Shows Need to Specify Trade Secrets and Distinguish Other Claims at Outset of Case

In California, by statute, companies and individuals seeking to enforce trade secrets have to be able to specify, with reasonable particularity, the trade secrets they are seeking to protect at the outset of the case.

On April 13, 2015, the Northern District of California rejected claims in a complaint by online real estate community and web application company plaintiff Top Agent Network, Inc. (TAN) that alleged online real estate marketplace, Zillow, Inc., improperly used and disclosed information about TAN's "Upcoming Listings" feature to develop a competing service. The court found that TAN failed to allege with sufficient specificity the trade secret and non-trade secret proprietary information on which it based its claims and also found other related tort claims superseded by the California Uniform Trade Secrets Act (CUTSA) or redundant.

Although TAN was granted leave to amend its complaint, the court's opinion indicates how trade secret plaintiffs may be required to specify their alleged trade secrets in detail in their initial pleadings, and that any additional tort claims that are asserted should be materially distinct from the trade secret claims to survive a motion to dismiss. The impact of the decision on other courts remains to be seen, as federal courts have not uniformly required plaintiffs to comply with California's statutory requirement to disclose their trade secrets with particularity. The decision can potentially provide persuasive authority to other courts considering these issues, state or federal.

Facts

In its complaint, TAN contended that it developed a strategy and system for aggregating and disseminating exclusive information about properties that have not or will not be listed on the Multiple Listing Service (MLS) that is available to all registered real estate agents. The data are available only to registered real estate agents who meet certain sales criteria and who receive log-in and password credentials for accessing TAN's private content under its "Upcoming Listings" feature.

In February 2014, TAN's CEO contacted Zillow's Chief Revenue Officer to discuss a potential investment in TAN by Zillow. TAN contended that it provided Zillow with initial "non-confidential background information" over email and subsequently provided Zillow with access to TAN's Upcoming Listings feature on other content, based on Zillow's assurances that all of the information would be treated confidentially and used only to evaluate a potential investment by Zillow. TAN maintained that Zillow stated that it would enter a non-disclosure agreement (NDA), but no NDA was ever signed. The complaint contended that TAN and Zillow had further calls and an in-person meeting and TAN provided access to its database, which TAN maintained disclosed trade secrets regarding its features, model and strategy.

In May 2014, Zillow indicated in an email that it would not be investing in TAN, stating that it was "not what we do nor have ever done." One month later, Zillow launched a feature that TAN contended contained all of the core features of TAN's Upcoming Listings service. TAN subsequently filed suit, alleging 13 claims against Zillow, including trade secret misappropriation, fraud, unfair competition, breach of confidence, breach of oral contract and breach of the implied covenant of good faith and fair dealing, all arising out of Zillow's alleged use and disclosure of information obtained during its discussions with TAN and from access to TAN's Upcoming Listings service.

Court's Ruling

The Northern District of California dismissed TAN's trade secret claim on the grounds that the complaint did not plead the existence of trade secrets with sufficient specificity to meet the standard set forth in California Civil Code § 2019.210. Although trade secret plaintiffs typically submit a separate document to the defendant—which is not filed with the court—to describe their trade secrets in detail, here the court held that to satisfy pleading standards in federal court, the plaintiff must "itemize the information claimed as a trade secret with reasonable particularity." The court reasoned that TAN's complaint described the trade secrets "only in broad strokes" and did not specify "what pieces of information shared through each could constitute trade secrets, offering not nearly enough detail to allow the Court to make the required 'item-by-item determination' of what is and is not protectable as a trade secret." Notably, federal courts have not uniformly required plaintiffs to comply with Section 2019.210 at the pleading stage or otherwise.

In addition, the court found that TAN did not allege facts adequately showing how the security measures it claimed to have taken to protect its trade secrets were reasonable. The court further held that TAN failed to plead facts to show that the information at issue was protectable as a trade secret, rather than as "non-protectable ideas." The court also found that TAN did not distinguish between its alleged trade secrets and any non-trade secret information that it contended supported its non-trade secret claims for relief.

Finally, the Northern District of California dismissed TAN's state law claims on the grounds that they were superseded by the CUTSA provision that preempts claims based on the same nucleus of facts as trade secret misappropriation. The court reasoned that there was no material distinction between the alleged conduct that formed the basis for TAN's trade secret claim and its claims for fraud, negligent misrepresentation, breach of confidence, misappropriation of ideas, unfair competition, promissory estoppel and unjust enrichment. Accordingly, the court dismissed each of these claims, as well as TAN's other claims, finding them unsupported or redundant of superseded claims, and left intact only TAN's claim for breach of oral contract.

Conclusions

In California, by statute, companies and individuals seeking to enforce trade secrets have to be able to specify, with reasonable particularity, the trade secrets they are seeking to protect at the outset of the case. While it is not typical to require this level of trade secret detail in an initial pleading, this case appears to show that some courts may interpret the statute and pleading rules to impose such a requirement. Whether enforcing or defending trade secret claims, understanding the trade secrets at issue at the earliest stages of the case can be critical, and even dispositive of the claims. Similarly, this case continues a trend in favor of interpreting the preemptive effect of CUTSA broadly. If plaintiffs cannot materially distinguish their non-trade secret claims from their trade secret claim under CUTSA, their claims are likely to be vulnerable to dismissal at the pleading stage.