Key Defense Strategies in Trade Secrets Cases

• Citation: Vol. 39 No. 1
• Publication year: 2014
• Author: James Hardin

Key Defense Strategies in Trade Secrets Cases

James Hardin

Newport Trial Group

Tyler Woods

Newport Trial Group

INTRODUCTION

In trade secret cases, vagueness and obfuscation are the greatest enemies of the defense. In defending these cases, your job is to require plaintiff to delimit and define its position on the key issues which are: (1) what is the claimed trade secret; (2) on what theory of misappropriation is the plaintiff proceeding; (3) how did the alleged misappropriation cause the plaintiff harm, and how is it attributable to defendant; and (4) what legally cognizable harm did the plaintiff allegedly suffer, and was the misappropriation the cause of the harm. It is the plaintiff's burden to offer factually and legally viable premises and arguments in answer to these questions, and to proffer a coherent set of conclusions that connect these points.

Thus, the key to a successful defense is for a defendant consistently to demand specificity from the plaintiff during the pleading and discovery stages, through motions challenging the pleadings, specific discovery requests, and motions to compel if necessary, to take advantage of the many legal doctrines available to limit or invalidate many trade secret misappropriation theories. Some of these legal doctrines and strategies are summarized below.

NARROW THE CASE BY ARGUING PREEMPTION UNDER THE CALIFORNIA UNIFORM TRADE SECRET ACT ("CUTSA")

California trade secret law is codified by the California Uniform Trade Secret Act (CUTSA).¹ Under California Civil Code section 3426.7(b), the CUTSA "preempts common law claims that are 'based on the same nucleus of facts as the misappropriation of trade secrets claim for relief."² Silvaco, which is the leading California case specifically addressing this issue of preemption, emphasized the sweeping nature of the CUTSA:

[A] prime purpose of the [CUTSA] law was to sweep away the adopting states' bewildering web of rules and rationales and replace it with a uniform set of principles for determining when one is—and is not—liable for acquiring, disclosing, or using 'information...of value.' (See § 3426.8.) Central to the effort was the act's definition of a trade secret. (See § 3426.1, subd.(d).) Information that does not fit this definition, and is not otherwise made property by some provision of positive law, belongs to no one, and cannot be converted or stolen.³

Under the majority rule, the CUTSA preempts all common law tort claims that sound in trade secret misappropriation even where the claims are based on the misappropriation of information that does not satisfy the definition of trade secret under CUTSA.⁴ This is a potent argument for the defendant. The Defendant can rely on this argument of preemption to try to eliminate all other quasi-trade secret causes of action, including claims alleging breach of fiduciary duty, breach of confidence, breach of loyalty, conversion, misrepresentation, interference with contract, or unfair competition, even those arising from the same common nucleus of operative fact as the trade secret claim. The argument of preemption could be used to defeat the plaintiff's argument that the alleged confidential information does not rise to the level of a trade secret, and should therefore be considered under the common law of tort.⁵

[Page 29]

Under the majority rule, the issue of the CUTSA preemption focuses on the facts alleged in the complaint and, therefore, preemption can be successfully asserted in a motion to dismiss or demurrer.⁶ Under the minority rule, however, the court will allow discovery regarding the nature of the common law tort claims to determine whether the confidential information underlying the tort claims is "less than" the requirements for a trade secret. If so, the courts under the minority rule may decide that the common law claim is not preempted and deny the motion to dismiss:

This Court agrees with the approach taken by other courts within this district: 'To the extent the claim is based on these trade secrets, it cannot go forward. However, [the plaintiff] may continue to pursue the [tort claim] so long as the confidential information at the foundation of the claim is not a trade secret, as that term is defined in [the CUTSA]. If, in subsequent pleadings or briefs, or at trial, it is established that the disclosures on which [the plaintiff] bases this claim were trade secrets, the claim will be dismissed with prejudice.'⁷

Under either rule, it is crucial for defense counsel to require the plaintiff to explain, at the pleading stage and in discovery, the extent to which its common law claims differ from its trade secret claim. Although this may not be dispositive at the pleading stage before courts following the minority rule, if the defense can establish through discovery that the common law claims significantly overlap with the trade secret claim, those claims could be successfully attacked on a motion for summary judgment or a trial.⁸

