You are invited to listen to Episode 79 of Greenberg Traurig's Trade Secret Law Evolution Podcast, The Ninth Circuit Revisits "The Delicate Problem."
In this episode, Jordan Grotzinger and Gregory Bombard discuss the Ninth Circuit's recent decision impacting the most litigated issue in trade secret cases – trade secret identification.
Gregory Bombard (00:00):
This podcast episode reflects the opinions of the hosts and guests, and not of Greenberg Traurig, LLP. This episode is presented for informational purposes only and it is not intended to be construed or used as general legal advice nor a solicitation of any type.
Jordan Grotzinger (00:14):
This is a really impactful case on the most litigated, I am confident, the most litigated issue in these cases, which is, you guessed it, trade secret identification.
(00:34):
Welcome, everyone, to episode 79 of the podcast. I have with me today our most recurring co-host, my partner Greg Bombard out of Boston. Greg, how are you?
Gregory Bombard (00:46):
Doing great. Very excited to be back and really excited to talk about this new case.
Jordan Grotzinger (00:50):
And a new case it is. We're going to be discussing a case out of the Ninth Circuit that was filed, the decision was filed on August 12th. And Greg, you and I were talking offline and saying that, and I still believe it, this podcast has been on for six years, I struggle to think of an appellate decision with more potential impact than this one. And at the same time, and later on I do want to discuss with you, is it going to be so different or not? But we'll get there.
(01:24):
This is a case out of the Ninth Circuit. Let me give a brief snapshot and then, Greg, you could dive into the facts. The main issue in this case is under the Federal Defend Trade Secrets Act when and how specifically must a plaintiff identify its alleged trade secrets or, as the court put it, "This appeal asks at what point in the case and with how much particularity a DTSA plaintiff must specify its purported trade secrets."
(01:54):
I thought the court's framing of the issue was rather striking. I'm just going to read it. "By definition, trade secrets derive their value from non-disclosure. Both plaintiffs and defendants want to protect their trade secret information from the opposing party, often a competitor. So, trade secret cases present what we have called a delicate problem. How can plaintiffs plead, discover, and prove whether a trade secret has been misappropriated without giving away the trade secret? On the other hand, how can defendants respond to discovery without giving away their own trade secrets? Requiring too much disclosure too early could encourage fishing expeditions. Requiring too little disclosure too late could prevent the parties from proving or defending their claims. All civil discovery presents these concerns, but they are especially acute in trade secret cases."
(02:54):
So, this case enforces, as the court called it, the delicate problem first noted in the Hartley Pen Company case over 60 years ago.
Gregory Bombard (03:04):
And it is for sure a delicate problem. Let's dive into what happened in this particular case.
(03:11):
The plaintiff and the defendant are each California-based companies specializing in DNA sequencing and analysis. From 2013 to 2019, they operated under a business arrangement that eventually deteriorated. In 2019, the plaintiff alleges that the defendant abruptly locked it out of its shared office space, seized its equipment, and poached several of its employees. The plaintiff responded by filing a suit in federal court under the Defend Trade Secrets Act, alleging misappropriation of nine distinct trade secrets. And those included customer databases, marketing plans, proprietary reagents, and DNA donor technology. Notably, the plaintiff did not bring any claims under the California Uniform Trade Secrets Act, even though the case was filed in federal court in California.
(04:08):
During the initial 26(f) conference, the parties disputed whether the plaintiff needed to identify its trade secrets with "reasonable particularity," something that is required under the California state law. The district court agreed with the defendant and ordered the plaintiff to provide detailed disclosures for each asserted trade secret, including their economic value, security measures taken, and the specific elements of the trade secret akin to patent-style claims.
(04:41):
The plaintiff subsequently submitted an amended disclosure under seal in which it expanded its descriptions of the alleged trade secrets and subdivided some of the alleged trade secrets into subparts. However, the defendant again challenged the sufficiency of the amended disclosure and moved to strike most of the alleged trade secrets. The district court granted the motion, striking nine of 11 trade secrets and allowing the case to proceed on only two, the customer profile database and the vendor database. After further discovery, the plaintiff dropped one of the remaining claims and a jury ultimately found in favor of defendant on the last surviving trade secret. So, the plaintiff, having lost its entire case, appealed and argued that the district court's early dismissal of its trade secrets was improper under the DTSA and federal procedural rules.
