September 20, 2005
In a case of first impression, on September 13, 2005, the California Court of Appeal, Second Appellate District, Division Six, in Advanced Modular Sputtering Inc. v. Superior Court (B181405, B183766), answered two questions involving trade secret discovery in civil cases:
1. Does Code of Civil Procedure Section 2019.210 (formerly Section 2019(d)), which provides that discovery related to trade secrets may not commence until the trade secret is identified with "reasonable particularity," extend to any cause of action which relates to the trade secret where the party alleging the trade secret misappropriation also asserts a cause of action under the Uniform Trade Secrets Act ("UTSA"); and
2. What is the degree of "reasonable particularity" that must be met to satisfy the identification requirement needed before the commencement of discovery?
The Court of Appeal answered the first question in the affirmative, noting that Section 2019.210 is not "cause of action" specific. As for the second question, the Court held that the trial court applied too "stingy" a view of trade secret designations, and that a proponent of an alleged trade secret need not describe it with "the greatest degree of particularity possible" before being permitted to conduct discovery, but rather, need only make a "reasonable" showing, i.e., one that is "fair, proper, just [and] rational," to permit discovery to commence.
This decision arose from a ten cause of action complaint filed by plaintiff Sputtered Films, Inc. ("Sputtered Films") against defendants Advanced Modular Sputtering, Inc. ("AMS") and its founders, Sergey Mishin and Rose Stuart-Curran. Sputtered Films is in the business of manufacturing "sputtering" equipment, which deposits a thin film of material onto a silicon wafer or other substrate. Sputtered Films claims its equipment was developed following 35 years of researching and developing sputtering processes, and employs Sputtered Films' trade secrets and patented technology.
Mishin and Curran are former employees of Sputtered Films, but were laid off. As an accommodation, Sputtered Films gave Mishin permission to service sputtering machines it had sold to Agilent Technologies. Mishin and Curran subsequently formed AMS which, within a few years, was selling sputtering equipment to Agilent and other customers of Sputtered Films.
Sputtered Films sued Mishin, Curran and AMS for misappropriation of trade secrets, breach of contract, unfair competition, interference with prospective economic advantage, and various other contract and tort claims. Each of plaintiff's causes of action was based on the foundational allegation that the defendants misappropriated Sputtered Films' trade secrets.
The trial court initially granted a protective order barring Sputtered Films from conducting discovery under Code of Civil Procedure Section 2019.210 until it identified the specific trade secrets it alleged were misappropriated. Section 2019.210 provides that in any action alleging misappropriation of a trade secret under the UTSA, before commencing discovery "relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity." Following the trial court's order, Sputtered Films filed three "trade secret designations" in an effort to comply with Section 2019.210. Each time, AMS objected. On each occasion, after reviewing expert declarations submitted by the parties, a discovery referee found that Sputtered Films had not sustained its burden to identify its trade secrets with "reasonable particularity," as required by Section 2019.210. The referee recommended that discovery "relating to the allegations of misappropriation of trade secrets . . . be further stayed," but that discovery should proceed in "all other respects." The referee further noted that if Sputtered Films wanted to pursue its cause of action for misappropriation of trade secrets, it should proceed with the preparation of a further designation, or seek a determination from the trial court that the last designation was adequate. The trial court adopted the referee's recommendations, but then went further, ordering that any subsequent designation of trade secrets must be filed within 15 days, and that unless good cause was shown, the plaintiff's misappropriation of trade secrets cause of action would be dismissed in 30 days.
AMS and Sputtered Films each filed a petition for writ of mandate, AMS seeking relief from that portion of the trial court's decision which permitted Sputtered Films to conduct discovery on all causes of action other than its claim under the UTSA, and Sputtered Films seeking relief from that portion of the court's decision holding that its trade secret designations were inadequate. After the Court of Appeal summarily denied both petitions, the Supreme Court of California, on a petition for review from AMS, directed the Court of Appeal to show cause why AMS's petition should not be granted. Sputtered Films subsequently filed another writ petition, renewing its earlier request for review from the trial court's order. The Court of Appeal accepted review, consolidated both petitions, and on September 13, 2005, vacated the trial court's discovery order.
On the issue of AMS's challenge of the trial court's order permitting Sputtered Films to conduct discovery on all nine of its non-UTSA causes of action, the Court of Appeal held that the plain language of Section 2019.210 is not "cause of action" specific, but rather refers to any "action" wherein it is alleged there is a "misappropriation of a trade secret." Because each of Sputtered Films' causes of action "hinge[d] upon the factual allegation that AMS misappropriated Sputtered Films' trade secrets," the Court found that "an order that bars discovery on the cause of action for misappropriation but permits it on the others simply makes no sense."
Turning to the second issue before it, the Court of Appeal concluded that the referee and the trial court had erred by taking a "rather stingy view of the trade secret designations, harkening back to the days of strict code pleading." In rejecting such an approach, the Court held that the party alleging a misappropriation need not "define every minute detail of its claimed trade secret," and a trial court need not conduct a "miniature trial" on the merits of the misappropriation claim before permitting discovery. Rather, the Court held that the plaintiff need only "make some showing that it is reasonable, i.e., fair, proper, just and rational[,] . . . under all of the circumstances to identify its alleged trade secret in a manner that will allow the trial court to control the scope of subsequent discovery, protect all parties' proprietary information, and allow them a fair opportunity to prepare and present their best case or defense at a trial on the merits." In short, the proponent need not allege its trade secret with "absolute precision" or "with the greatest degree of particularity possible." Rather, where, as in this case, experts testified that they were capable of understanding the designation and distinguishing the alleged trade secrets from information in the public domain, the designation should, "as a general rule, be considered adequate to permit discovery to commence."
This decision makes clear that Section 2019.210 will now apply to impose a "hurdle" in discovery with respect to any and all causes of action involving a misappropriation of trade secrets, so long as the party alleging the misappropriation includes a cause of action under the UTSA in its complaint. The Court, however, left open the question of whether Section 2019.210 applies to non-UTSA claims that are tantamount to a theft of trade secrets claim but are artfully pled to avoid the statute's restrictions. One would certainly expect that AMS and/or Sputtered Films will file a Petition for Review with the California Supreme Court. Barring the Supreme Court accepting review, at the very least, this decision provides some sorely needed guidance as to what is required under the statute to identify trade secrets with "reasonable particularity."
For more information, please contact the authors:
Robert A. Weikert
415.369.7350
raweikert@thelenreid.com
John A. Chatowski
415.369.7195
jachatowski@thelenreid.com
©2005 by Thelen LLP. This Client Alert has been published as an information service for clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. The authors, listed above, or your Thelen attorney contact, would be happy to discuss the information in this article in greater detail and its application to your specific situation. We welcome your comments and suggestions.
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