Early Monday morning you learn that Jane, your former employee, has stolen your company’s confidential information and her new employer is using it. You call your lawyer and tell her that you want to put Jane in jail. Your counsel, however, focuses on whether the information is a “trade secret” under California law. California’s Uniform Trade Secrets Act, Civil Code section 3426.1(d), defines a trade secret as (1) “information, including a formula, pattern, compilation, program, device, method, technique, or process” that (2) derives independent economic value by being secret and (3) is subject to reasonable efforts to keep it secret. For many businesses, including yours, trade secrets are their most essential asset.
After determining that the stolen information is, indeed, a protectable trade secret and after hearing about the thorough investigation you conducted, your attorney recommends that you file suit, seek a temporary restraining order (TRO) and preliminary injunction, and, if necessary, proceed to trial to recover your company’s damages. Full speed ahead, you think. Your lawyer then tells you, however, that you’ll need to disclose your trade secrets to the court, a public institution, and to the other side. “Wait,” you say, “how can that be? The whole point is to keep them secret!” But your attorney explains that you must adequately disclose the trade secrets you contend were stolen to obtain a TRO and pursue your complaint, citing Synopsis, Inc. v. ATopTech, Inc., 2013 WL 5770542 (N.D. Cal. Oct. 24, 2013) andPerlan Therapeutics, Inc. Superior Court (2009) 178 Cal. App. 4th 1333 as examples. “Well then,” you say, “how do I get the remedies I’m entitled to without spilling my company’s intellectual property to the whole world?”
While there isn’t an app for that, your business can pursue its claim without “telling the world” about its trade secrets. The following are the principal disclosure events in a trade secret lawsuit and the tools to keep those secrets a secret.
1. The Complaint and TRO
Trade secret lawsuits start with a complaint, and businesses often seek a TRO at the same time. A TRO is a short term injunction that prevents the defendants from using the stolen information until further evidence can be presented at the subsequent preliminary injunction hearing. Not every business seeks a TRO; some decide to file a complaint and proceed to a preliminary injunction or simply to trial. Other businesses believe the damage from continuing use of their trade secret will continue to harm their business and seek a TRO immediately.
Both the complaint and TRO must allege with some particularity the trade secrets that have been misappropriated. As a result, from the outset a business must assess how much to say about its trade secrets. While laying out all the details of the trade secrets is usually not necessary at this juncture, what’s “sufficient” to support the complaint and TRO will depend on the nature of the secrets; vague, catch-all descriptions could result in the denial of the TRO or even dismissal of the complaint.Nextdoor.com, Inc. v. Abhyanker, 2013 WL 3802526 *4-5; Diodes, Inc. v. Franzen (1968) 260 Cal. App. 2d 244, 252-53.
If a detailed articulation of the trade secrets at this initial stage is warranted, state and federal courts permit a business, upon showing of sufficiently compelling reasons, to file a complaint and portions of a TRO application under seal. The sealing order will shield those secrets from the public. California Rules of Court, Rule 2.550-2.551; Northern District of California Local
Rule 79-5.
2. The Initial Trade Secret Disclosure to Permit Discovery The next disclosure stage in the trade secret case is discovery, the in-depth exploration of the trade secret primarily through the production of documents and witness depositions.
California Code of Civil Procedure section 2019.210 governs the initiation of trade secret discovery. It requires that “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.…” This statute applies to every trade secret misappropriation claim brought in a California state court.
Although there is not a direct counterpart under federal statutes, some federal courts have held that California’s discovery rules govern in cases alleging a misappropriation of trade secrets under California law. See Social Apps, LLC v. Zynga, Inc., 2012 WL 2203063 (N.D. Cal. June 14, 2012). Other federal courts apply section 2019.210 to manage the discovery process because they find it useful. Jobscience, Inc. v. CVPartners, Inc., 2014 WL 852477 (N.D. Cal. Feb. 2, 2014); Nextdoor.Com v. Abhyanker, 2013 WL 3802526 (N.D. Cal. July 19, 2013).
