Trade Secret Takeaways from the Ninth Circuit’s Decision in InteliClear, LLC v. ETC Global Holdings, Inc.

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Courts often require a plaintiff to identify a trade secret with reasonable particularity before commencing discovery (and it is a statutory obligation in California).  But frequently a trade-secret plaintiff does not know precisely which trade secrets have been taken by the defendant before discovery commences.  In the recent Ninth Circuit decision InteliClear v. ETC Global Holdings (9th Cir. Oct. 15, 2020), the appellate court held that, under its particular circumstances, a plaintiff who had not adequately specified its trade secrets at issue should nevertheless be permitted to engage in discovery for this purpose, where the plaintiff had shown discovery could provide the necessary information.  (Disclaimer: Sheppard Mullin served as co-counsel to the successful appellant-plaintiff in this case.)

Background in the District Court

InteliClear filed suit against ETC Global Holdings (“ETC”) and asserted causes of action under the federal Defend Trade Secrets Act (“DTSA”) and the California Uniform Trade Secrets Act (“CUTSA”) for misappropriation of trade secrets, among others.  Its alleged trade secrets related to InteliClear’s system for tracking securities trading, which it licensed to securities organizations.

The day after commencement of discovery, ETC moved for summary judgment by asserting InteliClear failed to identify its trade secrets with sufficient particularity, and that InteliClear did not show that its system was a trade secret or that ETC had access to InteliClear’s source code.  The district court granted ETC’s motion for summary judgment on the ground that InteliClear failed to sufficiently identify which elements of its systems were trade secrets.  The district court also denied InteliClear’s request—pursuant to Federal Rule of Civil Procedure 56(d)—to defer the motion for summary judgment until after completion of discovery because the court concluded discovery would not resolve InteliClear’s purported failure to state the alleged trade secrets with sufficient particularity.

Ninth Circuit’s Decision

The Ninth Circuit framed the issue on appeal as involving “the requisite particularity with which trade secret misappropriation plaintiffs must define their trade secrets to defeat a motion for summary judgment.”  The Ninth Circuit held that summary judgment should not have been granted for ETC because there was a triable issue of material fact as to whether InteliClear identified its trade secrets with sufficient particularity.

While ETC contended InteliClear’s explanation of its trade secrets was “unclear,” the Ninth Circuit explained that this was an issue of fact that could not be resolved on summary judgment.  As the Court of Appeals explained: “we hold that there is a genuine issue of material fact as to whether InteliClear identified its trade secrets with sufficient particularity.  A reasonable jury could conclude that the uniquely designed tables, columns, account number structures, methods of populating table data, and combination or interrelation thereof, are protectible trade secrets.”

The Ninth Circuit also rejected the district court’s rationale that, while InteliClear may have identified “some” of its trade secrets, it impermissibility “leaves open the possibility that it might later argue that other unnamed elements of the InteliClear System are trade secrets as well.”  As the circuit court explained: “At this stage, particularly where no discovery whatsoever had occurred, it is not fatal to InteliClear’s claim that its hedging language left open the possibility of expanding its identifications later.  InteliClear’s burden is only to identify at least one trade secret with sufficient particularity to create a triable issue.”

The Ninth Circuit further concluded the district court abused its discretion by denying InteliClear’s request to defer its summary judgment ruling to permit discovery.  The Ninth Circuit noted that ETC filed its motion only one day into the discovery period and no discovery had been provided.  The Ninth Circuit also acknowledged that often “discovery provides an iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification.”  The Ninth Circuit pointed to policy considerations that support letting discovery play out to further shape trade secret identification.  The Ninth Circuit concluded, “[T]he summary judgment granted was precipitous, premature and did not fairly permit development of the issues for resolution, because the nonmoving party has not had the opportunity to discover information that is essential to its opposition.”

The Ninth Circuit found InteliClear had met the legal burden to establish cause for a continuance of a summary judgment motion to pursue discovery.  It noted that “[e]ven a small amount of discovery would have let InteliClear clarify [its underlying trade secrets], which would have driven a potentially meritorious case forward.”

The Ninth Circuit concluded that its decision balanced the tension between two competing interests of the parties:  “Refining trade secret identifications through discovery makes good sense.  The process acknowledges the inherent tension between a party’s desire to protect legitimate intellectual property claims and the need for intellectual property law to prevent unnecessary obstacles to useful competition.”

Lastly, the Ninth Circuit emphasized that its holding was on the particular facts before it, and distinguished the most recent Ninth Circuit opinion on this same subject.  See Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1164 (9th Cir. 1998) (holding defendant was entitled to summary judgment where plaintiff failed to adequately identify its trade secrets).  The Court of Appeals explained that in its prior decision, Imax, summary judgment was properly granted because the parties had already “gone through a protracted discovery period” yet the plaintiff could still not specifically identify its trade secrets.  By contrast, ETC had moved for summary judgment on “the day after the initiation of discovery” and no discovery was ever conducted before the district court ruled on the motion.

Takeaways

The InteliClear decision does not prevent a defendant from moving for summary judgment early in a case against a plaintiff for failing to adquately identify its trade secrets.  But InteliClear is a reminder that to prevail on such a motion, a defendant may need to demonstrate to the court that allowing plaintiff to engage in further discovery will not shed light on its trade secrets, or that the plaintiff has already had a fair opportunity to conduct discovery on this issue.

Accordingly, defense counsel should consider whether to wait to file its potential summary judgment motion until the plaintiff has had its opportunity to conduct discovery.  Otherwise, the motion may give the plaintiff a road map of what discovery it should conduct to plug holes in its case.  Of course, there may be reasons to file a summary judgment motion out of the gate (e.g., all the discovery in the world won’t permit the plaintiff to cure defects in its case and the defendant should not have to be subject to burdensome and intrusive discovery before extricating itself from the litigation.

Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe.  A potential victim of trade secret theft, or the accused, should swiftly consult experienced litigation counsel.

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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