Jordan Grotzinger (05:43):
So, as to the Ninth Circuit analysis and holding, first, the court recognized that "to show that information is a trade secret, a plaintiff may not simply rely upon catch-all phrases or identify categories of trade secrets. Instead, a plaintiff must prove that the claimed trade secret has sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons skilled in the trade."
(06:15):
And Greg, as you mentioned, the trial court dealt with this issue of trade secret identification, ruled on this issue under two federal rules, Rule 12(f), which is the motion to strike rule, and Rule 16, which governs discovery and the court's inherent authority to govern it broadly.
(06:37):
As to the 12(f), the motion to strike ruling, as you mentioned, Greg, the court struck most of the trade secrets from the amended disclosure and the court of appeals reversed. The court stated what that rule says, and it says in relevant part, "The court may strike from a pleading an insufficient defense or any redundant immaterial impertinent or scandalous matter." That is the text of Rule 12(f) that allows a defendant in federal court to what's called move to strike certain superfluous, if you will, more specifically described in the rule I just read, allegations.
(07:22):
And the Ninth Circuit said, in this case, this rule was not a basis to strike trade secrets because they were not "redundant, immaterial, impertinent, or scandalous." In other words, the striking of the trade secrets didn't fit what Rule 12(f) empowers defendants to do, which is strike superfluous allegations from a pleading. These ill-defined or allegedly ill-defined trade secrets did not fit the Rule 12(f) definitions.
(07:53):
As to the broader rule on discovery, Rule 16, and whether the striking of the trade secrets was a proper discovery sanction or penalty under that rule, the Ninth Circuit ruled that the dismissal of the nine trade secrets under Rule 16 was an abuse of discretion and reversed. It said, in relevant part, identifying trade secrets with "sufficient particularity under the DTSA is a fact question for summary judgment or trial." Now, that's a really important ruling because, as we've discussed in many prior cases, often trade secret identification is the subject of a motion to dismiss on the pleadings. And I am not saying that that's not proper anymore. I want to be very clear. But this case is saying that in this case, and as this case was pled under the DTSA, sufficient particularity is a fact question.
(08:56):
And then the court said early dismissal before discovery deprived the plaintiff of the iterative process that trade secret cases often require. It said, "As we recognized in Hartley Pen, defendants share similar concerns about turning over trade secrets or other proprietary information in response to plaintiff's discovery requests. So, for both sides, the conventional order of pleadings, initial disclosures, and firstround discovery may not be enough to set the stage for future factual development of a trade secret claim. Discovery in a trade secret case then requires an iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification."
(09:45):
The court also said, "Federal rules of civil procedure equip a district court to manage this delicate problem with broad Rule 16 pretrial powers and more specific authority to order that trade secrets be revealed only in a specified way."
(10:03):
And here's a key discussion from the opinion. The court noted that "some federal district courts have applied CUTSA, that's the California Uniform Trade Secrets Act, reasonable particularity rule to CUTSA claims at times in combination with DTSA claims. Still, DTSA requires a plaintiff to identify a trade secret with sufficient particularity as a matter of fact, unlike CUTSA's reasonable particularity rule. And unlike CUTSA, DTSA does not set out requirements for the specific timing or scope for identifying trade secrets. Instead, the conventional procedures under the Federal Rules of Civil Procedure apply. Here, the defendant cited Rule 12(f) and the district court cited Rule 16 in managing the 'delicate problem' of trade secret discovery. But in moving to strike and striking the plaintiff's trade secrets, the defendant and the court ultimately relied on a California rule that does not control a federal trade secret claim. And based on the facts and procedural posture of this case, neither Rule 12(f) nor Rule 16 authorized the district court to strike and functionally dismiss the plaintiff's claim to nine of its trade secrets."
(11:27):
So, Greg, let's go over the takeaways. And as I said at the top of the podcast, I do want to discuss with you how impactful this is really going to be and whether you can't move to dismiss for lack of trade secret identification anymore. I don't think that's the case, and we'll talk about why, but let's go over the takeaways.
