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“Know Before You Go”: A Condition Precedent for Trade Secret Litigation

A version of this article was published in martindale.com Legal Library on February 14, 2014 and by the Intellectual Property Committee of the ABA Section of Litigation in Summer 2011.

If you are a plaintiff, time is of the essence in trade secret litigation. Consider the following scenarios: At 5 p.m. on a Friday, a high-level employee with access to your client’s confidential customer lists and data informs your client that she has accepted a job with a competitor effective immediately. Monday morning, the client’s IT department discovers that over the weekend the employee transferred highly confidentiality trade secret information to a home computer before she left, and the client believes she will begin utilizing that information right away with her new employer. Or, a joint venture in which the parties have shared technology and know-how falls apart on the eve of a new product launch and your client believes its now ex-venturer plans to move forward with the launch anyway, using your client’s secrets.

As anyone who has litigated a trade secret case knows, when these situations arise, the first call you make is to your spouse, family and friends. If you had plans for the weekend, cancel them. Vacation? Not. You spend the next several days or weeks scrambling to understand exactly what trade secrets are at risk. Where do you look? The answer obviously depends on the nature of your client’s business, but unless your client had the foresight to conduct a trade secret audit, you look everywhere you can. The compromised information could include client information, computer source codes, standard operating procedures, patent applications, non-disclosure agreements, manufacturing data and even board presentations. The list is lengthy. You gather facts in the time available, verify the accuracy of your information as best you can, file your complaint and motion for injunctive relief, and say a little prayer that you have all of the details right. Perhaps in the back of your mind you think that, even if the specifics are a little off, you can take some discovery of the defendant to hone your trade secrets claim.

While no good litigator would intentionally trade accuracy for speed, a number of recent trade secret decisions indicate the increasing importance of understanding (and articulating) at the outset of the litigation the precise nature of the trade secrets your client believes have been misappropriated. The days are on the wane when a plaintiff could file its trade secrets complaint and count on discovery of a defendant before identifying the precise nature of the claims in dispute.

These recent decisions also demonstrate why tools to help clients gather and memorialize trade secrets – such as trade secret audits and related protocols -- can be critical to success or failure in litigation. Quick actions by a company faced with trade secret misappropriation require that the company be able to identify its trade secrets. While this sounds self-evident, a surprising number of companies have not conducted adequate trade secret audits and have only vague ideas about the scope of their own trade secrets. Under the recent decisions described below, these companies will not be well-positioned to strike quickly to protect their core IP assets.

A. Perspectives on the Past: Flexibility or Abuse?

Unlike patents, copyrights and trademarks, trade secrets are an amorphous type of intellectual property. The Restatement of Torts, which provided the original explication of trade secrets, defines a “trade secret” as follows:

A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.

Restatement of Torts §757, cmt. b (1934).

The Uniform Trade Secret Act, which has been adopted by 44 states and the District of Columbia,1 provides a definition of equal breadth and opacity:

[I]nformation, including a formula, pattern, compilation, device, method, technique or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Unif. Trade Secrets Act §1(4).

The scope of a company’s trade secrets thus may be extremely broad, encompassing everything from financial information to marketing plans to manufacturing techniques and beyond. A company’s trade secrets may just as often involve the processes or information the company does not practice or utilize, as well as those that it does. Trade secrets also may be “combination claims” which combine secret and non-secret items together. The protean nature of trade secrets has lead to a conundrum for some IP practitioners: how does one adequately define and protect a company’s trade secrets without inadvertently excluding related combinations and extensions?
To a certain degree, trade secret litigation in the past solved this problem. Courts in earlier trade secret cases often allowed plaintiffs to resist precise identification of the trade secrets at issue in a case until very late in the litigation, sometimes upon completion of discovery or even on the eve of trial. These courts have identified at least three policies justifying this approach: 1) a plaintiff’s broad right to conduct discovery under the Federal Rules of Civil Procedure; 2) the recognition that a trade secret plaintiff, particularly if the plaintiff has hundreds or thousands of trade secrets, may have no way of knowing what has been misappropriated until it receives discovery on defendant’s operations; and 3) the “Catch-22” that might result in forcing a plaintiff to produce either a list of information that is too broad to qualify as trade secrets, or too narrow to capture the defendant’s misappropriation.

As commentators have rightfully noted, however, the practice of allowing plaintiffs to conduct discovery before identification can lead to litigation abuse.2 Without a clear identification of the claims, defendants may be forced to defend a much broader set of trade secret issues than is justified. Plaintiffs, having looked into a defendant’s bag of secret tricks, may be able to tailor their trade secret claims to fit the defendant’s business practices. Finally, weak trade secret claims that might otherwise be appropriate for early dismissal survive longer than they should, at considerable expense to the parties.

