Litigation

A central issue in all trade secret litigation is the adequacy of plaintiff’s pre-discovery disclosure of the alleged trade secrets. The Fourth District Court of Appeal has contributed to the growing body of case law interpreting the adequacy of the initial trade secret disclosure required by California Code of Civil Procedure section 2019.210. (Perlan Therapeutics v. Superior Court of San Diego County (November 4, 2009), 178 Cal.App.4th 1333.) Section 2019.210 provides that a plaintiff suing for misappropriation of trade secrets must identify the alleged trade secrets with “reasonable particularity” before commencing discovery. The Perlan decision joins two other recent decisions evaluating the particularity required in the plaintiff’s trade secret disclosure. (See Brescia v. Angelin (2009) 172 Cal.App.4th 133 and Advanced Modular Sputtering, Inc. v. Superior Court (2005) 132 Cal.App.4th 826.) The Perlan court analyzes the Brescia and Advanced Modular decisions in addressing critical procedural and substantive questions.

Perlan sued its former employees, alleging they misappropriated trade secrets related to protein-based therapeutics for viral infections. The trade secret statement at issue was actually plaintiff’s second attempt to comply with section 2019.210. The plaintiff’s section 2019.210 statement began with boilerplate objections similar in nature to written objections, which in no way attempted to comply with the requirements of section 2019.210. The remainder of the statement repeated the narrative information alleged in the complaint with some limited additional technical information. However, the court found that additional technical information was very general in nature and was also publicly available. Although plaintiff’s statement contained highly-technical language, the court noted that the technical language “does not provide specific identifications of the peptides or reagents used in the process.” (Id. at 1338.) In addition to the general descriptions, plaintiff apparently referenced 50 additional documents related to the alleged inventions and included a catchall clause that the trade secrets included “all related research, development, advances, improvements, and processes related thereto.”

The defendants attacked the amended trade secret statement, stating that it “remains a non-committal collection of loosely worded conclusory allegations.” Defendants demanded a clear explanation of the particular substances and processes at issue, arguing that plaintiff’s descriptions were not reasonably particular and were not sufficient as to distinguish that information the description from matters generally known in the scientific field.

The purpose of section 2019.210 has been outlined by the court in Advanced Modular. Those four purposes include: (1) promoting well-investigated claims and discouraging the filing of meritless trade secret complaints; (2) preventing plaintiffs from abusing the discovery process to learn about defendants’ trade secrets; (3) framing the issues in order to place reasonable limitations on discovery from defendants; (4) allowing defendants to formulate well-reasoned defenses and not have to wait until the eve of trial. (Id. at 1343, citing Advanced Modular, supra, 132 Cal.App.4th at 833-34.)

The Perlan court analyzed what has been described as the “’ubiquitous’ problems of litigating the appropriate scope and timing of trade secret identification.” (Id. at 1344.) Plaintiffs rarely provide detailed descriptions of the alleged trade secrets without court order. They do so for numerous reasons, some more legitimate than others. Plaintiffs do not want to be tied down early on in the litigation in the hope of amending or refining their contentions as the litigation and discovery progress. Plaintiffs also have the legitimate concern that, in the event defendants did not completely misappropriate their trade secrets, a detailed description in the section 2019.210 statement will give defendants the valuable element they did not steal. Plaintiffs are also justifiably concerned that the detailed disclosure might somehow be leaked to the public, thereby depriving plaintiffs of the economic value of the trade secret.

The trial court in Perlan held that plaintiff’s amended statement failed to describe the alleged trade secret with reasonable particularity and failed to demonstrate that the information disclosed was not generally known to the public. The appellate court affirmed the ruling and relied on the prior decisions in Advanced Modular and Brescia in doing so. The Perlan decision is useful in that it summarizes both the procedural issues related to the appellate review as well as the substantive issues relating to the adequacy of the disclosure.

