One of the first elements that a plaintiff must prove to succeed on a trade secret claim is that it is the owner of a valid trade secret. To do so, the law generally imposes a burden on plaintiffs to identify its trade secrets with sufficient particularity in order to succeed. As the Ninth Circuit recently recognized, this burden allows courts and litigants to navigate “the line between the protection of unique, innovative technologies and vigorous competition.” In InteliClear, LLC v. ETC Global Holdings, Inc. (decided October 15, 2020), the Ninth Circuit addressed the issue of whether a plaintiff had satisfied the “sufficient particularity” burden and whether the trial court erred in granting summary judgment to a defendant when its motion was filed after just one day of discovery.
In the early 2000s, InteliClear created an electronic system for managing various stock broker and securities services called “InteliClear Systems,” which used a structured query language relational database to process millions of trades a day. In 2008, ETC Global Holdings (through its predecessor and later a subsidiary) licensed the InteliClear System and signed a Software License Agreement. Within the terms of that agreement was an acknowledgment that the InteliClear information that was being provided “was confidential, proprietary and copyrighted” and that ETC agreed to maintain that confidentiality.
About a decade later, in 2017, ETC decided to terminate the Software License Agreement. Pursuant to its terms, ETC had to remove all of the InteliClear database from its systems and certify that it had done so.
Prior to the termination, ETC had been developing its own electronic trading system. At about the time ETC’s termination of the agreement became effective, InteliClear noticed that there were some similarities between ETC’s new trading system and the InteliClear System it had previously licensed. The InteliClear System’s architect noticed that among these similarities was a table that had the same “unique names” as the InteliClear System. During the next several months, ETC and InteliClear negotiated to allow for a forensic computer examination to be done of the two systems. In late 2018, the forensic expert issued a report that concluded there was “abundant evidence” that elements of the ETC system were identical to the InteliClear System. In 2018, InteliClear sued ETC for trade secret misappropriation under both the federal Defendant Trade Secrets Act (“DTSA”) and the California Uniform Trade Secrets Act (“CUTSA”).
Discovery in the case began on May 20, 2019 and, one day later, ETC filed its motion for summary judgment as to the trade secret claims. (InteliClear’s unfair competition claim had been dismissed earlier under the preemption doctrine.) After briefing on the summary judgment motion, the district court granted ETC’s motion and awarded it judgment as to InteliClear’s trade secret claims. The district court found that InteliClear had failed to sufficiently identify its alleged trade secrets and that this was a defect that could not be cured with further discovery. InteliClear appealed this ruling to the Ninth Circuit.
Given that the ruling was obtained through summary judgment and not after a trial, the Ninth Circuit began by recognizing the standards by which it reviews a lower court’s summary judgment ruling. First, it had to review the evidence that had been submitted in connection with the summary judgment motion in a “light most favorable to the non-moving party,” i.e., InteliClear. The Ninth Circuit also noted that the summary judgment would have to be reversed “if the evidence is such that a reasonable jury could return a verdict for” InteliClear. Finally, the Ninth Circuit reasoned that because the elements of a trade secret claim under the DTSA or CUTSA are nearly identical, its analysis of these claims would be the same.
The Ninth Circuit began by noting that the statutory definition of a trade secret is relativity “broad.” In essence, a trade secret has some independent economic value from not being generally known and is information that can include “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.” Further, in order to prevail on a trade secret case, a plaintiff must establish that not only does it possess a trade secret, but that it has taken reasonable measures to protect the secrecy of that information.
InteliClear, as the Ninth Circuit noted, has the burden of identifying its claimed trade secrets and must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade.” Importantly, the Ninth Circuit noted that a trade secret plaintiff must “clearly refer to tangible trade secret material,” rather than merely referring to a “system” that could potentially qualify for trade secret protection. That is, the Ninth Circuit cautioned that a plaintiff “may not simply rely upon `catch all’ phrases or identify categories of trade secrets they intend to pursue at trial,” a plaintiff must be specific. It reasoned that placing the burden on a trade secret plaintiff to identify its information with reasonable particularity provides a defendant with “concrete identification” to prepare a rebuttal.
In finding that the lower court erred, the Ninth Circuit concluded that InteliClear had “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’.” In supporting this position, InteliClear submitted a declaration by its system architect that “outlined the specific tables, table columns, account identifies, codes and methodologies InteliClear claimed `to be trade secret’.” Although the district court seemed to be swayed by ETC’s position that these identifies were still “unclear,” the Ninth Circuit concluded that a reasonable jury could find that these uniquely designed tables and related information could be protectable trade secrets. The Ninth Circuit concluded that this was a reasonable outcome given that no discovery had occurred at the time that ETC had filed its summary judgment motion.
Turning to the issue as to whether InteliClear had taken “reasonable measures to keep such information secret,” the Ninth Circuit focused on the district court’s ruling that although the InteliClear system had features that were “uncommon” in other similar systems, they were not generally unknown and that some of these features were “visible to end users … who are not under confidentiality obligations.” The Ninth Circuit rejected both of these findings.
First, the Ninth Circuit in looking at the evidence submitted by InteliClear focused not merely on the fact that some of the features may have been “uncommon,” but rather, that the way that the InteliClear System utilized this information in combination was “unique in the industry.” The Ninth Circuit recognized that databases in the industry to a certain extent would have some overlap but concluded that InteliClear had shown, for purposes of defeating summary judgment, “that the combination and interrelation of its database components was unique.”
Next, the Ninth Circuit concluded that a jury could conclude that InteliClear had taken reasonable measures to protect its trade secrets. This evidence included encrypting its database and requiring licensees to agree to confidentiality provisions to protect the secrecy of its trade secret information. Given the above, the Ninth Circuit concluded that a reasonable jury could find portions of the InteliClear system are not “generally known” or “readily ascertainable to others.”
Finally, the Ninth Circuit appeared troubled that summary judgment had been granted so early in the litigation. Normally, the issue of whether a plaintiff has described its claimed trade secret information with “sufficient particularity” is decided in determining the scope of permissible discovery. For instance, in California state courts, a defendant can seek to block discovery until a plaintiff has satisfied its burden of describing its claimed trade secret information with “sufficient particularity” under California Civil Code section 2019.210. (Federal district courts in California tend to be split as to whether to follow the dictates of section 2019.210 in administering discovery in a trade secret case pending in federal court.)
The Ninth Circuit found it sufficient that in opposing ETC’s summary judgment motion, InteliClear had submitted declarations showing that it reasonably believed that it would obtain further information in discovery that would allow it to refine its identification of its claimed trade secret information. The Ninth Circuit reasoned that “even a small amount of discovery would have let InteliClear clarify such discreet points, which would have driven a potentially meritorious case forward.” Thus, the Ninth Circuit concluded “that the summary judgment granted was precipitous, premature and did not failure permit development of the issues for resolution” and ordered that the summary judgment be vacated.
The Ninth Circuit’s InteliClear decision can be frustrating for defendants in trade secret cases in that it seems to provide a trade secret plaintiff additional opportunities in which to designate its claimed trade secret information as part of its claim, even allowing discovery into defendant’s information before doing so. This will likely result in trade secret cases having to proceed through at least some period of discovery before summary judgment will be appropriate.