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Lead Article: The Particularity Hurdle in Trade Secret Litigation

October 27, 2024
Business Litigation Reports

            Plaintiffs face a Goldilocks problem when identifying trade secrets for litigation.  If the allegations are too broad, plaintiffs risk dismissal or deadlock at discovery.  If the allegations are too narrow, plaintiffs forego damages justly owed.  The problem is exacerbated by the fact that each case has a different judge making a decision based on oftentimes ambiguous standards with unpredictable outcomes.  This article observes patterns and trends across jurisdictions pertinent to the standards for identifying trade secrets with particularity at pleading and discovery.  This article further addresses an increasingly popular method for meeting that challenge—expert testimony.  By utilizing technical experts to help articulate trade secrets, plaintiffs can put their best foot forward toward capturing their full claim. Defendants can use experts to their advantage by presenting testimony on how the technology was well within the bounds of public knowledge.

Across Jurisdictions, Plaintiffs Face Uncertainty When Identifying Trade Secrets at the Outset of Litigation.

            Every claim for misappropriation of trade secrets must begin by defining the categories of protected information.  Alleging that a trade secret exists is the first burden the plaintiff must carry.  Under Federal Rule of Civil Procedure 8, this means that “[i]nformation alleged to be a misappropriated trade secret must be identified with enough specificity to place a defendant on notice of the bases for the claim being made against it.”  Oakwood Lab’ys LLC v. Thanoo, 999 F.3d 892, 906 (3d Cir. 2021) (emphasis added).  On its face, this is not a high bar.  See, e.g., Packaging Corp. v. Croner, 419 F. Supp. 3d 1059, 1066 (N.D. Ill. 2020) (“[Under the DTSA,] plaintiffs must only plead the existence of trade secrets in broad strokes.”).  Nevertheless, individual courts’ analysis of this “fact-specific question … decided on a case-by-case basis,” Syntel Sterling Best Shores Mauritius Ltd. v. The Trizetto Grp., 68 F.4th 792, 801 (2d Cir. 2023), varies widely, and trade secret plaintiffs face a complex landscape when deciding how to approach this threshold issue.

            For starters, not all jurisdictions apply the same particularity standard.  For example, Delaware courts still adhere to pre-Iqbal “liberal notice pleading standards” and purport to apply that liberal standard in trade secret cases.  Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002) (finding alleged “unique set of marketing strategies and processes” sufficiently particular to survive a motion to dismiss).  At the other end of the spectrum, the Massachusetts Uniform Trade Secrets Act imposes a “heightened pleading standard” for plaintiffs alleging under the statute.  Welter v. Med. Pro. Mut. Ins. Co., 2023 WL 2988627, at *16, n.15 (D. Mass. Feb. 23, 2023) (citing Mass. Gen. Laws ch. 93, § 42D(b)).  In general, federal district courts appear to be trending toward stricter requirements for trade secret plaintiffs.  The requirements, however, are not necessarily characterized by either consistency or clarity, even within the same jurisdiction.  Compare Zurich Am. Life Ins. Co. v. Nagel, 538 F. Supp. 3d 396, 404 (S.D.N.Y. 2021) (trade secrets not sufficiently identified despite their alleged embodiment in specific emails and attachments), with Pauwels v. Deloitte LLP, 2020 WL 818742, at *4 (S.D.N.Y. Feb. 19, 2020) (trade secrets sufficiently identified when allegedly embodied in one or more of an indefinite number of spreadsheets).

Establishing Particular Trade Secrets is Often a Prerequisite to Discovery.

