Opinion
21-cv-01594-VC (LB)
02-24-2022
STEMCELL TECHNOLOGIES CANADA INC., et al., Plaintiffs, v. STEMEXPRESS, LLC, et al., Defendants.
DISCOVERY ORDER
RE: ECF NO. 74
LAUREL BEELER, UNITED STATES MAGISTRATE JUDGE
INTRODUCTION
The parties are biotech companies. StemExpress supplied cell products (sometimes referred to by the parties as “leukopak” products) to STEMCELL. The parties' business relationship was governed by a contract that had confidentiality provisions. When the relationship ended, the parties sued each other for, among other claims, breach of contract. StemExpress also claimed that through STEMCELL's quality audits, STEMCELL gained access to and misappropriated StemExpress's trade secrets, in violation of the California Uniform Trade Secrets Act (CUTSA), to start its own competing business. The current discovery dispute is about the sufficiency of StemExpress's designation of its trade secrets. STEMCELL's main argument is that the alleged trade secrets are not actually trade secrets. That is a merits challenge to the designations, but since the parties filed their letter brief, the trial judge denied the motion to dismiss the trade-secret claims. For reasons that include STEMCELL's access to confidential information governed by the parties' confidentiality agreement, StemExpress's designations are sufficient to allow discovery.
First Am. Compl. - ECF No. 20; First Am. Countercls. - ECF No. 51. Citations refer to material in the Electronic Case File (ECF); pinpoint citations are to the ECF-generated page No. at the top of documents.
Order - ECF No. 78 (denying motion to dismiss trade-secret and breach-of-confidentiality-agreement counterclaims); 2/10/2022 Tr. - ECF No. 75.
STATEMENT
1. Allegations in First Amended Counterclaims
StemExpress's claims are primarily for breach of contract and theft of trade secrets. It supplies “researchers and clinicians with human tissue and primary cell products through blood collection, bone marrow collection, and primary cell isolation” at its donor-collection and lab facilities in seven locations in the U.S. Before the parties began their negotiations for a potential supply agreement for StemExpress to supply STEMCELL with cell products, they signed a confidentiality agreement. It defined “confidential information” as follows:
First Am. Countercls. - ECF No. 51 at 22-27; 2/10/2022 Tr. - ECF No. 75 at 4:4-9; Order - ECF No. 78 at 1. The UCL claim does not survive, at least for now. Order - ECF No. 78 at 1; 2/10/2022 Tr. - ECF No. 75 at 4:4-9.
First Am. Countercls. - ECF No. 51 at 4 (¶ 11).
(a) “Confidential Information” means, in relation to a party to this Agreement, information known at used by such party in connection with its business or technology that is confidential to such party and includes, without limitation, trade secrets, know-how, show-how, inventions, creations, designs, methods, software, techniques, processes and other intellectual properly and technical information, customer information, financial information, marketing information, and information as to business opportunities, strategics and research and development,
(b) all designs, analyses, compilations, forecasts, studies or other materials prepared by a party to this Agreement will, to the extent they comprise any of the other party's information described in §(a), be deemed to be the Confidential Information of such other party, and
(c) any samples of materials provided by a party to this Agreement to the other during the course of their business relationship will be deemed to be the Confidential Information of such first party.
Id. at 5 (¶ 13).
The agreement had a non-disclosure provision that, in short, required both parties to keep the confidential information confidential. Among other terms, it required written consent of the “Discloser” to disclose information and allowed the disclosure of confidential information to a party's employees, agents, and affiliates with a “definable need to know” and only if they “were informed” that the information was confidential and “were bound” by the same confidentiality restrictions in the non-disclosure provision. The confidentiality provision also said that the “Recipient” could not analyze or reverse engineer samples.
Id. at 5-6 (¶ 14).
Ultimately, the parties signed a supply agreement for StemExpress to supply STEMCELL with bone marrow, blood, frozen primary cells, and “human peripheral blood products.” It had a confidentiality provision defining confidential information:
Id.at 6-7 (¶ 18).
