In reality, however, trade-secret cases are rarely so spicy or straightforward. More common is the situation where a company loses an employee to a competitor and is concerned that the former employee's experience and specific knowledge of his or her previous employer's business will be used to put him or her (or the new employer) at an undeserved competitive advantage. In the absence of an enforceable noncompete agreement, what can the former employer do to avoid losing the value it has invested in proprietary and confidential information such as formulas, software, customer lists, and unpatented inventions? Trade-secret law may provide the answer. But too often, plaintiffs in these situations allege that broad categories of proprietary information were misappropriated without defining the boundaries of what, exactly, they believe qualifies as a protectable trade secret. This article discusses recent cases in which courts have ruled against plaintiffs at various stages of litigation for failing to identify their alleged trade secrets with sufficient particularity. The article also emphasizes that early identification may be essential to the plaintiffs' success.
Although there have been proposals for creating a private right of action under federal law—including the Private Right of Action Against Theft of Trade Secrets Act of 2013 (H.R. 2466)—civil suits for trade-secret misappropriation are governed by state law. The Uniform Trade Secrets Act (UTSA) has been adopted in some form by all states except Massachusetts, New York, and North Carolina. See Uniform Law Comm'n, Trade Secrets Act (last visited Jan. 3, 2014). Under the UTSA, a "trade secret" is any information that (i) "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use," and (ii) "is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Uniform Trade Secrets Act § 1(4). It can include, by way of example, a formula, pattern, compilation, program, device, method, technique, or process. Id.
A plaintiff may not get very far if it merely parrots the words of the statute and alleges that a former employee misappropriated proprietary "formulas," "programs," or "techniques." Although the owner of alleged trade secrets may favor broad allegations to avoid limiting its claims or tipping off its competitors as to where the real secrets in its business lie, "unless the plaintiff engages in a serious effort to pin down the secrets a court cannot do its job." IDX Sys. Corp. v. EIPC Sys. Corp., 285 F.3d 581, 583 (7th Cir. 2002). For this reason, courts frequently dismiss claims, deny injunctions, or prohibit discovery when a plaintiff is not able (or not willing) to identify the specific information it alleges to be a trade secret.
Generally, a defendant's first opportunity to challenge the plaintiff's claims is a motion to dismiss under Rule 12(b)(6) (or its state-law equivalent) or a motion for a more definite statement. Particularly in the wake of Twombly's requirement that a claim must allege facts sufficient to put the defendant on notice of a "claim for relief that is plausible on its face," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), courts often do not allow a plaintiff to stand on conclusory allegations that broad categories of confidential information to which the defendant had access constitute trade secrets. A search for cases decided in the last few months alone shows courts are demanding more.
For example, in Synopsys, Inc. v. ATopTech, Inc., No. 13-cv-2965, 2013 WL 5770542 (N.D. Cal. Oct. 24, 2013), the court granted the defendant's motion to dismiss for failure to state a claim, holding that allegations of trade secrets were insufficient where the complaint identified the secrets broadly as information in the plaintiff's software code and technical documentation. Id. at *6. According to the court, these "sweeping and vague" allegations did not permit the defendant or the court to determine which parts of the plaintiff's software are supposed to be trade secrets and which parts are publicly available commands. Id.
In another recent case, Rovince International Corp. v. Preston, No. 13-cv-3527, 2013 WL 5539430 (C.D. Cal. Oct. 7, 2013), the court granted the defendant's motion for a more definite statement because the plaintiff's "encyclopedic lists" of alleged trade secrets and internal contradictions within its amended complaint left it so vague or ambiguous that the defendant could not reasonably prepare a response. Id. at *7; see also Am. Registry, LLC v. Hanaw, No. 2:13-cv-352, 2013 WL 6332971, at *4 (M.D. Fla. Dec. 5, 2013) (finding broad categories of allegedly misappropriated information such as "software" and "information and records" were "so broad as to be meaningless"); In re Nortel Networks Inc., No. 11-cv-53454, 2013 WL 6500224, at *6 (Bankr. D. Del. Dec. 10, 2013) (holding that the complaint "does not come close to meeting the pleading requirements necessary to survive" a motion to dismiss and noting that plaintiff did not identify what specific trade secrets defendant misappropriated); but cf. TE Connectivity Networks, Inc. v. All Sys. Broadband, Inc., No. 13-cv-1356, 2013 WL 6827348, at *4 (D. Minn. Dec. 26, 2013) (finding "somewhat vague" allegations that trade secrets consisting of "technical specifications, design parameters, performance criteria, testing data" and the like were sufficient to survive motion to dismiss because they pertained to specific products).