            Past the motion to dismiss, fights over the sufficiency of trade secret identifications can occur in the context of discovery.  Though theoretically raising the same question, the discovery posture entails different considerations that can result in a different (usually higher) standard for particularity at discovery versus dismissal.  Leading the charge in this regard is California, where the Code of Civil Procedure § 2019.210 requires that, “before commencing discovery,” plaintiffs “identify the trade secret with reasonable particularity.”  Note that this does not mean plaintiffs must satisfy this requirement to avoid dismissal, only to obtain discovery.  Truong v. Philhower, 2020 WL 3481427, at *10 (Cal. Ct. App. June 26, 2020).  A similar, discovery-only requirement appears in Delaware state and federal common law, although recent decisions make that application less certain.  See Leucadia, Inc. v. Applied Extrusion Technologies, 755 F. Supp. 635, 637 (D. Del. 1991) (denying defendant’s Rule 12 motion and granting motion to postpone discovery in the same order) (citing Delaware cases); You Map, Inc. v. Snap Inc., 2021 WL 3171838, at *9, n.10 (D. Del. July 27, 2021), report and recommendation adopted, 2022 WL 4377031 (D. Del. Sept. 22, 2022).  But see HID Global Corp. v. Vector Flow, Inc., C.A. No. 21-1769-VAC-JLH (D. Del. May 31, 2022) (“I agree with plaintiffs [that] discovery sequencing [doesn’t] apply to plaintiff’s federal trade secrets case.”).

            Apart from any specific legal requirement, many district courts have embraced their “broad discretion [under Federal Rule 26(d)]” to decide, on a case-by-case basis, what level of particularity a given plaintiff must reach before obtaining discovery.  DeRubeis v. Witten Techs., Inc., 244 F.R.D. 676, 678-81 (N.D. Ga. 2007).  Under this approach, courts equitably weigh plaintiffs’ general right to discovery against defendants’ right not to be subject to “fishing expedition[s]” based on unbounded claims.  See Vesta Corp. v. Amdocs Mgmt. Ltd., 147 F. Supp. 3d 1147, 1153-56 (D. Or. 2015) (citing DeRubeis); Group14 Techs., Inc. v. Nexeon Ltd., (W.D. Wash. Mar. 26, 2024) (same); see also Blockchain Innovation, LLC v. Franklin Res., 2023 WL 4045234, at *3 (N.D. Cal. June 15, 2023) (“[A] federal court undoubtedly has the discretion to require the disclosure of [plaintiff’s] trade secrets before allowing trade secret-related discovery to proceed.”).  Despite their discretionary aspect, these cases highlight how a plaintiff’s showing of its good faith effort to identify its trade secrets reasonably under the circumstances can go a long way in terms of alleviating courts’ fairness concerns.  See, e.g., ACI Worldwide Corp. v. Mastercard Techs., LLC, 2015 WL 429974, at *2 (D. Neb. Feb. 2, 2015) (“Plaintiff has seemingly gone to great lengths to address Defendants’ continuing concerns.”).

Pleading Trade Secrets With Particularity

            While the standard for particularity varies widely among courts and postures, the basic idea remains fairly consistent: a plaintiff must take care to include allegations that distinguish its technology from the pool of general knowledge.  This means not only establishing what “it” is but how it “derive[s] independent economic value, actual or potential, from not being generally known by or readily accessible to the public.”  DTSA 18 U.S.C. § 1839(3).  This is especially true where an alleged trade secret contains non-secret elements, such as in the case of a “process,” which is often going to be made up of “steps” which are, in and of themselves, not secret.  There, it is the connective tissue between the steps which constitutes the actual secret, and accordingly, courts often require plaintiffs to spell out “the steps in the process and explain … how those steps make [the] method or process unique.”  See, e.g., Carlisle Interconnect Techs. Inc. v. Foresight Finishing LLC, 2023 WL 2528324 (D. Ariz. Mar. 15, 2023) (denying plaintiffs’ motion).