(11:43):
One, in the Ninth Circuit anyway, don't over-import state rules. In pure DTSA claims, the California Uniform Trade Secrets Act is not binding.
Gregory Bombard (11:53):
Another key takeaway that you already see in many cases is this iterative approach to trade secret discovery where some courts will require a plaintiff to have a certain trade secret list to survive a 12(b)(6) motion to dismiss. Then they might require more specificity to be produced under seal to the opponent in order to start discovery into the defendant's secret information and then may require further particularity still as the case approaches summary judgment or as it gets to trial, a narrowing approach that is permissible under Rule 16.
Jordan Grotzinger (12:35):
Another takeaway, as I think I mentioned when quoting the decision, is that particularity is still required. You must at least eventually distinguish trade secrets from general industry knowledge or vague catchall categories, which won't survive.
Gregory Bombard (12:53):
Another takeaway is that the risk of this sort of extreme sanction may be diminished in cases that are brought under the Defend Trade Secrets Act. Certainly there's no question we are going to see many more disputes over trade secret identification in discovery in federal cases. That is not going away. But the holding is limited because the Ninth Circuit ruling ultimately was that the dismissal of claims, the dismissal of trade secrets was improper under Rule 12(f), the ability to strike scandalous material from a pleading. That didn't apply, didn't fit. Or Rule 37, which under these facts for an initial trade secret disclosure didn't fit either. But the Ninth Circuit did not expressly rule either way on the common practice of delaying discovery into a defendant's technology or its business until a plaintiff has sufficiently identified its trade secrets to the court's satisfaction. So, it remains to be seen how this particular ruling plays out, but the risk of early dismissal under 12(f) or Rule 37 is limited by this decision.
Jordan Grotzinger (14:15):
It's limited by this decision in the Ninth Circuit and in pure DTSA cases.
(14:20):
Okay, let's unpack this a little bit in terms of the practical effect of this decision, which, I don't want to call it bright line, but it's pretty specific in its ruling. For the first time, the Ninth Circuit has said the particularity test in the state act doesn't apply to pure DTSA cases and rejected the defendant's motion to strike allegedly ill-identified trade secrets. And the decision also talks about this so-called iterative process.
(14:53):
Even without this decision, Greg, how many cases have we seen at pleadings where this iterative process goes through sometimes a round of amendments ultimately followed by a ruling granting a motion to dismiss, or sometimes past that when you do have to get into fact discovery and maybe there's a motion for summary judgment? So, to that end, although this seems like more of a bright-line rule than we've seen on trade secret identification, do you think it's really going to make a difference litigating these cases? I'm asking you to crystal ball this.
Gregory Bombard (15:29):
Sure. You see this issue not just in California. Obviously when you're in either state court or federal court in California, plaintiffs both sides are well-attuned to this issue, and it's common in my experience to have federal courts impose a standard like the CUTSA even on the federal claims. But elsewhere, it's not just California, elsewhere, you see this issue play out in many jurisdictions where a court will require a plaintiff to make a disclosure of its trade secrets with particularity before it permits discovery or before it compels the defendant to produce discovery. And so this rule, this phasing, this iterative process, it exists and it existed separate and apart from the California standard.
(16:25):
So, the narrow holding of this case is that the California state standard does not apply to the Defend Trade Secrets Act. But even so, there's already case law in many circuits that applies something else, something similar to the California standard in trade secret cases. But there's no question that this case will cause arguments over the sufficiency of a trade secret disclosure in many cases to come everywhere because it's a thorough discussion of this delicate issue of when and how to require a plaintiff to disclose their trade secrets.
Jordan Grotzinger (17:05):
I agree with all that. I also think that the court's statement, or rather ruling, that sufficient particularity under the DTSA is a fact question for summary judgment or trial does not mean that it is always a fact question for summary judgment or trial. For example, if a plaintiff's alleged trade secret, even specifically enough described, actually identifies something that is public or not secret, well, then in that case, and maybe this is semantics, it's not a fact issue because the court can rule as a matter of law. If a plaintiff pleads that, "Here's my specific description of a trade secret," but you read this thing and you go on the internet and this other company is doing the exact same thing and it's public or open source, this opinion will not prevent a defendant in that case from moving to dismiss at the pleading stage and winning.
