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Ninth Circuit:
Error to Use State Disclosure Rule in U.S. Trade Secrets Case
Opinion Says Trial Judge Erred in Demanding That Federal Plaintiff Disclose Nature of Proprietary Information With ‘Particularity’ at Discovery Outset, Saying Timing Only Applies to Claims Alleged Under California Law
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals held yesterday that a trial judge erred in striking a plaintiff’s trade secret allegations for failing to identify the information at issue with sufficient particularity at the outset of discovery, saying the jurist improperly imported a California timing rule not present in the federal statutory scheme.
At issue is when a plaintiff, asserting a claim under The Defend Trade Secrets Act (“DTSA”), codified at 18 U.S.C. §1836, must specify with “sufficient particularity” the nature of the proprietary information it alleges has been stolen.
Circuit Judge Anthony D. Johnstone wrote yesterday’s opinion, acknowledging that the case presents a difficult question and saying:
“How can plaintiffs plead, discover, and prove whether a trade secret has been misappropriated without giving away the trade secret?...Requiring too much disclosure too early could encourage fishing expeditions. Requiring too little disclosure too late could prevent the parties from proving or defending their claims. All civil discovery presents these concerns, but they are especially acute in trade-secret cases.”
However, the jurist said that the trial judge solved the difficulty by borrowing a rule from California law, which requires plaintiffs to disclose with “reasonable particularity” each allegedly misappropriated trade secret at the outset of discovery. Saying this was in error, Johnstone remarked:
“[U]nlike [the California Uniform Trade Secret Act (“CUTSA”)], the federal DTSA does not require a plaintiff to identify with particularity its alleged trade secrets from the start. CUTSA’s ‘reasonable particularity’ disclosure rule is similar to the ‘sufficient particularity’ showing we require to establish ownership of a trade secret under DTSA. But whether a DTSA plaintiff has identified information that is sufficiently particular to constitute a trade secret—information that is kept secret and derives value from not being generally known—is a question of fact. So whether a plaintiff has sufficiently particularized a trade secret under DTSA is usually a matter for summary judgment or trial.”
Violations Asserted
The question arose after Quintara Biosciences Inc. filed a complaint against Ruifeng Biztech Inc. in July 2020, asserting violations of the DTSA. Both companies operate in California and offer services relating to DNA sequencing.
In the operative pleading, Quintara asserted one count under DTSA for misappropriation of multiple trade secrets, alleging that the competitor stole its customer database, marketing plan, new product designs, vendor database, and other proprietary information.
After a discovery-planning conference at which Ruifeng argued that Quintara must specify its secrets as required by CUTSA, Senior District Court Judge William Alsup of the Northern District of California ordered the plaintiff to provide, under seal, the requested information.
To comply with the order, Quintara expanded the description of each trade secret from a few sentences to one or more paragraphs. Ruifeng, still unsatisfied, moved to strike Quintara’s trade secrets from the disclosure under Federal Rule of Civil Procedure 12(f), which provides:
“The court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”
Alsup granted Ruifeng’s motion, striking all but two trade secrets. He acknowledged that “state procedure does not govern here,” but applied the CUTSA standard anyway, reasoning that Federal Rule of Civil Procedure 16, governing pretrial conferences, gave him the authority as the action was necessary to “permit [the court] to discern the reasonable bounds of discovery.”
After discovery closed on the two remaining trade secrets, Quintara proceeded to trial as to the alleged theft of the company’s customer profile database. After a jury returned a verdict for Ruifeng, the plaintiff appealed the ensuing defense judgment.
Broad Protections
Saying that DTSA defines “trade secret” broadly, Johnstone noted that, despite this breadth, “not all proprietary information qualifies for protection as a property interest under DTSA” and “a plaintiff must prove that the claimed trade secret has ‘sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons…skilled in the trade.’ ”
He opined:
“Discovery in a trade-secret case, then, requires an ‘iterative process where requests between parties lead to a refined and sufficiently particularized trade secret identification.’…The Federal Rules of Civil Procedure equip a district court to manage this ‘delicate problem’ with broad…pretrial management powers….”
However, he said:
“Still, DTSA requires a plaintiff to identify a trade secret with ‘sufficient particularity’ as a matter of fact, unlike CUTSA’s…rule….And unlike CUTSA, DTSA does not set out requirements for the specific timing or scope for identifying trade secrets. Instead, the conventional procedures under the Federal Rules of Civil Procedure apply.”
The jurist added:
“Here, Ruifeng cited Rule 12(f) and the district court cited Rule 16 in managing the…trade-secret discovery. But in moving to strike and striking Quintara’s trade secrets, Ruifeng and the court ultimately relied on a California rule that does not control a federal trade-secret claim. And based on the facts and procedural posture of this case, neither Rule 12(f) nor Rule 16 authorized the district court to strike—and functionally dismiss—Quintara’s claim to [most] of its trade secrets.”
Rule 12(f)
Finding that the order striking the trade secrets from the disclosure was in error, Johnstone wrote:
“Even if Quintara’s Disclosure could be construed as a pleading, neither Ruifeng nor the district court identified any strikable matter under Rule 12(f). Quintara’s trade secrets are not an ‘insufficient defense[]’….Nor are the trade secrets ‘redundant’….And the trade secrets are not ‘impertinent’ because whether Quintara can recover and protect these trade secrets is directly related to the harm being alleged….Finally, the trade secrets are not ‘scandalous.’…So any authority to strike the trade secrets at issue cannot lie in Rule 12(f).”
Addressing whether Alsup was justified in striking the information as a discovery sanction, the judge wrote:
“Because the district court dismissed Quintara’s trade secrets as a discovery sanction but did not make specific findings supporting such a sanction, we ‘review the record independently to determine whether the dismissal was an abuse of discretion.’ ”
Johnstone noted that “[a] dismissal based on a failure to comply with a pretrial order is a harsh penalty” that “should be dispensed only” in extreme circumstances, and opined:
“Although our…test for dismissal sanctions invites case-specific analysis, a DTSA trade-secret claim will rarely be dismissible as a discovery sanction in a situation like this. The district court’s dismissal of these trade secrets came early in the litigation….And the reason for striking the trade secrets went to their merits: a fact question of ‘reasonable particularity’ that should be resolved on summary judgment or at trial….While district courts have broad discretion and ample alternatives under the Federal Rules of Civil Procedure to manage the disclosure of trade secrets in discovery, here the district court abused its discretion in granting Ruifeng’s motion to strike and dismissing Quintara’s claim to the…trade secrets at issue.”
The case is Quintara Biosciences Inc. v. Ruifeng Biztech Inc., 23-16093.
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