The Perlan court held that the adequacy of a section 2019.210 statement is a discovery issue and discovery rulings are reviewed for an abuse of discretion, citing Scripps Health v. Superior Court (2003) 109 Cal.App.4th 529, 533. However, the court in Advanced Modular and in Brescia reviewed the legal questions de novo, and the plaintiff in Perlan argued that the Court should do the same. The Perlan court noted that Advanced Modular and Brescia correctly applied the de novo standard of review, but only because the trial courts in those cases applied an improper legal meaning of “reasonably particular.” In Advanced Modular, the trial court erroneously weighed the conflicting testimony from a competing expert and, in Brescia, the trial court conducted a mini-trial seeking an explanation how the trade secrets which Brescia had described with precision differed from publicly-available information. Those trial courts applied an incorrect interpretation of “reasonable particularity,” which those appellate courts correctly reviewed de novo. However, the Perlan court found that the trial court had applied the correct legal standards and, therefore, it was obligated to review the decision under the abuse of discretion standard.

The Perlan court noted that neither Brescia nor Advanced Modular provides an easy answer to the substantive question of whether the plaintiff’s statement was sufficiently detailed. Advanced Modular held that the section 2019.210 disclosure does not require “every minute detail” of the trade secret or the “greatest degree of particularity possible.” (Advanced Modular, supra, 132 Cal.App.4th at 835-36.) Section 2019.210 also does not require a mini-trial on the merits of the misappropriation claim before discovery can begin. However, the Advanced Modular court also held 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, the more exacting level of particularity may be required to distinguish the alleged trade secrets from matters generally known to people skilled in the field.” (Id. at 836.) The Advanced Modular court went on to hold that the trial court applied the wrong legal standard in weighing the conflicting testimony of experts as to whether the section 2019.210 disclosure, although reasonably particular, actually disclosed information not generally known to the public. In that context, the court held that the trial court committed reversible error in improperly weighing the conflicting testimony of the parties’ respective experts.

In Brescia, the plaintiff claimed a trade secret in its pudding formula and manufacturing process and disclosed the precise recipe and process in its section 2019.210 disclosure. Despite this exacting disclosure, the trial court found that Brescia’s disclosure was silent on the question of whether the recipe was known to persons knowledgeable in the field. The appellate court disagreed, holding that section 2019.210 does not create a mechanism by which a defendant can litigate the ultimate merits of the case – for example, whether the precise formula at issue was actually a trade secret. The precise recipe identified by Brescia was certainly sufficient to allow a defendant to formulate a defense and to investigate whether the recipe was within the public domain and was, therefore, not a trade secret.

After reviewing this precedence, the Perlan court found that plaintiff’s trade secret designation did not comply with the standards of section 2019.210 in that the statement was not “succinct” because it contained numerous pages of surplusage, including objections, qualifications, allegations, and references to hundreds of pages of documents. The Perlan court held that the exactitude used by plaintiff in Brescia in reciting its exact pudding recipe was not legally required by section 2019.210, but certainly more specificity was required of the plaintiff. The court found that a highly-specialized technical field like this one does require a more exacting level of particularity to describe the trade secret and to identify what is known to persons knowledgeable in the field, citing Advanced Modular.

The lessons to glean from Perlan is that the section 2019.210 statement must describe the alleged trade secret concisely and with clarity, but need not include “every minute detail.” If more than one trade secret is alleged, the individual trade secrets must be segregated and not blended together. The section 2019.210 statement should further describe how the trade secrets differ from publicly-available knowledge. Lastly, the disclosure must not contain unnecessary surplusage and should avoid documents that require the court and the defendant to guess which specific reference might constitute the alleged trade secrets. As the court stated, “Perlan [is not] entitled to hide its trade secrets in ‘plain sight’ by including surplusage and voluminous attachments in its trade secret statement.” (Perlan, supra, at 21.)

The Perlan decision includes a final discussion that should impact a litigant’s decision on whether to seek writ relief related to the adequacy of the section 2019.210 disclosure. The plaintiff in Perlan argued that it would suffer undue prejudice if forced to disclose the additional information about a trade secret before commencing discovery. The appellate court was not sympathetic, finding that once discovery commences, plaintiff will be required to provide responses to interrogatory and document demands that will require disclosure of the alleged trade secrets in exacting detail. The tactical advantages concerning when the detailed information was provided is generally not sufficient to warrant extraordinary appellate relief. That reasoning would apply equally to a defendant contemplating extraordinary relief. A defendant can always obtain detailed information later by way of interrogatories, requests for admission, and document demands, and the tactical advantage of having the plaintiff disclose the alleged trade secret with more detail at the outset generally should not warrant extraordinary relief.

