Panel Says Judge Klausner Acted ‘Precipitously’ in Deciding Winner Before Discovery Could Be Conducted
By Sandra Hong, Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday revived a trade secrets misappropriation lawsuit against a Los Angeles-based securities clearing firm after concluding that a District Court judge erred in granting a summary judgment without discovery having commenced.
Circuit Judge Ronald M. Gould wrote the opinion which reverses a determination by District Court Judge R. Gary Klausner of the Central District of California.
“To date, no discovery has been conducted and oral argument in the district court was cancelled,” he said. “On these facts, we conclude that the summary judgment granted was precipitous, premature and did not fairly permit development of the issues for resolution.”
Summary judgment was granted in favor of defendant ETC Global Holdings in an action alleging that it misappropriated securities tracking software which it had licensed for almost a decade from plaintiff InteliClear.
Klausner found that that InteliClear failed to identify its trade secrets with sufficient detail. He also determined discovery would not cure the deficiency and denied a motion by InteliClear to defer a summary judgment ruling under Federal Rules of Civil Procedure rule 56(d) which permits a court to grant parties time to conduct discovery before issuing a ruling.
Abuse of Discretion
“We hold that the district court abused its discretion in declining to defer a summary judgment ruling until discovery had proceeded,” Gould declared. His opinion was joined by Circuit Judge Sandra S. Ikuta and District Court Judge David A. Ezra of the District of Hawaii, sitting by designation.
Gould said discovery was the typical “battleground” for federal courts to determine whether trade secrets are sufficiently identified.
“In such cases, discovery provides an iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification,” he observed, adding:
“Refining trade secret identifications through discovery makes good sense. The process acknowledges the inherent tension between a party’s desire to protect legitimate intellectual property claims and the need for intellectual property law to prevent unnecessary obstacles to useful competition.”
InteliClear’s software for managing and clearing stock and securities transactions had been used under license by a predecessor of ETC since 2008 and later by a subsidiary. In 2017, ETC terminated the software license agreement.
About a year later, the systems architect who developed InteliClear’s software, Martin Barretto, noticed similarities to a new system released by ETC.
A technology forensics expert hired by InteliClear investigated the two systems and found striking similarities. He set forth in a declaration that “it appeared to us that ETC’s system had been constructed by a programmer who had one eye on the InteliClear System as it was running and the other eye on the system he was building, like a painter looking back and forth at a live model while depicting her on the canvas.”
InteliClear filed claims against ETC for misappropriation under the federal Defend Trade Secrets Act and the California Uniform Trade Secrets Act (“CUTSA”), as well as for unfair competition. Klausner dismissed InteliClear’s unfair competition claim finding it was preempted by the CUTSA.
ETC moved for summary judgment a day after discovery began, arguing InteliClear did not identify its trade secrets with sufficient particularity or show that ETC has access to its source code. InteliClear submitted a sealed declaration by Barretto describing the system’s features in more detail.
Gould said this declaration identified specific aspects of the “database logic and architecture” that created a triable issue of fact.
“A reasonable jury could conclude that the uniquely designed tables, columns, account number structures, methods of populating table data, and combination or interrelation thereof, are protectable trade secrets,” he wrote.
Trade Secrets Identification
Klausner acknowledged Barreto’s declaration identified some trade secrets but not all.
“By only identifying ‘some’ of its trade secrets, Plaintiff leaves open the possibility that it might later argue that other unnamed elements of the InteliClear System are trade secrets as well,” Klausner wrote.
However Gould said this placed too heavy a burden on InteliClear, explaining:
“At this stage, particularly where no discovery whatsoever had occurred, it is not fatal to InteliClear’s claim that its hedging language left open the possibility of expanding its identifications later. InteliClear’s burden is only to identify at least one trade secret with sufficient particularity to create a triable issue.”
‘Unique in Industry’
Both federal and state trade secrets acts, under 18 USC §1839(3) and California Civil Code §3426.1(d) require that reasonable efforts be made to keep the information secret and that any information attained by “proper” means cannot be a trade secret. Klausner determined features of InteliClear’s system were not truly secret because they were either “uncommon” in other systems but not “generally unknown” or they were visible to end-users who were not obligated to confidentiality.
But Gould said Barretto’s declaration demonstrated InteliClear’s features were more than uncommon and “unique in the industry.”
Not only were certain components of the database “not common in other systems” but “InteliClear went further and made it sufficiently clear that the combination and interrelation of its database components was unique,” Gould said.
Gould also concluded that InteliClear’s licensing and confidentiality agreements with clients and employees constituted “reasonable measures” to keep information secret.
The software license agreement assigned to ETC in 2012 expressly provided ETC was to keep confidential all information acquired through its license “during and after” the terms of the agreement, Gould noted.
“Though ETC provided some evidence that end-users of the InteliClear System can see some of the logic and source code underpinning the database, InteliClear introduced sufficient rebuttal evidence to create a genuine dispute of material fact,” he said, adding:
“InteliClear’s efforts to protect its trade secrets through licensing agreements constitute reasonable measures that are adequate to preclude judgment as a matter of law.”
The case is InteliClear v. ETC Global Holdings, 19-55862.
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