(a) “Confidential Information” shall mean any information or data disclosed by one Party (“Discloser”) to the other Party (“Recipient”), whether orally or in writing, that is designated as confidential or that reasonably should be understood to be confidential given the nature of the information and the circumstances of disclosure, including, without limitation, information and materials regarding Discloser's (i) patents, trade secrets, Know-How, processes, procedures, techniques, and other Intellectual Property; (ii) financial and business affairs; (iii) proposed or existing projects, programs, products, and materials; (iii) sales and marketing materials and methodologies; and (iv) employees, clients, customers, vendors, and suppliers. “Confidential Information, ” however, shall not include any information which was (a) known to Recipient before disclosure to Recipient under this Agreement, (b) is generally known or generally available in the public domain, or becomes publicly known and made generally available in the public domain after disclosure to the Recipient under this Agreement, or (c) is received by the Recipient from a source other than the Discloser, in both cases other than by a breach of an obligation of confidentiality.
Id. at 8 (¶ 24(a)) (emphasis removed).
The non-disclosure provision required the confidential information to be held in “strict confidence” and prohibited disclosure to anyone except for compliance of the party's obligations under the supply agreement.
Id. (¶ 24(b)).
When the parties entered into their contracts, “STEMCELL did not possess independent knowledge, skill, or information relating to procur[ing] blood and bone marrow collection or manufactur[ing] primary cell isolation products, ” and “StemExpress was the procurer and manufacturer.” In short, STEMCELL “did not have the independent know-how to operate” collection centers, and it had no collection centers, which is why it contracted with StemExpress.
Id. at 8-9 (¶ 25).
The supply agreement's initial term ended on May 1, 2019, and automatically renewed for three years (subject to any party's notice of termination at least twelve months before the end of the term). On April 26, 2018, StemExpress notified STEMCELL that it was not renewing the contract and asked to renegotiate the terms. The parties negotiated from 2018 to early 2019 and were close to reaching an agreement. On April 1, 2019, STEMCELL ended the negotiations.
Id. at 9-10 (¶¶ 29-32).
“On multiple occasions from 2013 to 2018, STEMCELL performed ‘quality audits' of StemExpress” that allowed it access to StemExpress's “confidential information and trade secrets in connection with its procurement and donor collections, the laboratory manufacturing operations, and business plans. STEMCELL then produced confidential audit reports using StemExpress'[s] information . . . [that] contain discussions of StemExpress's confidential procurement and manufacturing operations. . . .” To facilitate the audits, StemExpress gave STEMCELL access to “troves of confidential procurement and manufacturing information relating to its know-how, processes, procedures, and techniques, ” pursuant to the confidentiality protections in the supply agreement. During its audit process, STEMCELL asked for StemExpress's confidential information and discuss it in the reports, including StemExpress's evaluation of cities to potentially expand its donor sources, donor information (such as processes for screening, management of donor pools, and processes to achieve optimum blood draws), and information about manufacturing, quality control, logistics, equipment, procurement, and operating procedures.
Id. at 10 (¶ 33).
Id. at 10-11 (¶ 36).
Id. at 10-14 (¶¶ 35, 37-45).
STEMCELL then started a company called Canventa, allegedly with StemExpress's confidential information and trade secrets in order to “knockoff” StemExpress's business.STEMCELL audited StemExpress's facility in Folsom, California, in April 2018 - one week after it registered the initial corporation called Fundamenta (later changed to Canventa) - regarding confidential aspects of StemExpress's “procurement and manufacturing facilities and business.”STEMCELL's access to confidential information was reflected in its audit agenda, sent in March 2018, and audit report, sent in September of 2018, and included “extensive and detailed confidential and proprietary information about StemExpress.”
Id. at 16 (¶ 1, 7, 52).
Id. at 17 (¶ 56).
Id. at 16-18 (¶¶ 55, 58).
