A Clear Need: To Allege Misappropriation, Identify Trade Secret

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The US Court of Appeals for the Ninth Circuit reversed a district court’s grant of summary judgment, finding that the plaintiff had sufficiently pled trade secret misappropriation by identifying its trade secrets and how they were protected with sufficient particularity. InteliClear, LLC v. ETC Global Holdings, Inc., Case No. 19-55862 (9th Cir. Oct. 15, 2020) (Gould, J.).

In 2004, InteliClear began development on a comprehensive electronic system for managing stock brokerage firm accounting, securities clearance and securities settlement services using a Structured Query Language relational database designed to handle millions of trades each business day. It named the program the “InteliClear System.”

In 2008, ETC’s predecessor signed a software license agreement with InteliClear and obtained a license for the InteliClear System. The license agreement acknowledged that all information InteliClear provided was confidential, proprietary and copyrighted, and ETC agreed to maintain that information in confidence “during and after” the terms of the agreement.

In 2017, InteliClear sent ETC a notice terminating the license agreement. ETC committed to remove the InteliClear database from its systems by February 26, 2018. On March 5, 2018, ETC certified that the InteliClear System had been removed from all ETC servers and that all copies had been destroyed. But, before the license agreement ended, ETC had already begun building its own securities clearance software. Around the same time that InteliClear terminated the license agreement, ETC launched its own electronic trading system. InteliClear immediately contacted ETC about its suspicion that ETC had improperly used the InteliClear System to build its own system, and, after months of negotiations, ETC agreed to allow a computer forensics company to compare the two systems and investigate. The forensics company found an abundance of evidence that the elements of each system were identical.

InteliClear sued ETC for trade secret misappropriation under federal and state law and for unfair competition. The district court dismissed the claim for unfair competition, reasoning that it was preempted by the California Uniform Trade Secrets Act. One day into discovery, and before any discovery had been requested or provided, ETC moved for summary judgment, asserting that InteliClear failed to identify its trade secrets with sufficient particularity and that InteliClear did not show that the InteliClear System was a trade secret or that ETC had access to InteliClear’s source code. The district court granted ETC’s motion and denied InteliClear’s motion to defer ruling until after completion of discovery under Rule 56(d). InteliClear appealed.

The Ninth Circuit analyzed the federal and state trade secret misappropriation claims together because the elements were substantially similar. The Court noted that to succeed on a claim for misappropriation, a plaintiff must prove (1) that the plaintiff possessed trade secrets, (2) that the defendant misappropriated the trade secrets, and (3) that the misappropriation caused or threatened damage to the plaintiff. To prove the first element, “a plaintiff must identify the trade secrets and carry the burden of showing they exist.” The Court pointed out that it is important to identify trade secrets with sufficient particularity because defendants need “concrete identification” to prepare a rebuttal. The Court found that InteliClear described its trade secrets as “the InteliClear System’s unique design and concepts and the unique software, formulas, processes, programs, tools, techniques, tables, fields, functionality, and logic by which its components interrelate and process data.” InteliClear also submitted a declaration by the architect of the InteliClear System describing specific features of the database as trade secrets, including specific tables, table columns, account identifiers, codes and methodologies. ETC’s chief technology officer submitted a declaration asserting that certain areas of InteliClear’s explanation of its trade secrets were “unclear.” For example, ETC argued that it did not know what “methodology” meant, even though InteliClear had described specific underlying technical attributes of the product.

The Ninth Circuit concluded that there was a genuine issue of material fact as to whether InteliClear identified its trade secrets with sufficient particularity. The Court noted that a jury could conclude that the uniquely designed tables, columns, account number structures, methods of populating table data, and combination or interrelation thereof were protectable trade secrets. The Court found that InteliClear had identified aspects of its database logic and architecture, including specific program processes, table columns and identifiers, to create a triable issue of fact. The Court also found that InteliClear had introduced sufficient facts showing that it protected its trade secrets through licensing agreements that precluded judgment as a matter of law. The Court determined that genuine disputes of material fact remained as to whether InteliClear demonstrated that it possessed protectable trade secrets and that the district court abused its discretion in denying discovery under Rule 56(d).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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