Is the work product of an attorney always protected? No, according to the First Circuit in a decision which may draw the attention of the U. S. Supreme Court. The First Circuit, sitting en banc (the “Court”) ruled that the attorney work product doctrine did not protect tax accrual work papers prepared by in-house attorneys to support defendant Textron Inc.’s (“Textron”) calculation of tax reserves. United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009). Practitioners, especially in-house counsel, need to be aware of this decision and determine whether it influences how they practice.

The work product doctrine, initially pronounced by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), and later codified in Rule 26(b)(3) of the Federal Rules of Civil Procedure, provides, in pertinent part:

“[A] party may obtain discovery of documents and tangible things otherwise discoverable under [Rule 26(b)(1) of the Federal Rules of Civil Procedure] and prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative . . . only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.”

Fed. R. Civ. P. 26(b)(3)(emphasis added). Among other things, the purpose of this doctrine is “to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy ‘with an eye toward litigation’ free from unnecessary intrusion by his adversaries.” United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (citing Hickman v. Taylor, 329 U.S. 295, 510-11 (1947)). Unlike the attorney-client privilege, which protects all confidential communication between a client and his or her attorney in connection with legal advice sought by the client, the attorney work product doctrine’s protections are far narrower. The latter’s protections apply only to documents prepared by attorneys for their clients in anticipation of litigation or for trial. Textron, 577 F.3d at 30-31.

In determining whether a document was prepared “in anticipation of litigation,” courts have utilized two different tests: (1) the Fifth Circuit’s “primary purpose” test, under which documents are deemed to be prepared in anticipation of litigation when the “primary motivating purpose behind the creation of the document was to aid in possible future litigation.” United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982); and (2) the “because of” test, where the “relevant inquiry is whether the document was prepared or obtained ‘because of’ the prospect of litigation.” United States v. Textron Inc. and Subsidiaries, 507 F.Supp.2d 138, 149 (D.R.I. 2009) (citing Adlman, 134 F.3d at 1205). The First Circuit has adopted the “because of” test. Maine v. Dept. of the Interior, 298 F.3d 60, 68 (1st Cir. 2002).

Other circuits, including the Ninth, have also adopted the “because of“ standard, which, rather than considering “whether litigation was a primary or secondary motive behind the creation of a document,” considers “the totality of the circumstances and affords protection when it can fairly be said that the ‘document was created because of anticipated litigation, and would not have been created in substantially similar form but for the prospect of that litigation.’” In re Grand Jury Subpoena, 357 F.3d 900, 907-08 (9th Cir. 2004) (citations omitted); see, also, Logan v. Commercial Union Ins. Co., 96 F.3d 971, 976-77 (7th Cir. 1996) (adopting “because of” test); PepsiCo, Inc. v. Baird, Kurtz & Dobson LLP, 305 F.3d 813, 817 (8th Cir. 2002) (adopting the “because of” test). Given that the “because of” standard does not consider whether the primary motive behind the document creation was litigation, it is arguably a more protective standard than the “primary purpose” one, especially with respect to dual purpose documents.

Publicly traded companies like Textron must prepare audited financial statements to comply with federal securities laws. Textron, 577 F.3d at 22 (citing 15 U.S.C. §§ 78l, 78m (2006)). In doing so, the company “must calculate reserves to be entered on the company books to account for contingent tax liabilities.” The possibility and amount of the company’s potential future tax liabilities is often the subject of both legal and financial analysis. Textron, 577 F.3d at 22-23. After the Enron debacle, the IRS began obtaining companies’ tax accrual work papers if the IRS suspected the company had engaged in transactions that the IRS considered to be tax avoidance transactions. Id., citing 26 C.F.R. § 1.6011-4(b)(2)(2009)). In Textron, the IRS determined that Textron had engaged in a number of sale-in, lease-out (“SILO”) transactions – transactions deemed by the IRS to be tax avoidance transactions. Textron, 577 F.3d at 23-24.

