Protect Your Trade Secrets Before the Scheduling Order Occurs

Mar 23

The Northern District of Texas recently permitted a plaintiff to conduct a request for inspection on the Defendants’ premises to search for relevant trade secrets. Judge Godbey denied the Defendants’ request to stay discovery pending identification of the trade secret with “reasonable particularity.” The primary rationale for permitting this discovery boils down to the fact that the Court already entered a scheduling order and no showing was made as to why any special discovery procedures should apply in this case.

Parties typically rely upon the failure to identify a trade secret with “reasonable particularity” as a grounds for objecting to broad discovery. The place and time are typically dispositive of whether a court will grant this “reasonable particularity” objection.

“Bifurcating discovery and motion practice forces the plaintiff to disclose their trade secrets first and only then allows discovery into those subject matters where the plaintiff survives an early summary judgment. It is well known that parties seek bifurcation and phases for discovery and motion practice in patent infringement cases—claim construction followed by infringement and damages.”

The place where a “reasonable particularity” objection is most likely to be sustained will be in California courts. Section 2019.210 of the California Civil Procedure Code provides that “a party alleging . . . misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code.” For most other states, the scope of discovery in Rule 26(b)(1) automatically allows for a party to obtain information related to its trade secret claim in the complaint.

Depending on the breadth of the allegations in the complaint, a party may be able to obtain discovery on the competitor’s potential pending patent applications, client lists, and other information. As such, a party will likely not have their “reasonable particularity” objection sustained under either Rule 26(b)(1) or 26(c)(1) in the context of a discovery dispute unless they are in a state or federal court located in California or a party is asserting a claim under the California Uniform Trade Secrets Act.

The time for asserting the “reasonable particularity” objection should be as early as possible. As in this case, most parties frequently and informally “waive” this valid objection under Rule 26(b) and (c) at two operative times: (1) the terms of a protective order, and (2) the status report before the 26(f) initial scheduling conference.

First, a protective order may limit who may view this business competitive information, but it does not limit what information may be withheld as irrelevant. Further, a protective order makes it more difficult to withhold irrelevant information because one must prove that the attorneys’ eyes only or highly confidential designations lack adequate safeguards to prevent the other side from using the information improperly. Consequently, once the Court issues a protective order, a defendant will typically narrow their ability to assert discovery objections under Rule 26(c).

Second, at the Rule 26(f) stage, parties typically overlook the ability to request discovery bifurcation under Rule 26(f)(3) or even bifurcation on motion practice under Rule 16(b).

Bifurcating discovery and motion practice forces the plaintiff to disclose their trade secrets first and only then allows discovery into those subject matters where the plaintiff survives an early summary judgment. It is well known that parties seek bifurcation and phases for discovery and motion practice in patent infringement cases—claim construction followed by infringement and damages. Further, judges will typically bifurcate several other issues if persuasively advocated for how they will result in judicial efficiency at the initial conference, such as res judicata and collateral estoppel.

Trade secret cases have some similarities with patent cases because the dispositive issues typically relate to whether the plaintiff can prove a trade secret exists and, if so, whether that trade secret was misappropriated. For example, the scope of a trade secret case drastically expands if the trade secret concerns a customer list, a potential novel conception or invention, or numerous items.

The primary focus for such bifurcation should be some or all purposes outlined in Rule 16(a)—namely, (1) expediting disposition of the action; (2) establishing early and continuing control so that the case will not be protracted because of lack of management; (3) discouraging wasteful pretrial activities; (4) improving the quality of the trial through more thorough preparation; and (5) facilitating settlement. For example, the court may expedite disposition of the action by narrowing discovery to the only trade secret at issue is a client list with Company A, B, C, and D. By doing so, the Court will eliminate from the scope of discovery information pertaining to all pending patent applications or research and development materials on different projects. Now, a company can more effectively prevent its competitor from learning about its trade secrets.

For some reason, however, defendants are quick to indicate that they do not see issues in the case that are worth bifurcating or phasing out. By doing so, a party essentially waives the ability to require an early identification of the trade secret with “reasonable particularity” where it is not emphasized before the scheduling order issues. The argument supports waiver because a party not arguing reasonable particularity early indicates to the Court and the plaintiff that the parties really don’t have any extremely sensitive information that shouldn’t be shared with their competitor or that cannot be addressed in a protective order.

Keep in mind, a defendant has a more difficult position when attempting to compel a plaintiff to produce trade secret information that the plaintiff argues is not relevant to their case. In other words, a plaintiff may use an amorphous allegation of a trade secret in the Complaint as a sword and a shield, but a defendant is not in the same position unless they force a plaintiff to do so early on. Consequently, defendants should place a greater emphasis on the need to bifurcate trade-secret cases where the allegations in the complaint are essentially the definition of “trade secrets” under 18 U.S.C. § 1839(3).

In sum, defendants should push to bifurcate the trade secret issue. The scheduling order should require that a plaintiff identify the trade secrets by an interrogatory and substantiate each with document production within 30 days—much like the typical patent infringement disclosures. Then, a defendant should identify by interrogatory their contentions for each not qualifying as information protectable as a trade secret, such as public disclosures, published patent applications, or lack of security protection. With these narrow categories resolved, defendants should push for an early motion for summary judgment on those identified where possible.