The issue of trade secret identification, on its face, seems like an elementary and uncontroversial one. In concept, every trade secret plaintiff should be expected to identify the trade secrets in the lawsuit it brings. After all, the plaintiff knows best what it considers to be a trade secret and what it doesn’t consider to be a trade secret, and the defendant shouldn’t be left to guess what those trade secrets might be. For these and other reasons, California, a key bellwether state for trade secret law, has long required by statute that a party claiming trade secret misappropriation identify those trade secrets with specificity before being permitted to conduct discovery relating to its trade secret claim. However, nothing tests the limits of common sense like the realities of litigation, and plaintiffs in California have complained that this procedure has been misused by defendants to frustrate or derail otherwise meritorious trade secret cases. Perhaps for these reasons, courts outside California remain divided over the so-called California rule as several recent rulings have demonstrated.
Section 2019.210 of California’s Code of Civil Procedure states “[i]n any action alleging the misappropriation of a trade secret . . . before commencing discovery relating to the trade secret, the party alleging misappropriation shall identify the trade secret with reasonable particularity.” Several policy reasons have been offered for this rule including: (1) deterring meritless trade secret cases; (2) preventing unscrupulous companies from using discovery to conduct improper fishing expeditions regarding their competitors’ trade secrets; (3) ensuring that a defendant can defend itself by knowing what it stands accused of stealing; and (4) framing the issues of the case to enable the trial court to better determine the parameters of what other discovery may be appropriate and relevant to that litigation. (For those interested in finding out more about the issue, I would recommend Charles Tait George and Brian D. Range’s excellent and seminal article on the issue, “Identification of Trade Secret Claims in Litigation: Solutions for a Ubiquitous Dispute”, published in The Northwestern Journal of Technology and Intellectual Property).
However, the rule is not without its critics. Plaintiffs in trade secret cases have complained that they cannot know what trade secrets have been misappropriated until they conduct discovery on a defendant, who is always in the best position to know what he or she took. This argument can have particular force where a plaintiff has a legitimate reason to believe, based on forensic analysis, that large amounts of data or information have been transferred or taken. In these situations, plaintiffs have argued that they face a “catch-22” by being forced to list out every trade secret they can think of (resulting in a waste of the parties’ time and resources) or potentially missing trade secrets taken by the defendant of which they are unaware. Finally, since trade secret cases frequently involve requests for injunctive relief, an otherwise legitimate request for an injunction could be stymied by a defendant’s insistence on identification prior to the entry of any relief.
In light of these competing arguments, federal courts have been divided over requiring trade secret identification in connection with the sequencing of discovery in the cases before them. Several courts have allowed discovery to go forward without requiring trade secret identification first (see for example, the decision of the District of Nevada in Global Advanced Metals USA, Inc. v. Kemet Blue Powder Corp., 2012 U.S. Dist. LEXIS 126550 (D. Nev. Sept. 6, 2012)) while others have found that the burden of identifying trade secrets is one properly born by the plaintiff and that it should be done before discovery on the other sides’ trade secrets (see the Northern District of Georgia’s decision in DeRubeis v. Witten Technologies, Inc., 244 F.R.D. 676, 680-81 (N.D. Ga. 2007). While I have not done a survey, my educated guess is that courts have begun to lean towards requiring some form of identification and sequencing of discovery in an effort to balance these competing concerns.
To that point, the Southern District of Ohio has increasingly shown a willingness to require the plaintiff to identify its trade secrets and postpone certain categories of discovery until that identification is completed. In a very recent decision, A&P Tech., Inc. v. Lariviere, 2017 U.S. Dist. LEXIS 211822 (Dec. 27, 2017 S.D. Ohio), U.S. District Court Judge Timothy Black required the plaintiff in that case to submit a specific, narrative list of its allegedly misappropriated trade secrets before permitting any discovery of the defendant’s trade secrets. In a thorough and well-reasoned opinion, Judge Black considered the policy arguments above and found identification should be required. However, Judge Black did not preclude discovery on other claims and allowed that the plaintiff could later amend its list of allegedly misappropriated trade secrets as needed based on information gained through discovery. It’s worth noting that in the same opinion, Judge Kemp denied a request for a preliminary injunction that sought to impose the inevitable disclosure doctrine after the defendant’s two-year non-compete had expired. That suggests, at least to me, that the court was unpersuaded by the trade secret claims before it, and therefore more amenable to postponing trade secret discovery until the plaintiff could make a more credible trade secrets case.
Judge Black’s reasoning relied on an earlier case from the Southern District of Ohio requiring trade secret identification. In Safety Today, Inc. v. Roy, 2014 U.S. Dist. LEXIS 17116 (S.D. Ohio Feb. 11, 2014), U.S. Magistrate Terence Kemp rejected an effort by the plaintiff in that case to produce documents in lieu of an interrogatory answer seeking identification of the plaintiff’s trade secrets. Magistrate Kemp found that “[o]nly the employer will know what portion of that myriad of information known to its employees can legitimately be claimed as a trade secret, and no amount of record production . . . can provide the appropriate answer to that question.”
However, just one you think you spot a trend, an important state throws a wrench in that analysis. Last month, the Texas Supreme Court denied a writ of mandamus, in a petition styled In re Terra Energy Partners, that sought to compel the plaintiff to identify its trade secrets in that case. Zach Wolfe’s Five Minute Law Blog and Seyfarth Shaw’s Trading Secrets Blog both have discussions of the case and ruling. As those posts make clear, the defendants made compelling points for requiring trade secret identification: according to their submissions, plaintiff simply produced 170,000 pages of documents and refused to identify the trade secrets contained within those documents; in addition, defendants claimed it would cost them over $1 million to engage experts and try to discern the trade secrets. The Supreme Court’s order provided no reasoning for the denial and one can surmise that a writ of mandamus seeking to compel a discretionary discovery ruling by a trial court was, to put it gently, a longshot. Nevertheless, if true, it is difficult to reconcile how a trial court could allow a plaintiff to get away with that type of disclosure.
Takeaway: The lack of consensus among courts is likely a reflection that these competing policies are difficult to resolve with a single hard-and-fast approach. A consensus by those practicing in this area might help courts fashion appropriate benchmarks to balance these interests. However, arriving at a consensus in the legal community is complicated by the fact that where you stand on the issue of trade secret identification is going to be influenced by the fact of whether your ox is the one being gored.
To appreciate the benefits of the California rule, one only has to be a defendant in a case where a plaintiff bobs and weaves because it believes “something” has been taken but doesn’t want to be pinned down for fear that the alleged trade secrets can be proven to be bogus or to not have been misappropriated at all. At some point, every plaintiff needs to be required to identify its trade secrets in a timely way that ensures that a defendant has the ability to evaluate and challenge the bona fides of those trade secrets.
However, from the plaintiff’s side, particularly in situations where there have been significant downloads or transfer of information and there is a request for an injunction, a hard-and-fast rule requiring trade secret identification before injunctive relief is an invitation to mischief by a defendant. A well-funded and unscrupulous defendant can use the California Rule to drag out a litigation and frustrate a small company’s efforts to get critical injunctive relief.
Until these competing concerns are properly balanced, we will continue to see different rules applied by courts throughout the U.S.