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Identifying Trade Secrets with "Reasonable Particularity"

November 13, 2009

URL: www.theiplawblog.com

Section 2019.210 of the Code of Civil Procedure requires that a plaintiff identify its alleged trade secrets with “reasonable particularity” before that party can commence discovery on its claims based upon trade secret misappropriation. In Perlan Therapeutics, Inc. v. Superior Court (NexBio, Inc.), a California appellate court revisited the requirements of section 2019.210 and held that a trial court has “broad discretion” in determining whether a plaintiff has complied with its obligations under section 2019.210.

Defendant Mang Yu incorporated Perlan in 1997 to develop “protein based therapeutics for the treatment of diseases caused by viral infection and diagnostic products to detect viral infection.” He and his wife, Fang Fang, served as directors and officers of Perlan at various times. Perlan developed a product known as “ColdSol,” a daily nasal spray for treating the common cold. Yu resigned from Perlan in June 2001 and incorporated a new company, NexBio, Inc., the following August. Fang continued to work at Perlan until May 2003. She then joined her husband as a director and officer of NexBio. NexBio obtained more than $50 million in grants to fund its research into “protein therapies for influenza”. Perlan sued NexBio, Yu and Fang claiming that they had secretly formed NexBio “to wrongfully exploit and misappropriate the Perlan technology inventions and other proprietary information.” Perlan’s second amended complaint included 12 causes of action that were all based, at least in part, on allegations of trade secret misappropriation.

Perlan attempted to conduct discovery after providing an initial 2019.210 trade secret disclosure statement but defendants moved for a protective order. Perlan then amended its 2019 statement which was again met with a motion for protective order. Perlan’s amended trade secret statement consisted of a “preliminary statement” and “general objections” that often appear in typical discovery responses. The rest of the amended trade statement consisted of four pages, much of which repeated the narrative in the second amended complaint and provided additional technical details concerning the trade secrets that was also publicly available. The statement continued to provide additional details about an invention and related processes that were not included in the second amended complaint but contained only general descriptions and did not provide the specific identification of particular ingredients used in the process. The statement concluded by claiming that the trade secrets also included “all related research, development, advancements, improvements and processes related thereto.”

In granting the defendant’s motion for protective order and thus preventing plaintiff from engaging in discovery, the Court concluded that Perlan “failed to demonstrate that the purported trade secret(s) is not generally known to the public or to other persons who can obtain economic value from its disclosure or use.” The Court also held that, although plaintiff was pursuing a claim for the misappropriation of several trade secrets, “the statement has not clearly identified all of the trade secrets at issue.” After the Court granted the protective order, plaintiff filed a petition for a writ of mandate challenging the Court’s discovery order.

The reviewing Court noted that although “writ proceedings are not the favored method for reviewing discovery orders,” it published “this opinion to emphasize that trial courts still have broad discretion under section 2019.210.” The Court began by noting the purpose of section 2019.210 was to: (1) Promote well-investigated claims and dissuade the filing of meritless trade secret complaints; (2) prevent plaintiffs from using the discovery process as a means to obtain the defendant’s trade secret; (3) assist the court in framing the appropriate scope of discovery and in determining whether plaintiff’s discovery requests fall within that scope; and (4) enable defendants to form complete and well-reasoned defenses. With these considerations in mind, the Court, after reviewing the record, concluded “(1) Perlan has the ability (but not the inclination) to provide clearer, more specific information about at least one of its alleged trade secrets; and (2) although Perlan lacks any particular information beyond three purported trade secrets, Perlan wishes to reserve the right to unilaterally amend (without leave of the Court) its identification so it can broaden its lawsuit to include claims it hopes to develop in discovery.” In reaching this conclusion, the Court reviewed two recent California appellate decisions, Advanced Modular Sputtering, Inc. v. Superior Court (2005) 132 Cal.App.4th 826 and Brescia v. Angelin (2009) 172 Cal.App.4th 133.

The Court noted that the Advanced Modular court observed that “the letter and spirit of section 2019.210 require the plaintiff … to identify or designate the trade secrets at issue with ‘”sufficient particularity’” to limit the permissible scope of discovery by distinguishing the trade secrets ‘”from matters of general knowledge in the trade or of special knowledge of those persons … skilled in the trade.”’” The Court noted that although trade secret identification does not require “every minute detail” of the trade secret to be disclosed or the “greatest degree of particularity possible,” nor does it envision a “miniature trial on the merits of a misappropriation claim before discovery ay commence,” the Court noted that where the alleged trade secrets consist of incremental variations on, or advances in the state of the art in a “highly specialized technical field;” then “a more exacting level of particularity may be required to distinguish the alleged trade secrets from matters already known to persons skilled in that field.”

Likewise, in reviewing the Brescia decision, the Court recognized that section 2019.210 “does not create a procedural device to litigate the ultimate merits of the case – that is, to determine as a matter of law on the basis of evidence presented whether the trade secret actually exists.” The Court noted that the Brescia court rejected the theory “that a trade secret claimant must, in every case, explain how the alleged trade secret differs from information available in the public domain.”

In light of these decisions, the Perlan court concluded that the legal interpretation of “the meaning of section 2019.210’s `reasonable particularity’ requirement” is a de novo review. However, a trial court’s determination of whether a party has complied with 2019.210 which does not include an improper understanding of the legal meaning of “reasonably particular” will be reviewed only for an abuse of discretion. The Perlan court noted that “so long as a trial court applies the correct legal standard and there is a basis in the record for its decision, appellate courts should not micromanage discovery. Rather, the trial court must exercise its sound discretion in determining how much disclosure is necessary to comply with section 2019.210 under the circumstances of the case.”

With that standard in mind, the Perlan court concluded that the trial court correctly determined that Perlan’s amended trade secret disclosure statement was inadequate. First, Perlan did not identify all of its trade secrets that it claimed to have been misappropriated. Second, Perlan was not entitled to include broad “catch all” language as a tactic “to preserve an unrestricted unilateral right to subsequently amend its trade secret statement.” The Court cautioned that if plaintiff did not known what its only trade secrets were, it had no basis to allege that defendants misappropriated them. The Court also noted that, if Perlan uncovered additional evidence during discovery that more of its trade secrets had been misappropriated, “it may have good cause to amend its trade secret statement under appropriate circumstances.”

Finally, the Court noted that Perlan was not being required “to convince defendants or the court in its section 2019.210 statement that its alleged trade secrets are not generally known to the public. This is an element of their case that must be proven, but not at the pre-discovery stage of the action.” The Court recognized, however, that the trial court was “simply applying the rule that in a `highly specialized technical field’ (such as developing protein based treatments for viral infections) a more exacting level of particularity may be required to distinguish the alleged trade secrets from matters already known to persons skilled in that field.”

The Perlan decision reminds plaintiffs of their duty to identify their alleged trade secrets with reasonable particularity and that a determination of whether this requirement has been satisfied will be left to the broad discretion of the trial court. In cases involving “highly specialized” fields of expertise, a plaintiff may wish to error on the side of caution and provide more detail about its alleged trade secrets because the trial court may place a greater burden on the party to make a detailed disclosure prior to allowing discovery to commence.


 
Photo by Hanna Therkildsen

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