, the alleging party must “identify the trade secret with reasonable particularity.” According to Judge Grewal, the statute provides a “flexible standard” which does not require “every minute detail” of the claimed trade secrets but must be adequate “to permit the defendant to learn the limits of the secret and develop defenses [and] to permit the court to understand the secret and fashion discovery.” He held that Delphon had fallen short. First, it had admitted that its depiction of the trade secret was imprecise; the court added that “In fact, the description is so general that Delphon did not even bother to protect the description under the terms of the Stipulated Protective Order.” Second, Delphon’s Director of Materials Technology conceded at her deposition that the disclosures were “conceptual” and lacked specific details even though Delphon has this information. Third, the court explained that Delphon had offered “no credible expert testimony suggesting that those in the field would be able to review Delphon’s designations and distinguish the alleged trade secrets from information in the field.”

The lessons learned from this case are that a trade secret misappropriation plaintiff should 1) insist on the entry of a protective order; 2) should state that the description of the confidential information is covered by that order, and 3) should avoid referring to the disclosed information as “general” or simply “conceptual.” Finally, the plaintiff should consider seeking to retain a qualified expert witness to the extent necessary to testify that the unique characteristics of the trade secrets have been described sufficiently to differentiate the trade secrets from public information.

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By Robert Milligan and Carolyn Sieve

As mentioned in a previous blog entry, the California Court of Appeal issued a significant trade secret decision earlier this year providing additional clarification concerning the trade secret identification disclosures which a party pursuing claims for trade secret misappropriation must make before commencing civil discovery in California state court.

The California Supreme Court subsequently denied Sylvester Stallone's and another named cross-defendant's petition for review challenging the Court of Appeal's decision.

Accordingly, the Court of Appeal decision is binding case authority.

A California statute requires that trade secrets be identified with particularity before commencing discovery relating to the trade secret in suits alleging the misappropriation of trade secrets under California’s Uniform Trade Secrets Act.

Specifically, Code of Civil Procedure § 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.

In Brescia v. Angelin, 172 Cal.App.4th 133 (Mar. 17, 2009), the Court of Appeal found that Code of Civil Procedure § 2019.210 does not require in every case that a trade secret claimant explain how the alleged trade secret differs from the general knowledge of skilled persons in the field to which the secret relates. The Court found that such an explanation is required only when, given the nature of the alleged secret or the technological field in which it arises, the details provided by the claimant to identify the secret are themselves inadequate to permit the defendant to learn the boundaries of the secret and investigate defenses or to permit the court to understand the designation and fashion discovery. The Court found that the trade secret designation is to be liberally construed, and reasonable doubts regarding its adequacy are to be resolved in favor of allowing discovery to go forward.

Our recent article published by the Oxford Journals in the Journal of Intellectual Property Law & Practice discusses the Court of Appeal decision in depth and its practical significance.

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