On October 4, 2018, STEMCELL applied for building permits in Emeryville, California under the name of Canventa for “TI for office to lab, office & clinic, ” with the proposed work valued at $940,000. From public records, STEMCELL is spending “additional hundreds of thousands of dollars in purchasing the same procurement and manufacturing equipment as StemExpress and that they accessed and documented as part of their audits and inquiries, ” including from confidential information. “With the knowledge and use of StemExpress'[s] confidential procurement and manufacturing information, Defendants were essentially able to replicate, through Canventa, StemExpress'[s] procurement and manufacturing operations.” StemExpress later discovered that senior officials at STEMEXPRESS were actively concealing Canventa's existence from StemExpress, “even worrying that they may get caught during the renegotiations of the Supply Agreement.” During this time, StemExpress did not know about Canventa or STEMCELL's plan to use StemExpress's confidential procurement-and-manufacturing information to form Canventa, which “would be a direct competitor of StemExpress.” Two weeks later, on October 17, 2018, STEMCELL audited StemExpress's Boston site and prepared a full audit report.
Id. at 18 (¶ 60).
Id. at 18-19 (¶ 61).
During their contract renegotiations, StemExpress would not agree to include “an ability to purchase StemExpress as part of the Supply Agreement.” As a result, STEMCELL worked systematically to “obtain as much confidential information about StemExpress'[s] procurement and manufacturing operations, with the intent of misusing” the information to form a competing procurement-and-manufacturing facility, Canventa. StemExpress understands that STEMCELL selected San Francisco as Canventa's location, knowing that StemExpress had “active plans” to open its next facility in San Francisco.
Id. at 19 (¶ 63).
On February 18, 2021, during a conference call, StemExpress confronted STEMCELL about its handling of StemExpress's confidential information. STEMCELL refused to answer any questions about its handling of the information.
Id. at 20 (¶ 66).
In short, now the parties are competitors. The breach-of-contract claims (claims one and two) are predicated on STEMCELL's alleged use of confidential information to “jumpstart and then operate Canventa.” The misappropriation-of-trade-secrets claim is similarly predicated on theft of confidential information that also constitutes trade secrets.
Id. at 22-25 (¶¶ 73-95).
Id. at 25-26 (¶¶ 96-102).
2. Designation of Trade Secrets
StemExpress designated twelve trade secrets. They include its internal processes for donor screening, management of donor pools, “batch records” that apparently function as the “recipe books for procurement and manufacturing, ” and quality-control test methods.
Designation of Trade Secrets - ECF No. 74-1 at 3-4; Order - ECF No. 78 at 2 (these allegations of “multiple categories of trade secrets . . . are of similar specificity to allegations in other cases in this district in which CUTSA claims have been permitted to go forward . . . and are sufficient to put the plaintiffs on notice of the boundaries within which the secret lies.”) (cleaned up).
ANALYSIS
The parties dispute whether StemExpress's trade-secret designations are sufficient and, if they are not, whether discovery (including the third-party subpoenas that the court authorized already) should be stayed until StemExpress designates its trade secrets more particularly. Neither party disputes that CUTSA should apply. (The trial judge applies § 2019.210 “to a point” as a case-management technique but does not view compliance with § 2019.210 as a legal requirement for federal courts sitting in diversity.) Applying § 2019.210 makes sense here: likely StemExpress's discovery also is aimed at STEMCELL's trade secrets and confidential information. That said, this case is about misappropriation of confidential information, not just misappropriation of trade secrets, in violation of the parties' supply agreement's confidentiality clause. STEMCELL's audits allowed it to obtain StemExpress's confidential information, copy its business model, and start Canventa, a competitor. STEMCELL's audits allegedly reflect the confidential information. Given this context, the court deems the identifications sufficient.
Joint Disc. Letter - ECF No. 74 at 2-4.
2/10/2022 Tr. - ECF No. 75 at 11:13-20, 29:20-25 (applying § 2019.210 “to a point” to allow “greater specificity on the trades secret disclosures”).