STRATEGICALLY REQUIRE ADEQUATE DISCLOSURE OF TRADE SECRET

Under the California Code of Civil Procedure Section 2019.210, a plaintiff alleging a trade secret claim is required to disclose the alleged trade secrets with "reasonable particularity" before beginning discovery.⁹ Many, but not all, federal courts within the Ninth Circuit incorporate this or a similar threshold requirement either as binding substantive law or as part of simply "managing" a trade secret case.¹⁰

Regardless of whether the letter or the spirit of Section 2019.210 applies, defense counsel should prod the plaintiff into abiding by its fundamental discovery obligation to identify specifically its alleged trade secrets. The push to have the plaintiff specifically identify its alleged trade secrets should be made strategically. While this is often done by a motion to compel during discovery, sometimes it makes sense not to move to compel, but instead to use inadequate discovery responses to set up a motion for summary judgment, a motion to exclude evidence at trial (e.g., motion in limine to exclude evidence regarding unidentified trade secrets), or to exclude certain arguments at trial.

The proper strategy will depend on the particular facts and dynamics involved in each case. The key from a defense perspective is to recognize early in the case the plaintiff's obligation to identify specifically the alleged trade secrets and wield this to your advantage. Ultimately, the plaintiff will need to show protectable trade secrets, causation, and damages; the defense should seek to identify the weak links in this chain early on and determine the best strategy to exploit them, whether it be a motion to dismiss, motion to compel, motion for summary judgment, or motion to exclude evidence at trial.

CHALLENGE INVALID TRADE SECRETS

It is well settled that for information to constitute a protectable trade secret it must be: (1) secret; (2) have actual or potential economic value because it was secret; and (3) the plaintiff made reasonable efforts to keep the information secret.¹¹ The plaintiff has the burden of proving all of these elements.

Defendants should consider several key challenges to alleged trade secrets. First, if the information is publicly available or has been disclosed, then it is not a trade secret. The CUTSA requires both secrecy and reasonable steps to preserve secrecy.¹² Plaintiff's disclosure of the trade secret—even if inadvertent—can be fatal.¹³ One material disclosure can trump an array of well-crafted policies and procedures designed to protect a trade secret.¹⁴

Second, the defense should argue that trade secret information must exhibit at least "minimal novelty."¹⁵ Although "[n]ovelty, in the patent law sense, is not required for a trade secret,... some novelty will be required if merely because that which does not possess novelty is usually known; secrecy, in the context of trade secrets, thus implies at least minimal novelty"¹⁶ In short, information that is too generic or obvious is arguably not a protectable trade secret.¹⁷

Third, the defense should consider whether the plaintiff has proven or can prove that the specific trade secret claimed has "actual or potential" economic value because it was secret.¹⁸ A trade secret must be "sufficiently valuable and secret to afford an actual or potential economic advantage over others."¹⁹ A court will often require a plaintiff to present specific evidence that the trade secret has value because of its secrecy—such that general evidence about the amounts spent on research and development and the like may not suffice.

Finally, the defense should argue that plaintiff has not demonstrated it undertook reasonable efforts to maintain the secrecy of the alleged trade secrets. To the extent that Plaintiff did not sufficiently advise employees of the existence of the particular trade secrets, require employees and third parties to sign confidentiality agreements, or limit access (both physical and electronic) to the trade secret on a "need to know" basis, this may be ground to challenge the existence of a claimed trade secret.²⁰

COMPEL PLAINTIFF TO ARTICULATE MISAPPROPRIATION THEORIES

Defense counsel should compel the plaintiff, as part of the pleading stage and throughout discovery, to identify specifically its misappropriation theories. This is important for two basic reasons.

[Page 30]

First, although there are three general types of trade secret misappropriation—acquisition, disclosure, and use of the trade secret— there are various scenarios in which acquisition, use, or disclosure of an alleged trade secret is not "misappropriation" as a matter of law. Acquiring trade secret information by independent efforts, reverse engineering, public sources or literature, or...