The IRS sought accounting work papers, but also sought copies of memoranda prepared by Textron’s in-house expressing their judgments regarding Textron’s chances, in percentage terms, of prevailing in any possible litigation and calculating a tax reserve amount in the event Textron did not prevail in such litigation. Textron and Subsidiaries, 507 F.Supp.2d at 142-43. The IRS also sought work papers “consisting of the previous year’s spreadsheet and earlier drafts of the spreadsheet together with notes and memoranda written by Textron’s in-house tax attorneys, reflecting their opinions as to which items should be included in the spreadsheet and the hazard of litigation percentage that should apply to each item.” Id. at 143. Textron refused to produce the documents, claiming, among other things, that the documents were privileged attorney work product. Textron, 577 F.3d at 25. The IRS brought an enforcement action in federal court to obtain the work papers. Id. The district court denied the IRS’ petition, concluding that the papers were protected by the work product doctrine. Id. On appeal, a divided 1st Circuit court upheld the district court’s decision. Id.

The IRS sought, and was granted, a rehearing en banc. The Court found that, based on the evidence presented in the trial court, that the purpose of the work papers was to make financial entries, to file quarterly and annual financial statements with the SEC, and to obtain a clean audit. Id. at 27. Textron’s director of tax reporting also testified that Textron, as a publicly traded company, was required to file its financial statements with the SEC, including any tax reserves. Id. at 28. The Court rejected the claim of privilege finding that “only work done in anticipation of or for trial . . . is protected.” Id. at 30. The Court even ordered the attorney memorandum evaluating the chances of prevailing in any future litigation.

The Court observed that, in adopting FRCP 26, the advisory committee noted that “materials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes,” even if prepared by attorneys or representing legal thinking, are not protected by the work product doctrine. Id., quoting Fed. R. Civ. P. 26 advisory committee’s note (1970). The Court stated that Textron’s tax audit work papers were prepared in the ordinary course of business, and “would have been created in essentially similar form irrespective of the litigation.” Textron, 577 F.3d at 30, citing Maine, 298 F.3d at 70. The Court further determined that the “only purpose of Textron’s papers was to prepare financial statements” and that there was no evidence in this case that the work papers were prepared for potential use in litigation. Id. The Court concluded that the work product doctrine is not “designed to help the lawyer prepare corporate documents or other materials prepared in the ordinary course of business,” especially when there is “a legal obligation to prepare such papers.” Id. at 31. In Textron’s case, the tax audit papers had to be prepared to comply with the securities laws and accounting principles for certified financial statements. Id. In short, the court concluded that the work product doctrine protects “work done for litigation, not in preparing financial statements.” Id. at 31.

In its most liberal construction, it is possible that the ruling could make all documents created by attorneys in the normal course of business discoverable. Alternatively, the ruling can be narrowly read as limited to the tax context. The Court noted that its decision, at least in part, rested on public policy grounds – “[u]nderpaying taxes threatens the essential public interest in revenue collection.” Id. Further, the opinion notes that “[o]ther circuits have not passed on tax audit work papers and some might take a different view.” Id. at 30 (emphasis added). The opinion also discusses that the “work product protection for tax audit work papers has been squarely addressed only in two circuits,” the First and the Fifth. Id. (emphasis added). Thus, while other circuits have ruled on the applicability of the attorney work product doctrine as it applies to dual documents in general, only the First and Fifth circuits have ruled on the doctrine’s applicability to tax audit work papers, which arguably makes the Court’s opinion more narrow. Given the First and the Fifth Circuit split, the decision could possibly be reviewed by the Supreme Court. In the interim, this ruling makes tax accrual work papers prepared by in-house attorneys potentially discoverable in litigation.

To safeguard both attorney-client privilege and work product, in-house and outside counsel should use caution in preparing memoranda or letters to be placed within accounting records to support management positions and judgments, and should not communicate with outside auditors with respect to interpretations and judgments or conclusions. These judgments are to be made by management of a company (with or without consulting counsel). Counsel’s written memoranda and letters to the client should always be framed in anticipation of a challenge in positions where questions on treatment or judgment may be challenged, and circulation of such guidance should be limited. Still, regardless of how the courts apply the attorney work product doctrine, it is important to note that the decision does not alter other confidential communications between clients and attorneys under the more traditional attorney client privilege.

The United States Government, which created the courts and a legal system to provide an avenue to seek redress for injury, is immune from suit in that system unless the Government agrees to be sued by waiving its immunity. This is commonly known as “sovereign immunity,” and allows many lawsuits to be dismissed at the pleading stage. On July 25, 2008, the U.S. Court of Appeals for the Federal Circuit issued an opinion regarding the scope of sovereign immunity as applied in a copyright infringement case.