B. Guidelines for the Future: Identification Early and Often

There have been scattered calls in the past by commentators and some courts for a uniform rule regarding early identification of trade secrets. As of 1996, courts had attempted to resolve this issue through at least nine different approaches, including bifurcation of discovery so that discovery of non-confidential information would take place first, after which a plaintiff would have to demonstrate a factual basis for its claims to allow discovery of confidential information. See DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, 680 (D.C. N.Ga. 2007).

Apropos of its position as one of the trade secret centers in the country, California has enacted a statutory requirement which requires a plaintiff in a trade secrets case “to identify the trade secret with reasonable particularity . . . before commencing discovery relating to the trade secret.” California Code of Civil Procedure Section 2019.210.
Courts in a number of jurisdictions are beginning to follow suit and apply this standard on their own.

In DeRubeis, the U. S. District Court for the Northern District of Georgia required plaintiff to identify its trade secrets with “reasonable particularity” before allowing plaintiff to take discovery. The court interpreted the reasonable particularity standard to require more than a description of areas to which the trade secrets relate: “reasonable particularity” means that the adversary is on notice of the nature of the claims and that the party can discern the relevancy of any requested discovery on its trade secrets. 44 F.R.D. at 681. The DeRubeis court concluded that this requirement was appropriate for a number of reasons: 1) plaintiff already appeared reasonably aware of the trade secrets at issue and would not have to list thousands of trade secrets in order to ensure it claims were protected; 2) the “reasonable particularity” standard would avoid the Catch-22 of either over- or under-identifying the crucial IP; 3) the standard would prevent plaintiff from engaging in a “fishing expedition” into defendant’s business; 4) the standard placed appropriate limits on discovery by excluding discovery into issues not identified by plaintiff and 5) requiring plaintiffs to identify its trade secrets at this stage would allow defendant to begin to mount a defense to the allegations. Id. at 681-682.

Relying on DeRubeis, the U.S. District Court for the Eastern District of Michigan in Dura Global, Tech, Inc. v. Magna Donnelly Corp., 2008 WL 2064516 (E.D. Mich.) stayed discovery until plaintiffs provided defendants with a list identifying the trade secrets alleged to have been misappropriated “with reasonable particularity.” The Dura Global court also provided some insight into how stringently this standard can be applied. The Court reviewed plaintiff’s initial list of trade secrets in connection with a motion to compel filed by the defendant and criticized the list as being “better described as a brief identifying areas as to which their trade secrets related . . . [the trade secrets] are described in general terms, such as ‘business strategies and inside information,’ interspersed with more specific information which identifies particular trade secrets.” (emphasis added). 2008 WL 2064516 at *2.

The court concluded that plaintiff’s list was lacking and highlighted the dangers of over-designating the trade secrets at issue:

If Plaintiffs are claiming the misappropriation of each of these thousand of trade secrets, such a list is required by the reasonable particularity standard, with the exception noted above regarding trade secrets which are compilations of secret and non-secret information for which the secret information need not be specifically identified. However, the compilation must be identified with particularity.

Id. (Emphasis added).3

In a similar vein, the U.S. District Court for the Northern District of California in Farhang v. Indian Institute of Technology, Kharagpur, 2010 WL 2228936 (N.D. Cal.) dismissed several of plaintiff’s claims for misappropriation of trade secrets due to insufficient early stage identification. In Farhang, plaintiff brought suit against defendants alleging, among other things, misappropriation of plaintiff’s core technology as described in patent applications relating to wireless data technology, and plaintiff’s “specific business models and implementations relating to this technology.” 2010 WL 2228936 at *14. While the court found that the patent applications sufficiently described trade secret information, it held that a description of the business models and implementation as “specifics regarding the actual implementation of . . . the project” was insufficient under the reasonable particularity standard. Id. The court accordingly dismissed this aspect of the trade secret claim.

Not all courts applying the reasonable particularity standard have found plaintiff’s identification lacking. In a trade secret case concerning computer software, Storagecraft Technology Corp. v. Symantec Corp., 2009 WL 361282 (D. Utah), the U.S. District Court for the District of Utah found that plaintiff’s description of its trade secrets as “all source code received under the License Agreement or derived or created from such code” met the reasonable particularity standard. 2009 WL 361282 at *2. The court specifically rejected defendant’s argument for a “bit by bit” identification of the source code, and further found defendant’s attacks on the ultimate merits of the trade secret claim improper at that stage of the case. Id. The Storagecraft court noted that “the reasonable particularity standard . . . is different from those standards used in determining whether a party is entitled to injunctive relief.” Id. at *3.

