IP Law Daily Trial court’s pre-discovery dismissal of trade secrets claim was an abuse of discretion
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Friday, October 16, 2020

Trial court’s pre-discovery dismissal of trade secrets claim was an abuse of discretion

By Thomas K. Lauletta, J.D.

Genuine issues of material fact existed regarding whether the plaintiff’s electronic system for managing brokerage accounts contained protectable trade secrets.

Trade secrets misappropriation claims brought by InteliClear, LLC, under the federal Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA) against ETC Global Holdings have been reinstated by the U.S. Court of Appeals in San Francisco, which reversed a district court’s dismissal of the complaint. There were triable issues of fact regarding whether parts of InteliClear brokerage management system were trade secrets that had been the subject of reasonable efforts to protect. These issues should be decided by a jury, rather than by summary judgment, the appellate court said. In addition, the Ninth Circuit held that the district court abused its discretion by refusing to allow the plaintiff to address these issues by additional discovery pursuant to Federal Rule of Civil Procedure 56(d) (InteliClear, LLC v. ETC Global Holdings, Inc., October 15, 2020, Gould, R.).

Between 2004 and 2006, InteliClear developed the "InteliClear System," a comprehensive electronic system for managing stock brokerage firm accounting, securities clearance, and securities settlement services. This system had been developed by InteliClear’s General Manager, Martin Barretto. In January 2008, the predecessor and later subsidiary of ETC Global Holdings ("ETC") obtained a license of the InteliClear System from InteliClear and signed a Software License Agreement, acknowledging that all information obtained from InteliClear was confidential, and would be kept confidential "during and after" the duration of the licensing agreement. Later, all rights and duties under the licensing agreement were assigned to defendant ETC.

In November 2017, ETC ended its licensing agreement with InteliClear. However, before terminating this agreement, ETC began building its own electronic trading system, and deployed it in February 2018. After InteliClear raised the issue of ETC’s possible improper use of the InteliClear system to create the ETC system, the parties agreed to allow Capsicum Group, LLC, a computer technology, and forensics expert, to compare the two systems and investigate. Upon receiving a report by Capsicum that the ETC system had elements that were identical to the InteliClear system, InteliClear brought action alleging that ETC misappropriated its trade secrets under the DTSA and CUTSA.

At trial, the district court granted ETC’s motion dismissing InteliClear’s DTSA and CUTSA claims, ruling that InteliClear did not identify its trade secrets with sufficient particularity, and that it did not show that the InteliClear System was a trade secret or that ETC had access to InteliClear’s source code. The district court also denied InteliClear’s motion to defer ruling until after completion of discovery under Rule 56(d) because the court determined that discovery would not resolve the underlying deficiencies—i.e., the failure to state the alleged trade secrets with sufficient particularity.

Appellate court’s analysis. Noting that the district court’s grant of summary judgment was made prior to discovery, the appellate court stated that this action did not allow for analysis of whether a genuine issue of fact existed with regard to InteliClear’s claims for misappropriation of trade secrets. The appellate court limited its analysis to the DTSA claim, noting that its elements were substantially similar to those of CUTSA. Under a DTSA misappropriation of trade secrets claim, a plaintiff must prove: (1) that the plaintiff possessed a trade secret, (2) that the defendant misappropriated the trade secret; and (3) that the misappropriation caused damage to the plaintiff.

Identification of trade secrets. Dealing with the question of whether InteliClear’s compliant identified its trade secrets with sufficient particularity, the appellate court noted that in addition to general description of its trade secrets, InteliClear provided detailed declarations by Barretto, submitted under seal to protect its trade secrets. Barretto outlined the specific tables, table columns, account identifiers, codes, and methodologies InteliClear claimed as trade secrets. ETC’s expert argued that this explanation of InteliClear’s trade secrets was unclear. Based on the conflicting evidence presented, the appellate court concluded that there was a genuine issue of material fact as to whether InteliClear identified its trade secrets with sufficiently particularity. This precluded summary judgment on this issue.

Plaintiff’s confidentiality efforts. Under DTSA, an owner of trade secrets must take reasonable measures to keep such information secret. The district court found no triable issue existed as to whether features of the InteliClear System were truly "secret" because they were either: (1) "uncommon" in other systems but not "generally unknown," or (2) visible to end-users of the InteliClear System who are not under confidentiality obligations. In rejecting the district court’s conclusion, the appellate court noted that the architect of the InteliClear system credibly testified that the combination of its features was unique and "not found elsewhere on Wall Street." In addition, the appellate court concluded that InteliClear took reasonable measures to encrypt and compile its source code and require licensees to agree to confidentiality. Accordingly, the court held that there was a genuine issue of fact regarding InteliClear’s actions to protect the confidentiality of its trade secrets that should be decided by a jury.

District court denial of Fed. Rule 56(d) request. InteliClear filed a motion with the district court to allow it additional discovery essential to obtaining information from ETC to allow InteliClear to refine its trade secrets identification it to oppose summary judgment. The court denied this motion, even though no discovery had taken place at this time, and no discovery occurred before the district court entered summary judgment against the plaintiff. Noting that plaintiffs in trade secrets actions may have valid reasons to avoid being overly specific in defining these trade secrets at the outset of proceedings, the appellate concluded that InteliClear’s request for additional discovery was reasonable. Further, the appellate court stated that the district court’s grant of summary judgment under the circumstances was premature and did not allow IntelliClear the opportunity to discover information that was essential to its opposition to the summary judgment. According, the appellate court held that the district court abused its discretion in declining to defer a summary judgment hearing until discovery had proceeded.

Court action. The court ruled that genuine disputes of material fact remained as to whether InteliClear demonstrated that it possessed protectable trade secrets and that the district court abused its discretion in denying discovery under Federal Rule 56(d).

This case is No. 19-55862.

Attorneys: Kenneth A. O'Brien, Jr., (Kenneth O'Brien) for InteliClear LLC. J. Kevin Fee (Morgan, Lewis & Bockius LLP) for ETC Global Holdings, Inc.

Companies: InteliClear LLC; ETC Global Holdings, Inc.

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