            It is easier to establish the existence of a trade secret where the information at issue is traceable and unique, for example, when it is known by as few people as possible, or embodied in a single document, or practiced in a single non-public location.  See, e.g., Oakwood Lab’ys LLC v. Thanoo, 999 F.3d 892, 907 (3d Cir. 2021) (plaintiff sufficiently identified trade secrets with a “very precise example … pointing to a particular document … disclosed … under a confidentiality agreement, and it specified the contents of that document as containing trade secrets.”); Dur-A-Flex, Inc. v. Dy, 349 Conn. 513, 582, 321 A.3d 295 (2024) (undisputed evidence that at-issue formula “can’t be found anywhere except at [the plaintiff’s factory]”).  It is worth noting that “uniqueness” does not necessarily equate to value.  For example, “obsolete information cannot form the basis for a trade secret claim because the information has no economic value.”  Fox Sports Net North v. Minnesota Twins, 319 F.3d 329, 336 (8th Cir. 2003).  Nevertheless, these clear-cut bounds (or a lack of them) make it easier for courts to assess a trade-secret identification prior to discovery.  

            Where the case involves more abstract or technical subject matter that is potentially available outside of the organization, the court will have a harder time discerning what is and is not generally known in the particular industry.  See, e.g., Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1167 (9th Cir. 1998) (“We further note that because Imax’s trade secrets claim involves a sophisticated and highly complex projector system, it is unlikely that the district court or any trier of fact would have expertise in discerning exactly which of the projector system’s many ‘dimensions and tolerances’ were trade secrets.”).  This is where experts on both sides can have an enormous impact on the case, even before the parties have incurred the considerable time and expense inevitable in discovery.

Experts Have a Key Role at the Outset of Trade Secret Litigation.

            With courts’ casting greater scrutiny on the identification of at-issue trade secrets, both plaintiffs and defendants should consider retaining a knowledgeable expert with strong communication skills early in the case.  While parties often delay the expert search process in other contexts in order to limit costs, doing so in the trade secret context could put them at a lasting disadvantage.  As we have seen, trade secret cases can rise and fall on the specificity of the allegations in the complaint or trade secret statement.  While these documents are drafted by lawyers with judges as the intended audience, both groups lack the technical expertise necessary “to explain why each secret is not a matter of public knowledge.”  Merck Sharp & Dohme Corp. v. Pfizer Inc., 2021 WL 2646943, at *3 (E.D. Pa. June 28, 2021).  Consequently, both sides of a trade secret dispute may need to work closely with subject matter experts to define the boundaries of the trade secrets.

            For plaintiffs’ attorneys considering how to best deploy expert knowledge early in a case, there is a delicate balance between failing to make out a particularized trade secret claim and providing so much detail as to limit the potential scope of the claims and related damages before discovery.  As an initial matter, there is no requirement, even under California’s stringent identification regime, that trade secret statements be supported by an expert declaration.  See Loop AI Labs Inc. v. Gatti, 195 F. Supp. 3d 1107, 1113 (N.D. Cal. 2016).  And, as many courts have noted, “[t]rade secret plaintiffs rarely provide a precise and complete identification of the alleged trade secrets at issue without a court order requiring them to do so,” which “is a strategy, not an accident.”  See, e.g., Masimo Corp. v. Apple Inc., 2022 WL 1599841, at *2 (C.D. Cal. Apr. 28, 2022).  Nonetheless, a recent discovery decision in a case based on DTSA misappropriation claims gives a sense of the fine detail plaintiffs must be able to explain in clear language in order for their trade secret claims to pass muster at the outset of litigation.  