While Federal Rule of Civil Procedure 65 (d) has always required specificity in orders granting injunctive relief, the Seventh Circuit’s decision in Patriot Homes, Inc. v. Forest River Housing, Inc., 512 F.3d 412 (7th Cir. 2008) may also be an indication of increased scrutiny of trade secret claims in the context of injunctive relief. And often, injunctive relief is the only remedy that can protect a client’s ongoing market advantage. The plaintiff in Patriot Homes sought an injunction prohibiting defendant from disclosing and using its trade secrets relating to modular home designs. In reversing the lower court’s grant of the TRO, the Seventh Circuit wrote that:

the preliminary injunction entered by the district court uses a collection of verbs to prohibit Sterling from engaging in certain conduct, but ultimately it fails to detail what the conduct is, i.e., the substance of the trade “secret” or “confidential information” to which the verbs refer.

512 F.3d at 416 (Emphasis added).

The court went on to note that while the plaintiff contended that its trade secrets were contained in its “playbook” for modular home construction, it was not possible to tell how much of the information in the playbook was readily available through FOIA requests. The court concluded that a district court issuing injunctive relief in a trade secret case must “identify each and every element of . . . trade secret and [identify] specific proscribed acts.” Id.

The “takeaway” from these recent decisions is that potential trade secret plaintiffs must conduct greater due diligence before filing litigation. Plaintiffs will not be able to get away with vague allegations of trade secret misappropriation, hoping to sharpen their case after taking discovery of defendants. If a plaintiff cannot identify with “reasonable particularity” the trade secrets at issue at the outset, the plaintiff may not get the opportunity to conduct discovery and its claims will be dismissed.

C. Trade Secrets Audits: “Reasonable Particularity”

Let’s turn back to the hypothetical litigation scenarios posed at the beginning. After you have informed your loved ones that you will not be able to enjoy a weekend at the beach with them because your client’s trade secrets have just walked out the door on a thumb drive, the second phone call you should place will be to your client, asking it to begin identifying the exact nature of the trade secrets at issue. With luck, the very first document your client will send to you will be its trade secret audit, updated within at least the last calendar year.

Much has been written recently about trade secret audits and the various forms they can take, depending on the size of the company, the nature of its business and the amount of money the company is willing to invest in the project.4 In broad terms, a trade secret audit will identify a company’s trade secrets and provide a comprehensive plan to protect them, including execution of employee nondisclosure agreements, confidential designations on trade secret material, and even physical barriers to prevent the dissemination of trade secrets.

From a litigator’s point of view, these audits should have several basic features in order to be valuable in assisting the prosecution of trade secret claims. First, the audit should describe the trade secret in as much detail as possible. So, for example, if the client believes its customer information is a trade secret, the audit ought to identify the kinds of information kept on customers, including, for example, in the case of manufactured goods, orders, payment history, margin analysis, specifications of custom products, marketing plans, and customer training programs. Providing this level of detail, instead of a generic designation of “customer files” or “sales history,” will enable litigation counsel to identify the precise nature of the affected trade secrets quickly, and describe the protected information to the court with “reasonable particularity.”

Second, a useful trade secret audit will identify the employees most knowledgeable on the particular topic, and this information will be updated on regular basis with new employee departures and arrivals. This information will enable litigation counsel to identify efficiently those witnesses who will need to be interviewed in preparation for the lawsuit, as well as identify custodians whose electronic data will need to be mined for discovery.

Finally, a useful trade secret audit will identify the documents that comprise and/or relate to the trade secret. So, in the case of our manufacturing example, all manuals, recipes, standard operating procedures and written protocols/instructions should be identified next to the description of the confidential process. Such a list will aid in the process of efficient document and information gathering during those first few crucial weeks when litigation counsel is working to understand and best present her initial salvo to the court. Of course, any company conducting a trade secret audit must bear in mind that the audit likely will be discoverable in litigation, and the audit should be thoroughly reviewed to ensure that it will be well-received by a court and/or jury.

D. Conclusion

While trade secrets remain a flexible form of intellectual property, the litigation procedures concerning misappropriation claims are tightening up to require earlier, more specific identification of the trade secrets at issue. This development should be a spur for clients and practitioners to create specific trade secret audits and related protocols upon which litigation counsel can draw when the need for speed in pursuing would-be misappropriators arises.
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1The remaining six states which have not adopted the UTAS – Massachusetts, New Jersey, New York, Pennsylvania, Texas and Wyoming – protect trade secrets through common law or state-specific statutes.
2See Lee Ann Stevenson, Can You Be More Specific?, New York Law Journal, February 15, 2010; Charles Tait Graves and Brian D. Range, Identification of Trade Secret Claims in Litigation: Solutions for a Ubiquitous Dispute, 5 Nw. J. Tech. & Intell. Prop. 68 (Fall 2006), at 78-81.
3But see Interactive Solutions Group, Inc. v. Autozone Parts, Inc., 2012 WL 1288173, 2 (denying motion to dismiss and noting that Dura opinion “did not involve a motion seeking to dismiss a trade secret misappropriations claim . . . Rather, the defendant sought to dismiss the trade secret count as a discovery sanction.”)
4See e.g., Scott F. Gibson, Conducting a Trade Secret Audit, For the Defense, February 2011.