Plaintiffs may also risk an early adverse decision by filing a motion for a preliminary injunction without having specifically identified the trade secrets at issue. For example, in Menzies Aviation (USA), Inc. v. Wilcox, No. 13-cv-2702, 2013 WL 5663187 (D. Minn. Oct. 17, 2013), the court denied a motion for a preliminary injunction in part because the plaintiff failed to identify the alleged trade secrets with sufficient particularity, asserting only that "marketing information, internal reports, employment matters and financial condition" were confidential. Id. at *8.
If vague identifications of trade secrets are not successfully challenged at the pleading stage, defendants typically have an opportunity to force the plaintiff's hand in discovery by requesting that the plaintiff identify, with specificity and precision, each alleged trade secret it contends was misappropriated in a manner that allows the defendant to identify the elements and boundaries of the alleged secret information. In California, there is a statute providing that a party cannot commence discovery on its trade-secret claim until it identifies the trade secret "with reasonable particularity." Cal. Civ. Proc. Code § 2019.210. Courts have split on whether this law is substantive such that it must be applied by federal courts applying California law. See Social Apps, LLC v. Zynga, Inc., No. 4:11-CV-04910, 2012 WL 2203063, at *1–2 (N.D. Cal. June 14, 2012) (recognizing split and adopting position that the law does apply to actions brought in federal court).
For suits brought under other states' laws, where there is no equivalent statutory requirement, many courts still have demanded that plaintiffs provide sufficient identification of their secrets in discovery responses before allowing them to proceed with their own discovery. In Switch Communications Group v. Ballard, No. 2:11-cv-285, 2012 WL 2342929 (D. Nev. June 19, 2012), plaintiff Switch Communications terminated the employment of its chief financial officer, who then developed plans to build a computer data center that would compete with his former employer's data centers. Plaintiff Switch Communications alleged that its former employee had become
intimately aware of Switch's trade practices and secrets, including the location of [its] carrier fiber and the structure of the related carrier fiber agreements, the location of Switch's key clients' installations, the terms of Switch's agreements with those key clients, who Switch's primary contractors and vendors are, the terms of Switch's arrangements with those contractors and vendors, and the design and operation of Switch's data center facilities.
Id. at *1.
When the plaintiff essentially repeated these allegations with little elaboration in response to the defendant's interrogatory asking the plaintiff to identify each trade secret it allegedly misappropriated, the defendant moved to compel a more detailed response. Id. at *2. The court granted the motion and the plaintiff provided an 18-page supplemental response. Id. at *3. According to the court, the response remained insufficient because it still failed to "specifically describe what particular combination of components renders each of its designs novel or unique, how the components are combined, and how they operate in unique combination." Id. at *5. The court then excused the defendant from responding to any discovery regarding the alleged trade secrets until the plaintiff provided a better description of what, exactly, it claimed to be trade secrets. Id.; see also MSCI Inc. v. Jacob, 945 N.Y.S.2d 863, 864–66 (N.Y. Sup. Ct. 2012) (precluding plaintiff from seeking further discovery until it identified which specific portions of the source code at issue were not publicly available, commonly used, or acquired from third parties because a plaintiff must allow a defendant a fair opportunity to test the plaintiff's theory through discovery).
Although courts may be willing to require specific identification from plaintiffs, defendants must be alert to request it. In Dana Limited v. American Axle and Manufacturing Holdings, Inc., No. 10-cv-450, 2013 WL 603104 (W.D. Mich. Feb. 19, 2013), the plaintiff listed 25 alleged trade secrets by category and corresponding exhibit number in its response to a motion for summary judgment and later in a pretrial order. The defendants filed a motion in limine, arguing that the plaintiff should be limited to pursuing only the 15 alleged trade secrets identified by a particular expert witness and discussed by the plaintiff's Rule 30(b)(6) witness, asserting that it had not had an opportunity to identify evidence to rebut the remaining alleged secrets. Id. at *1–2. The court denied the motion, finding that the expert's testimony was not intended to cover all of the plaintiff's trade secrets, that the defendant never asked the 30(b)(6) witness whether the plaintiff intended to rely on additional documents in support of its claims, and that the defendant never served an interrogatory asking the plaintiff to identify the trade secrets at issue. Id. at *2–3.
Although this case highlights the importance of defendants' pushing plaintiffs to identify the specific trade secrets at issue in a case, victory for this particular plaintiff was short lived; following a bench trial, the court rejected nearly every item identified as a trade secret by the plaintiff because the plaintiff could not prove the information did not represent the general knowledge of its employees or that the plaintiff made reasonable efforts to restrict access to the documents at issue. 2013 WL 4498993 (W.D. Mich. Aug. 19, 2013). In doing so, the court stated, "The manner in which the evidence was presented tended to blur the distinctions between what was confidential and what was not, what was reasonably protected and what was not, what was used and what was merely downloaded, what was copied and what was returned." Id. at *23. Thus, the plaintiff's inability or unwillingness to pin down the specifics of its alleged trade secrets in advance of trial ultimately may have cost it the case.