For instance, if the allegedly misappropriate[d] trade secret is executable object code, plaintiff must name the executable files and identify what about their functionality is alleged to be a trade secret. If plaintiff alleges misappropriation of source code, it must identify the specific lines of code or programs claimed to be a trade secret by, for example, printing out the code on paper with numbered lines and identifying the allegedly misappropriated lines by page and line number or by highlighting the code alleged to be secret, avoiding the improper inclusion of non-secret auto-generated code, open source material, or basic code mandated by the programming language or type of program within its trade secret identification. If plaintiff contends that algorithms or formulas existing within code are trade secrets, it must identify the mathematical information and the precise combination of functions that comprise the algorithms at issue. If plaintiff contends that higher-level architecture of the software is a trade secret, it must detail the combination of the specific algorithms employed. If plaintiff alleges trade secret data structures, the nature of those structures must be defined with particularity. Torsh, Inc. v. Audio Enhancement, Inc., 2023 WL 7688583, at *8 (E.D. La. Nov. 15, 2023).  While a sworn expert affidavit is not required to bolster such descriptions, attorneys should consider working with experts on the front end to ensure the accuracy of their trade secret statements, and their ability to proactively articulate the significance of the protected material.

            On the other side of these disputes are defendants, who are frequently the first party to inject expert testimony into a threshold dispute about trade secret identification.  They have a strong incentive to do so; the lack of expert testimony rebutting a plaintiff’s trade secret assertions can be fatal to a defendant’s motion for a protective order.  See, e.g., Yoe v. Crescent Sock Co., 2017 WL 11479991, at *6 (E.D. Tenn. May 25, 2017) (granting discovery and denying motion for a protective order where defendant offered “no expert disclosure of its own to supplement its position that the descriptions [plaintiff] has presented thus far in discovery do not describe the alleged trade secrets with reasonable particularity”); Pinkerton Tobacco v. Kretek Int’l, 2021 WL 4928024, at *3 (C.D. Cal. July 14, 2021) (noting a lack of expert analysis “identifying whether industry participants would consider this to be a vague or overbroad disclosure” meant the court had no grounds to deny the requested discovery).  On the other hand, defendants can limit or entirely bar discovery on certain topics by offering expert opinion on, among other issues, the scope of information in the public domain.  For example in Chung v. Intellectsoft Grp. Corp., 2024 WL 813445 (N.D. Cal. Feb. 12, 2024), defendants presented an expert rebuttal to plaintiff’s interrogatory responses identifying trade secrets to establish “matters of general knowledge or common practice among software application developers” and limit plaintiff’s claims accordingly.  Id. at *7.  However, there are also potential pitfalls for both sides when presenting experts early in the case.  The expert who fails to impress the court in the fight over the threshold question may do lasting damage to their credibility.

            Under certain circumstances, the risk may be greater for the defense side.  Given the mere plausibility and relevance standards that govern the early stages of litigation, grey areas can benefit the plaintiff in many cases, and the credibility of defense experts may be collateral damage.  For example, numerous California courts have granted discovery on the basis that at least one expert (predictably, usually plaintiff’s) had “declare[d] that they [were] capable of understanding the designation and of distinguishing the alleged trade secrets from information already known to persons in the field.”  Phoenix Techs., Ltd. v. DeviceVM, Inc., 2010 WL 8590525, at *4 (N.D. Cal. Mar. 17, 2010) (quoting Advanced Modular, 132 Cal. App. 4th at 836).

            At the same time, plaintiffs cannot rely on experts to embroider otherwise threadbare trade secret assertions.  In Group14 Techs., Inc. v. Nexeon Ltd., 2024 WL 1283530, (W.D. Wash. Mar. 26, 2024), plaintiff claimed trade secret protection over “negative know-how” embodied in slides recounting various projects that were “explored” in the course of developing composition materials useful in electrical energy storage applications.  Id. at *7.  Denying the plaintiff’s motion to compel, the court chided the plaintiff’s expert for “go[ing] beyond” what the slide actually said, effectively reading in trade secrets for which there was no evidence of transmission.  Id.

Conclusion

            Both Plaintiffs and Defendants face unique challenges in trade secret litigation, particularly in a sea of variable and uncertain standards.  While parties are turning to experts to help navigate the issues early in the case, caution must be exercised to ensure that arguments are properly framed as to not waive important trade secrets (especially without the benefit of discovery when initially defining them) and to secure expert witness credibility for the long run.