“In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act. . ., before commencing discovery relating to the trade secret, the party alleging the 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.” Cal. Civ. Proc. Code § 2019.210.
Section 2019.210's reasonable particularity requirement is a flexible standard. Brescia v. Angelin, 172 Cal.App.4th 133, 148-49 (2009). Reasonable particularity does not require a party to define its trade secret down to the finest detail or require a mini-trial on misappropriation before plaintiff is allowed discovery. Advanced Modular Sputtering, Inc. v. Super. Ct., 132 Cal.App.4th 826, 835-36 (2005). Still, the plaintiff must “make some showing that is reasonable, i.e., fair, proper, just and rational. . . [, ] under all of the circumstances to identify its alleged trade secret in a manner that will allow the trial court to control the scope of subsequent discovery, protect all parties' proprietary information, and allow them a fair opportunity to prepare and present their best case or defense at a trial on the merits.” Id. at 836. “In a highly specialized technical field . . . a more exacting level of particularity may be required to distinguish the alleged trade secrets from matters already known to persons skilled in that field.” Perlan Therapeutics, Inc. v. Super. Ct., 178 Cal.App.4th 1333, 1351 (2009).
In considering the adequacy of a trade-secret disclosure, “the designation should be liberally construed, and reasonable doubts about its sufficiency resolved in favor of allowing discovery to go forward.” Brescia, 172 Cal.App.4th at 149. Still, “a court does not abuse its discretion by compelling a plaintiff to produce a clear, non-evasive trade secret statement.” Perlan, 178 Cal.App.4th at 1352.
STEMCELL contends that “StemExpress has not distinguished what it does from matters of general knowledge in the trade.” Also, both parties “post content on their publicly accessible websites addressing the . . . identified . . . trade secrets[, ] and there is a vast body of public domain information discussing them.” To illustrate these points, it characterizes the trade secrets:
Joint Disc. Letter - ECF No. 74 at 3.
[T]he first two claimed trade secrets are “StemExpress'[s] method, technique and process for screening potential biospecimen donors for inclusion within its donor pool” and its “method, technique, and process for scheduling donors for collections of biospecimen samples.” The next six claimed trade secrets are identified as “proprietary step-by-step instructions” for processing sample and creating batch records for various products. The remaining claimed trade secrets are StemExpress's “method and technique of designing and configuring its biospecimen collection center and laboratory, ” its “method, technique, and process for freezing products, ” its “method, technique, and process for manufacturing off-catalogue custom isolated biospecimen products, ” its “IRB-approved donor consent template forms, ” and its “process for producing a Certificate of Analysis for its products to ensure accuracy and quality control needs are satisfied.”
Id. at 2.
It then gives five examples of why the designations are insufficient (although it also cites the declaration of its “Vice President, Primary and Cultured Cells, ” who has a Ph.D. in biochemistry, for the general proposition that “StemExpress's identification of its claimed trade secrets does not come close to meeting the statutory requirement to identify them with specificity”):
[T]he 5th secret claims batch records for cord blood products but STEMCELL provided StemExpress with the specifications it requires, together with step-by-step
instructions to process cord blood, isolate cells, and analyze cord blood products. The 6th secret is described as batch records for bone marrow products but STEMCELL provided StemExpress with the specifications it requires. The 7th secret is batch records for “custom” biospecimen sample products when it is the customers, not STEMCELL, who determine what needs to be included in the batch records. The 4th secret claims batch records for mobilized leukopak products when not one of the STEMCELL entities makes such products. Remarkably, the 11th “secret” consists of forms that are available to everyone who donates blood specimens and therefore cannot be trade secrets as a matter of law.
Id. at 2 (citing Sauvé Decl. - ECF No. 66-1).