Marine Travelift, Inc. v. Marine Lift Systems, Inc., No. 10-C-1046, 2013 WL 6255689 (E.D. Wis. Dec. 4, 2013), is another case in which a plaintiff litigated a matter for some time only to lose in the end for failure to identify the specific trade secrets allegedly taken. The defendant moved for summary judgment, arguing that, after three years of discovery, the plaintiff failed to identify the specific information it believed qualified as a trade secret. Id. at *2. The court agreed, stating, "It is not enough for a plaintiff to assert . . . that among the information the defendant had access to are various trade secrets and then leave it to a jury to decide which items of information were disclosed and whether they fit the statutory definition of a trade secret." Id. at *5. The plaintiff's identification of categories such as "testing data" or "engineering calculations" did not suffice. Id. at *6.
Counsel should also be cognizant of potential sanctions for pursuing a case on behalf of a client who cannot identify specific trade secrets a defendant may have misappropriated. In Loparex, LLC v. MPI Release Technologies, LLC, No. 09-cv-1411, 2012 WL 6094141 (S.D. Ind. Dec. 7, 2012), the plaintiff sued a former employee for trade-secret misappropriation, identifying the alleged secrets as
various confidential and proprietary information and trade secrets belonging to Loparex, including, but not limited to Loparex's expenditures to develop and establish a stable customer base, developing confidential pricing methods, developing marketing plans and strategies, confidential and proprietary client files, client information, software, forms, technical information, internal processes and procedures, business model, pricing, costs, and profit margins.
Id. at *2.
The district judge held a conference on the plaintiff's motion for a temporary restraining order (TRO) and denied it without a full hearing, finding that the plaintiff failed to identify any specific trade secrets allegedly misappropriated. Id. at *1. The plaintiff then voluntarily dismissed the case, filed a new suit in another district, and again moved for a TRO. Id. at *2. When the new district judge warned the plaintiff's counsel not to come to the TRO hearing without having identified the allegedly misappropriated trade secrets for the defendants, the plaintiff moved to vacate the hearing. Id. at *3. The case proceeded, and the court ultimately granted the defendant's motion for summary judgment, finding, among other things, that the plaintiff failed to articulate what its claimed trade secrets were. Id. at *5. The court also found that the case was frivolous and granted a post-judgment motion for fees and costs against the plaintiff and the plaintiff's counsel. Id.
These recent cases do not represent a complete survey of the current state of trade-secret law, but they are reflective of the judicial landscape. Trade-secret law is not uniform. Results in a particular case can depend on, among other variables, the jurisdiction, the judge, the specific facts of the case, and the defendant's diligence in demanding that the plaintiff identify its alleged secrets with particularity. Plaintiffs in some circumstances have prevailed (or achieved their goals short of full adjudication) without disclosing their trade secrets in specific detail. The point of this article is not to say that plaintiffs must immediately come forward and disclose their secrets in publicly filed complaints. Instead, we highlight here the fact that a court may require a plaintiff to define the boundaries of its alleged trade secrets with a certain level of specificity sooner rather than later. Plaintiff's counsel should take that into consideration when deciding whether to bring the case, where to bring the case, and how to draft the complaint. Defendant's counsel should be prepared to push the plaintiff early in the case to identify the alleged trade secrets. And all counselors should advise their clients to be vigilant about identifying and protecting their trade secrets in the ordinary course of their business, not to wait until a dispute arises after an employee leaves, at which point a trade-secret misappropriation claim—requiring reasonable protection measures—may no longer be viable.
While not every trade secret needs to be locked in a guarded vault, each company must identify the specific information it believes is uniquely valuable by virtue of being secret and must make reasonable efforts to keep it a secret. If a company cannot identify exactly what information should be considered a trade secret under the law so that efforts to protect it can be taken, it will have a more difficult time protecting that information later if it can protect the information as a trade secret at all. Requiring employees to sign agreements by which they acknowledge they will be exposed to confidential and trade-secret information and agree not to disclose or otherwise use that information outside of their current employment is a good practice, but it may not be enough if the company does not make continued and consistent efforts to ensure that its confidential and trade-secret information remains confidential and is not misused. If a company has a better handle on exactly what information qualifies as a trade secret, it will be much better equipped to limit its disclosure and, consequently, better able to pursue legal action if and when a problem arises.
Keywords: litigation, intellectual property, trade secrets, misappropriation, trade-secret identification, defenses, specificity