Ninth Circuit Says District Court Abused Its Discretion in Striking Biotech Company’s Trade Secrets at Discovery Stage

The U.S. Court of Appeals for the Ninth Circuit issued an opinion on Tuesday reversing a district court’s decision to grant a DNA-sequencing-analysis company’s motion to strike nine of 11 trade secrets asserted against it by a competitor.

The U.S. District Court for the Northern District of California found the trade secret owner, Quintara Biosciences, Inc., had failed to identify the trade secrets with “reasonable particularity” under the California Uniform Trade Secret Act (CUTSA) Section 2019.210, and therefore granted Ruifeng Biztech, Inc.’s motion to strike them under Federal Rule of Civil Procedure 12(f). However, the Ninth Circuit panel said that, under the Defend Trade Secrets Act (DTSA), “the fact question of ‘reasonable particularity’ should be resolved on summary judgment or at trial.”

Quintara and Ruifeng were in a business relationship between 2013 and 2019, but in 2019, according to Quintara, Ruifeng suddenly locked the doors and took over operations, taking its equipment and employees. Quintara thus sued, alleging trade secret misappropriation under the DTSA of nine of its trade secrets relating to customer and vendor databases, marketing plans, software code, etc. After a debate over whether Quintara needed to specify the secrets at issue with further particularity under CUTSA, the district court ultimately ordered Quintara:

“to provide (1) a summary of each specific trade secret; (2) how it has derived independent economic value by not being generally known; (3) how Quintara has maintained its secrecy; and (4) ‘each of the precise claimed trade secrets, numbered, with a list of the specific elements for each, as claims would appear at the end of a patent.’”

In response, Quintara filed an amended trade-secret disclosure under seal and also subdivided two of the trade secrets into four separate trade secrets. Ruifeng continued to object and sought to halt discovery, and the district court forced it to either accept the disclosure or move to strike it. Ruifeng moved to strike and the court granted the motion for all but two of the trade secrets, which the court determined Quintara had sufficiently described. The trial proceeded to summary judgment on those two secrets, Quintara dropped pursuit of one of them and a jury found for Ruifeng on the one remaining trade secret.

On appeal, the Ninth Circuit explained that the district court abused its discretion in granting the motion under “a California rule that does not control a federal trade-secret claim.” Furthermore, “based on the facts and procedural posture of this case, neither Rule 12(f) nor Rule 16 authorized the district court to strike—and functionally dismiss—Quintara’s claim to nine of its trade secrets.”

Under Rule 16, “a district court may issue orders, including those authorized by Rule 37, if a party ‘fails to obey a scheduling or other pretrial order.’” Rule 37 allows courts to sanction a party by “striking pleadings in whole or in part.” The appellate court reviewed the decision for abuse of discretion and weighed five factors under Yourish v. Cal. Amplifier, 191 F.3d 983, 990 (9th Cir. 1999) in its analysis of whether the dismissal was an appropriate sanction: “(1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the defendants; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic alternatives.”

First, the five-month delay of discovery  was not fully Quintara’s fault and “does not justify the functional dismissal of Quintara’s claim as to the nine trade secrets,” essentially making the resolution to strike premature and failing the first two factors. On the third factor, there was no evidence that any delay on Quintara’s part prejudiced the defendant, and factors four and five both weighed against dismissal. In particular, as to factor five, the district court gave Ruifeng an ultimatum to strike Quintara’s trade secrets in lieu of other considerations, such as granting a protective order limiting discovery.

Ultimately, “[a]lthough our five-factor test for dismissal sanctions invites case-specific analysis, a DTSA trade-secret claim will rarely be dismissible as a discovery sanction in a situation like this,” said the Ninth Circuit. The appeals court did affirm the district court’s denial of Quintara’s motion for a mistrial, however.

Carolyn Hoecker Luedtke of Munger, Tolles & Olson said in an email sent to IPWatchdog that the decision raises questions for plaintiffs to consider going forward. “The Quintara decision will raise questions for future trade secret plaintiffs as to whether if they are filing in California, they want to bring a CUTSA claim at all given it comes with the strict requirements of Section 2019.210,” Hoecker Luedtke said. She added:

“There is an ongoing question whether the procedural requirements of Section 2019.210 apply in federal court, and the Ninth Circuit explicitly declined to weigh in on that question in the Quintara decision. Further, the holding may be viewed as limited to the authority of the court to strike pleadings as a discovery sanction, as much of the holding is focused on that stringent test, and [should] not be read to undermine efforts to require disclosure in discovery or as a matter of case management.”