Revised Trade Secrets Disclosures May Be Costly

In some cases, there may be a severe cost – even a monetary cost – for plaintiffs who seek to materially amend their trade secrets disclosure following discovery.  This is what happened to the plaintiff, Swarmify, in its lawsuit against Cloudflare, now pending in the U.S. District Court for the Northern District of California.

As we reported previously, on February 27, 2018, the court in this case denied Swarmify’s motion for a preliminary injunction for failure to show irreparable harm.  At that time, the court commented that Swarmify’s trade secrets disclosure, produced pursuant to California Code of Civil Procedure Section 2019.210, was severely overbroad and “ever-shifting,” which the court characterized as a “blatant abuse of the system.”

Based on discovery it received during the preliminary injunction proceedings, Swarmify served a new trade secrets disclosure.  Cloudflare moved to strike the entirety of the new disclosure arguing that Swarmify should be barred from revising its disclosure after obtaining valuable information about Cloudflare’s litigation strategy and defenses during preliminary injunction briefing.  Swarmify countered that its new disclosure should be allowed because the February 27 Order amounted to “an instruction to provide clarification on [Swarmify’s] claimed trade secrets,” and argued, in the alternative, that it should be granted leave to further amend its disclosures.

In its order on the motion to strike, the court first explained that California’s trade secrets disclosure requirement seeks to avoid gamesmanship—namely, alleging vague trade secrets, taking discovery into defendants’ files, and then specifying whatever happens to be there as having been trade secrets stolen from the plaintiff.  The court further explained that in order to avoid this type of gamesmanship, various judges in the Northern District of California have (a) granted motions to strike or motions for summary judgment, after the commencement of discovery, when a plaintiff has failed to identify its alleged trade secrets with sufficient particularity; and (b) exercised discretion in case management to enforce Section 2019.210.

In keeping with the purpose and spirit of Section 2019.210, the court reasoned, first, that Swarmify should not be “allowed to drag Cloudflare into court based on meritless arguments, only to reboot its alleged trade secrets lineup and try again when the opening skirmish illuminates glaring flaws in Swarmify’s case.”  Second, even if Swarmify had not used information gained during expedited discovery to redefine its alleged trade secrets, information gleaned from Cloudflare via its preliminary injunction briefing (i.e. details of its technology and defenses) raised similar concerns of abuse.  Third, Cloudflare invested significant time, effort, and legal strategy in opposing Swarmify’s motion for preliminary injunction and would be prejudiced if it had to revamp its defenses in response to the new disclosure, “having already shown much of its hand to the opposing side.”

The court acknowledged that Swarmify’s revised disclosure was not “so unmoored from the core technology” in the original disclosure that it would be “unsalvageable” if allowed to proceed.  But the court also warned that as cases progress, plaintiffs’ initial disclosures are often revealed as unreasonable in light of developments in the case, which can lead to adverse rulings on entire claims.

Accordingly, the court held that Swarmify could proceed on its revised disclosure subject to the following conditions:

  1. The revised disclosure would be the final definition of Swarmify’s trade secrets with no further amendments permitted, and Cloudflare would still be permitted to reference the original disclosure in its arguments, for example, to show the jury the “shifting-sands nature” of Swarmify’s case;
  2. Swarmify would pay Cloudfare’s attorney’s fees for defending the motion for preliminary injunction; and
  3. Cloudfare would be entitled to additional expedited discovery, including repeat depositions.

The court ordered Swarmify to file a statement electing either to proceed on its new disclosure, subject to the above conditions, or instead stand on its original disclosure.  Swarmify elected to stand on its original disclosure.  We’ll have to wait and see how this strategy pays off.