The challenges to designations 5, 6, and 7 are not challenges to the sufficiency of the designations and instead are challenges to whether they are trade secrets at all: STEMCELL said that it provided the specifications for 5 and 6, and customers determine what is included in 7. This is a merits issue, and the trial judge denied the motion to dismiss the trade-secret claims.Similarly, the challenge to designation 4 is about relevancy: STEMCELL says it does not make mobilized leukopak products. But StemExpress claims theft of confidential and trade-secret information, and the facts are disputed, so the information is relevant. STEMCELL does not address proportionality or burden. Fed.R.Civ.P. 26(b)(1).
Order - ECF No. 78; 2/10/2022 Tr. - ECF No. 75.
The challenge to designation 11 is different: it apparently is a publicly available form. StemExpress did not respond to this point. The court thus deems it insufficient.
In her declaration, STEMCELL's vice president also said that StemExpress is claiming trade secrets that it actually obtained from STEMCELL, and STEMCELL, not StemExpress, had the experience and expertise. This too is a merits issue.
Sauvé Decl. - ECF No. 66-1 at 7-10 (¶¶ 15-17) (analyzing StemExpress's deficiencies revealed in STEMCELL's audits).
STEMCELL does not otherwise discuss the designations, either in the letter or in the underlying motion to strike. It does say generally (without any discussion of the designations) that other businesses in the industry “engage in some or all of the activities described above, meaning that StemExpress has not distinguished what it does from general knowledge in the trade.” Its vice president said that StemExpress has not identified how its systems are different than other companies in the industry and instead is describing commonplace categories of information widely kept by similar companies and processes that those companies commonly follow. These general assertions do not give the court much to work with. STEMCELL does not, for example, cite any cases (other than the general legal standards) where courts address similar designations in similar contexts.
Joint Disc. Letter - ECF No. 74 at 1-3; Mot. to Strike - ECF No. 66.
Joint Disc. Letter - ECF No. 74 at 2-3.
Sauvé Decl. - ECF No. 66-1 at 4-6 (¶¶ 10-14) (referencing quality-control standards that companies must meet), 10-18 (¶¶ 19-28, 30) (addressing designations 1 through 10 and 12 and asserting that all companies have similar methods, techniques, and processes for screening biospecimen donors and processing batch records).
That said, a trade-secret designation must distinguish the alleged trade secret from information that is already known to persons skilled in the field or is publicly available. See, e.g., Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998) (a plaintiff “should describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons … skilled in the trade”). StemExpress did not counter STEMCELL's declaration by submitting its own declaration saying (for example) that the information is not publicly available or is not known to those skilled in the field. But given STEMCELL's failure to analyze the designations except for its arguments that the trade secrets are not trade secrets, a counter-declaration is unnecessary.
Also, the trade-secret identifications are sufficient for at least two additional reasons: (1) the parties had a business relationship where STEMCELL had access to identifiable confidential information, and (2) StemExpress is not required to prove in its § 2019.210 statement that its trade secrets are not generally known.
First, as StemExpress contends, the parties' business relationship - governed by a confidentiality provision in the Supply Agreement and undisputedly involving access to confidential information - means that discovery should go forward. It is not as if the parties have no understanding of the information at stake in the litigation.
Joint Disc. Letter - ECF No.74 at 3-4.
To support this argument, StemExpress cites Alta Devices, where the parties had a similar business-development relationship governed by a confidentiality agreement. Alta Devices, Inc. v. LG Elecs., Inc. 343 F.Supp.3d 868, 882 (N.D. Cal. 2018). Alta had developed “a production line of thin-film GaAs solar cells.” Id. at 873. It entered into a nondisclosure agreement with LG, which had not developed the technology, so that LG could decide whether to invest in Alta or engage in “other business opportunities related to Alta's technology.” Id. LG visited Alta's headquarters, where it obtained confidential information. Id. at 873-74. Then, LG “began to plan how to develop” the same technology, sought and obtained “further detailed information about the techniques and processes involved in the actual manufacturing of the solar film, ” and ultimately “declined to make binding its previous tentative investment offer. Id. at 785. Thereafter, LG developed its manufacturing capabilities using Alta's confidential information and began making similar solar film. Id.