The Federal Government has waived its immunity for suits based on its infringing the rights of copyright owners. It is a rather limited waiver, however, and allows the Government to infringe much more freely than a private party. Last week’s Federal Circuit decision, Blueport Co., LLC v. United States, shows how easy it can be for a government employee to lose his rights to work he has created.

In Blueport, Air Force Technical Sergeant Mark Davenport was employed as a manager of the Air Force Manpower Data System, a database containing manpower profiles for the Air Force. He was also a member of the Air Force Manpower User Group, a group of manpower personnel that provided guidance on the use of the MDS. Davenport believed that the software used to run the MDS was not adequate, and set out to write his own software. The Air Force refused to train him on computer programming, so Davenport learned programming on his own, on his own time, and at his own expense.

Davenport wrote a software program – the AUMD program – to use with the MDS. He wrote it on his own time at his home computer. He brought the finished program to work and installed it on his work computer, shared it with his co-workers, and posted it on the Air Force’s website so that Air Force manpower personnel could download and use it. He modified the program based on feedback he received, and added an automatic expiration to require users to download the newest version of the AUMD program. He even gave a presentation on the AUMD program to senior Air Force manpower officers at an annual conference.

The Air Force decided it needed the AUMD program, and asked Davenport for the source code. Davenport refused to simply turn it over; it was his program, after all. The Air Force threatened him with demotion and a pay cut. Davenport responded by assigning all his rights to Blueport, who contacted the Air Force to negotiate a license agreement for the use of the AUMD program. The Air Force had other ideas, and went to SAIC to recreate the program. SAIC modified the AUMD program’s source code to extend the expiration date, which allowed Air Force personnel to continue to use the program. Davenport sued.

Common sense screams “This is not right!” Davenport wrote the program on his own, at his own expense, not using any government computers, so he should own the rights to it. The Air Force can’t just take it! That may be, but remember, it’s the Government, and since the Government makes the rules, it gets to decide which ones to play by. And in this case, it brought out the sovereign immunity rule.

Section 1498(b) of title 28, United States Code, contains the waiver of immunity for copyright infringement. As the Federal Circuit pointed out, it “grants copyright owners a right of action for copyright infringement against the United States, subject to three provisos.” First, there is no right of action where the employee “was in a position to order, influence, or induce use of the copyrighted work by the Government.” Next, there is no right of action where the employee prepared the work as part of his or her “official functions.” Finally, there is no right of action when “Government time, material, or facilities were used” in the creation.

After first deciding that these three provisos are jurisdictional limitations and not affirmative defenses, the Court of Appeals agreed that Blueport’s claim was subject to the first proviso, in that Davenport “influenced or induced” the AUMD program’s use by the Air Force. “Davenport’s position as a member of the Air Force manpower community gave him access and authority to distribute the AUMD program freely to his colleagues.” Therefore, his claim was precluded by the first proviso, and the court did not reach the other provisos. The lower court had held that all three provisos each barred Blueport’s suit. The Government’s waiver of immunity is rather limited.

Blueport also sued for violations of the Digital Millennium Copyright Act of 1998, which provides that “no person shall circumvent a technological measure that effectively controls access to a work protected under” the Copyright Act. Blueport claimed that the modification of the expiration date violated this statute. The Federal Circuit didn’t reach the merits of this claim, however. Instead, it held that the Government has not waived its sovereign immunity for claims under the DMCA, and therefore is immune from suit. The court based its opinion on finding that the term “person” in the DMCA does not include the term “sovereign.” Likewise, section 1498(b) does not include a waiver for claims under the DMCA, and a waiver of sovereign immunity must be express, not implied.

An interesting, although for Davenport unsatisfying, distinction can be drawn between this case and a case involving a “work for hire” under the Copyright Act. The copyright of a work for hire is owned by the employer, not the employee. The Government never claimed that it owned the copyright here. It just couldn’t be sued for infringing Davenport’s rights. The lesson to be learned is simple. If you are a government employee, and write a program (or book, manual, etc.) that will make your work place better or more efficient, think before you simply bring it to work and share it. You may be giving your employer a gift you didn’t intend to give.