Timing is everything: Pre-discovery identification of trade secrets in California state and federal district courts

Timing can be crucial when it comes to discovery in trade secrets cases. At one end of the spectrum, discovery might be permitted to proceed before a plaintiff specifically identifies the trade secrets at issue, resulting in broad discovery and a plaintiff then tailoring its claims based on information that it finds during the discovery process -- i.e., the classic fishing expedition. At the other end of the spectrum, discovery may proceed only after the plaintiff identifies the trade secrets at issue with reasonable particularity, and be strictly limited in scope to only information relating to those specifically identified trade secrets.

Five years after the 2016 enactment of the federal Defend Trade Secrets Act and also following wide-spread adoption (by 47 states) of the Uniform Trade Secrets Act, differences continue to exist in how states address discovery in trade secret misappropriation claims. Until recently, these differences also continued in California's federal district courts. This may be shifting, however, following the 9th U.S. Circuit Court of Appeals recent decision in Inteliclear, LLC v. ETC Global Holdings, Inc.

California's Early Trade Secret Identification Rule

California state procedural law requires that a party bringing a trade secret misappropriation claim under the Uniform Trade Secrets Act must identify the trade secret or secrets at issue with reasonable particularity before commencing discovery. Specifically, California Code of Civil Procedure Section 2019.210 requires that: "In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act (Title 5 (commencing with Section 3426) of Part 1 of Division 4 of the Civil Code), 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 under Section 3426.5 of the Civil Code."

This rule originated in a 1968 California Court of Appeals case, Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244 (1968). Recognizing the conflict between a trade secret plaintiff's reluctance to reveal the specifics of a trade secret in a complaint, and a trade secret defendant's concern that an insufficiently specific trade secret complaint could lead to overbroad discovery, the Diodes court held that "[b]efore a defendant is compelled to respond to a complaint based upon claimed misappropriation or misuse of a trade secret and to embark on discovery which may be both prolonged and expensive, the complainant should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies." Id. at 252.

In contrast to California, many if not most other states rely on common law to determine the appropriate timing of identification of trade secrets. This results in differing approaches, including some jurisdictions not only allowing discovery to proceed before identification of trade secrets, but going so far as to suggest that such discovery could even potentially help in such identification. See, e.g., M.H. Eby, Inc. v. Timpte Industries Inc., No. 19-386, 2019 WL 6910153, at *7-8 (E.D. Penn. Dec. 19, 2019). The M.H. Eby court explained: "[a] robust consensus of district courts within the Third Circuit have held that a party alleging misappropriation in violation of [the Pennsylvania Uniform Trade Secrets Act] need not describe trade secrets with particularity to survive Rule 12 scrutiny," citing these cases for the proposition that "the specific trade secret information used to accomplish the foregoing would be gained through discovery and did not need to be plead in more specificity." Id.

This procedural timing issue is important and results in some courts significantly favoring the plaintiff by allowing broad discovery prior to the identification of trade secrets, and others the defendant by narrowing the scope of discovery to already identified trade secrets, and also lessening the risk of expanding claims. Until recently, these differences existed not only as between California and other states, but among the federal district courts within California as well.

California Federal District Courts' Application of the State's Pre-Discovery Trade Secret Identification Requirement

Casting back to law school, one might vaguely recall the Erie doctrine and remember that federal district courts resolving disputes not directly implicating federal questions must apply state substantive law. This applies most frequently in cases where there is diversity jurisdiction, and also supplemental jurisdiction over state law claims. While since passage of the DTSA there is a separate federal cause of action for trade secret misappropriation, most complaints asserting such a claim will also assert a state law misappropriation claim, whether under state statute or common law, as well.

This then leads to the question: Is CCP Section 2019.210 substantive such that its identification requirements should be applied by the federal courts? For many years, federal district courts in California have adopted differing positions on this issue, sometimes applying the rule because it does "not conflict with any Federal Rule of Civil Procedure but rather assists the court and parties in defining the appropriate scope of discovery," but other times declining the apply the rule because the district court is not free to adopt "bits and pieces of the discovery civil procedure codes of the various states." See, e.g., Social Apps LLC v. Zynga Inc., No. 4:11-cv-04910-YGR, 2012 WL 2203063, at *1-2 (N.D.Cal. Jun. 14, 2012) (requiring pre-discovery trade secret identification and discussing cases with differing opinions); see also Monolithic Power Systems, Inc. v. Wei Dong, No. 20-cv-06752-JSW(LB), 2021 WL 3847961, at *1 (N.D. Cal. Aug. 27, 2021) (holding that CCP Section 2019.210 is not limited to causes of action under the UTSA, but also extends to claims of patent infringement and breach of a nondisclosure agreement).

Recently, the 9th Circuit cited CCP Section 2019.210 in Inteliclear, LLC v. ETC Global Holdings, Inc. in holding that "[t]o prove ownership of a trade secret, plaintiffs 'must identify the trade secrets and carry the burden of showing they exist'" and that "[t]he plaintiff 'should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons ... skilled in the trade.'" 978 F.3d 653, 658 n.1 (Oct. 5, 2020). The court also stated, though, that "discovery provides an iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification." Id. at 662. The Inteliclear court reversed summary judgment of no trade secret misappropriation based on a failure to specifically identify the trade secrets at issue, finding that issues of fact might exist that and might be found during the discovery process. Id.

While by citing the rule Inteliclear clarified the potential for application of California's pre-discovery trade secret identification requirements in federal court litigation, it did not provide an entirely clear path forward, at least as California federal district courts have read the decision. Not surprisingly given its history, the Northern District of California has read Inteliclear as "holding that section 2019.210 standards can apply in federal trade secret litigation." Quintara Biosciences, Inc. v. Ruifeng Biztech Inc., No. 20-04808-WHA, 2021 WL 2166880, at *1 (N.D.Cal. May 27, 2021). Stating that "trade secret cases are especially susceptible to pleading chicanery," Judge Alsup explained, "[e]xperience has shown that it is all too easy for a plaintiff to allege trade secrets with calculated vagueness, then use discovery to redefine the trade secrets to be whatever is found in defendant's files. To ensure fair and efficient resolution of disputes, courts have a distinct interest in preventing parties from taking a shifting-sands approach to trade secret claims." Id.

Other California federal districts, though, have focused on the "iterative process" language of Inteliclear, and interpreted the decision as allowing "refinement" of trade secrets during the case. In Masimo Corp. v. True Wearables, Inc., for example, the Central District of California, citing Inteliclear, distinguished between "wholly new" trade secrets (i.e., trade secrets not identified prior to the discovery process), which it held required a showing of good cause and no undue delay in order to amend to include, and expanding upon already identified trade secrets, which would not require a special showing of good cause. No. 18-cv-2001-JVS, 2021 WL 2546752, at *1-2 (C.D. Cal. Mar. 10, 2021). Even so, this distinction signals a step toward limiting plaintiffs from unfettered amendment, and may also support corresponding limits on discovery. Where this line will ultimately fall exactly, though, is left to be seen.

At the least, Inteliclear provides is a shift toward more consistent pre-discovery identification requirements in federal trade secret litigation, and provides a basis for raising the issue in all of California's federal district courts. As said by Judge Alsup, "[i]n sum, using a trade secret procedure based in part on Section 2019.210 is an important tool in preserving fair and efficient litigation in the district courts." Quintara, 2021 WL 2166880, at *1. Given the 9th Circuit's movement in this direction, too, it will be interesting to see if, and to what extent, California's other district courts can now agree.