Id.
At issue was whether Alta identified its trade secrets sufficiently in its complaint. It identified the technology at issue (the thin-film GaAs solar technology), and it also identified its confidential information (its methods of “high throughput thin-film deposition; epitaxial lift-off of the thin-film; and GaAs substrate maintenance and re-use, ” its “confidential cost analysis, ” “proofs and tests of manufacturing concepts and techniques, ” tool roadmaps, manufacturing process flows, and identification of equipment and equipment vendors). Id. at 881. An appendix to the agreement gave more information about why the information was confidential, broken into categories (e.g., CVD technology and its commercial viability) and bullet points to illustrate the categories (e.g., CVD chamber scheme, growth rate, thin-film quality, utilization, gas-utilization efficiency, scalability, and short-term feasibility). Id.
The Alta court held that Alta alleged its trade secrets with sufficient particularity, in part because Alta's claims were based on confidential information exchanged under the non-disclosure agreement. LG could “hardly claim that it was unable to determine what trade secrets” Alta gave to it under the agreement. Id. at 881-82 (cleaned up).
The Alta court also cited TMX Funding as a similar case. Id. at 883 (citing TMX Funding, Inc. v. Impero Tech., Inc., No. C 10-00202 JF (PVT), 2010 WL 2509979, at *3 (N.D. Cal. June 17, 2010)). TMX involved departing employees' alleged theft of trade secrets, identified as software, source code, data, formulas, business methods, marketing plans (“such as prospective customer and sales methods for attracting and retaining customers”), and product information such as cost, pricing, margin data, and other financial information). The TMX court held that these designations were sufficient. Id. (quoting TMX, 2010 WL 2509979, at *3); TMX, 2010 WL 2509979, at *1, *3. Applying TMX (and other cases), the Alta court concluded that Alta's allegations gave LG “notice of the boundaries within which the trade secrets lie.” Alta, 343 F.Supp.3d at 882.
When parties have a relationship through a confidentiality agreement, as they did in Alta and in this case, they have more information about the alleged confidential and trade-secret information. The designations here are not as specific as in Alta, but they are analogous, and they are close to those in TMX. Given STEMCELL's general arguments untethered to any case analysis, StemExpress's designations sufficiently define the boundaries of discovery.
Second, StemExpress does not need to prove confidentiality in its § 2019.210 designations. Perlan, 178 Cal.App.4th at 1351 (A plaintiff “is not required to convince defendants or the court in its section 2019.210 statement that its alleged trade secrets are not generally known to the public.”). Instead, it must “identify the alleged trade secret with adequate detail to allow the defendant to investigate how it might differ from matters already known and to allow the court to craft relevant discovery.” Brescia, 172 Cal.App.4th at 147; E. & J. Gallo Winery v. Instituut Voor Landbouw-En Visserijonderzoek, No. 1:17-cv-00808-DAD-EPG, 2018 WL 2463869, at *6 (E.D. Cal. June 1, 2018) (when a complaint plausibly alleges trade secrets, the issue of whether the trade secrets have been publicly disclosed is “properly the subject of discovery, ” and “[t]his sort of review is more appropriate on a motion for summary judgment”). Similarly, “the trade secret claimant need not particularize how the alleged secret differs from matters already known to skilled persons in the field.” Brescia, 172 Cal.App.4th at 143.
In sum, on this record and argument, the designations (except for designation 11) are sufficiently particular. The court previously denied the motion to quash the third-party subpoenas, in part because they sought public-record information. The sufficiency of the designations now means that discovery can go forward.
Order - ECF No. 68.
CONCLUSION
The court strikes designation 11 but otherwise denies STEMCELL's motion to strike the trade-secret designations and stay discovery. This disposes of ECF No. 74.
IT IS SO ORDERED.