The section 2019.210 disclosure battleground is usually over whether the business identified its allegedly stolen trade secrets “with reasonable particularity.” What constitutes “reasonable particularity” is, again, a case-by-case judgment. Courts have held, for example, that cases involving less sophisticated secrets such as a pudding formula may require a less detailed disclosure than trade secrets involving technology. Brescia v. Angelin (2009) 172 Cal. App. 4th 133. While a section 2019.210 disclosure does not require absolute precision, the identification must be sufficiently detailed to “limit discovery by distinguishing the trade secrets from matters of general knowledge in the trade or of special knowledge of those persons skilled in the trade.” Advanced Modular Spluttering v. Superior Court (2005) 132 Cal. App. 4th 826, 835.
The protection against broad dissemination of the trade secret during discovery rests in section 2019.210’s phrase, “subject to any orders that may be appropriate.” This phrase typically means an agreement between the business and the defendants, and entered by the court as a protective order, governing who may look at confidential documents and other information (including deposition testimony) exchanged between the parties throughout the course of the lawsuit. The stipulated protective order (“SPO”) allows parties to designate the information produced with varying levels of protection, from “Confidential” to “Highly Confidential” to “Attorneys Eyes Only.” The AEO designation usually applies to the most critically sensitive trade secret information, and there’s often a tug of war over whether a party properly used the AEO designation. While the AEO label greatly limits access to the trade secret, over-use of that designation can lead to unwelcome results: some courts have held that parties who excessively use the AEO designation can incur both sanctions and loss of the confidentiality protection. See Team Play, Inc. v. Boyer, 2005 WL 256476 (N.D. Ill. Jan. 31, 2005); Fears v. Wilhemina, 2003 WL 21737808 (S.D.N.Y. July 25, 2003).
Most SPOs require that any person who receives confidential information must sign an acknowledgement that they have read the SPO, they agree to be bound by it and limit use as allowed by the SPO, and to return to counsel all copies of the designated records promptly after the lawsuit ends. Opposing counsel is usually allowed to keep one copy of the designated records and information for its files but they must be maintained in a way that preserves their confidentiality; they must also either return to the producing party or destroy all other copies of the designated records and information.
3. Preliminary Injunction, Summary Judgment, and Sealing Orders
Preliminary injunction and summary judgment motions substantively address the merits of the business’s claim. As a result, both sides will need to present their trade secret evidence in detail. Once more, the protective order customarily addresses the protection against unnecessary disclosure during this stage of the lawsuit through a provision enabling the parties to file documents under seal. While courts are sensitive to the importance of sealing records in trade secret cases, most will not rubber stamp the parties’ request to seal; courts have an independent obligation to balance the public’s right of access against the interest of the party in having its records sealed. Kamakana v. City & County of Honolulu, 447 F.3d 1172, 1178 (9th Cir. 2006); PQ Labs, Inc. v. Yang Qi, 2014 WL 4617216 (N.D. Cal. Sept. 15, 2014). Therefore, depending on the court and judge, a party should be ready to justify its request for a sealing order even if the SPO permits sealing. California Rules of Court, Rule 2.550-2.551; Northern District of California Local Rule 79-5.
4. Trial
Trials are public events and courts are very careful not to limit the public’s access. Moreover, in a high profile trade secret case, the public’s interest (directly and through the press) often becomes more intense. Here again, the sealing process is the tool to limit the disclosure of key trade secret information.
Before trial, the business—and the defendants—will identify the information detailing the trade secrets that will be presented to the court and jury. This process normally means pre-trial motions both to exclude sensitive information the business believes is irrelevant and motions to limit the dissemination of the core trade secret information during trial. Provided sufficient cause exists, courts can fashion protections that range from sealing orders to closed courtrooms. Pre-trial motions to limit trade secret disclosure during trial is prudent: courts have held that the failure to request sealing and similar orders before or at the beginning of trial can lead to a loss of protection if the request occurs after the presentation of the evidence. See Ayyad v. Sprint Spectrum, L.P., 2009 WL 2197276 *2-4 (First Dist. Ct. App. July 24, 2009).
Trade secret lawsuits are hard fought and fast paced, and they depend on a close examination of the contested secrets. Fortunately, the statutes, rules, and procedures in trade secret litigation permit the parties to utilize the court process with confidence that their trade secrets will remain confidential if the business takes the appropriate precautions.
If you have any questions, please contact Robert at rbleicher@carr-mcclellan.com or at (650) 342-9600