Gregory Bombard (18:11):
Totally. And this issue, zooming out, we probably talk about this every time we do a case about trade secret identification, but this is a contentious issue, I think you said this, in most cases. And as a plaintiff, it can be so frustrating to see the circumstantial evidence of misappropriation like a rapid developmental leap by a competitor and not know at that early stage, that early pleading stage, exactly what information was taken. And when courts require these early trade secret disclosures with a particularity, plaintiffs can feel like the deck is stacked against them because they need the discovery to know exactly what was taken.
(18:53):
But then on the other hand, when we represent defendants, those cases can often feel like discovery. It's just a big bait and switch. The plaintiff comes in arguing that everything is a trade secret, and they claim that you get these trade secret lists that are hundreds of pages of broad categories of things that could encompass either any business or, even if they're tailored to the plaintiff's business, they're broad enough that they do pull in public information like patent filings or papers that have been published. And if the court allows that, then that leads obviously to very broad discovery, which then in some cases leads to abuses where plaintiffs aren't held to a strict pleading standard and they just use their trade secret claim as a ticket to an open-ended fishing expedition into the defendant's business and technology.
(19:44):
Just from practice, you see both sides of this issue and why the Ninth Circuit referred to it as this "delicate problem." It really does not have an obvious clear solution because either way you stack the deck, you end up either favoring broader discovery, favoring plaintiffs, or running the risk of an extreme outcome, like the district court in this case, of dismissing trade secret claims before the plaintiff can get any discovery into the claim.
Jordan Grotzinger (20:19):
Right. And on that point, and the court of appeals addressed this too, the harshness of the district court's ruling was an issue. In other words, instead of granting leave to amend to try to more specifically identify the alleged trade secrets, these alleged trade secrets were stricken and the case was effectively dismissed.
(20:44):
Often, and we see this all the time too, the initial identification of a trade secret and a pleading is just sloppy and it's not a function of needing discovery, which is why very often, and in fact in my experience, and I'm confident across the board, the more common remedy, at least initially, when a court finds that a trade secret wasn't sufficiently identified is to grant leave to amend. And not with discovery, but just can you allege something that's not secret? Can you be a little more specific? And that happens sometimes.
(21:19):
So, Greg, have we essentially just concluded that despite the impactful blockbuster nature of this case, nothing has really changed? Is that the full circle here or am I wrong?
Gregory Bombard (21:32):
Isn't that what always happens with these new cases? You read this and you think, wow, this is big. We are going to be arguing this case in every single case now forever. But as we've both said already, you argue this issue in nearly every case already anyway, so it's maybe more fuel on this fire of trade secret identification disputes because by citing Rule 16 and saying there are these procedures in place under the federal rules, the Ninth Circuit is absolutely not ruling out controlling discovery and using trade secret disclosures as a way of controlling discovery.
(22:16):
I suppose the question is, if you as a court order the plaintiff to provide more specificity and then the plaintiff doesn't and you order them again and the plaintiff doesn't again, then what? Because this ruling really seems to limit the tools at the district court's disposal to do anything about it. 12(f) is just not the right fit. And the standard for Rule 37 sanctions, including the dismissal of claims, the Ninth Circuit lays out the very strict standard for obtaining dismissal sanctions, including showing that delay in discovery was prejudicial or dilatory, the dismissal has to serve the public interest, you have to demonstrate that less drastic alternatives were available and not considered. It's a very high standard to get something dismissed. So, this may ultimately lead to more disputes over trade secret identification and push us to come up with more creative solutions for dealing with this delicate problem.
Jordan Grotzinger (23:23):
Well, I feel differently about the case now than I did when we started this episode, and I'm sure I'll feel differently about it tomorrow. And I suppose that such is the nature of the law and its evolution. One of our favorite words.
(23:42):
Greg, thanks for this fun discussion and hope to see you soon.
Gregory Bombard (23:46):
Thanks, Jordan.
Jordan Grotzinger (23:47):
Thanks, everybody.
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