Sada, et al. v. Mikal, et al. CASE NO. 112CV227414
DATE: 27 June 2014 TIME: 9:00 LINE NUMBER: 5

This matter will be heard by the Honorable Judge Socrates Peter Manoukian in Department 19 in the Old Courthouse, 2nd Floor, 161 North First Street, San Jose. Any party opposing the tentative ruling must call Department 19 at 408.808.6856 and the opposing party no later than 4:00 PM Thursday 26 June 2014. Please specify the issue to be contested when calling the Court and counsel.
On 27 June 2014, the motion of defendants VeriFone, Inc., VeriFone Commerce Services, Inc., Paul Warrin, Jake Cunningham, Tim Brinkman, and Philip Mikal to quash deposition subpoenas and for a protective order was argued and submitted. Plaintiffs Alexander Sada and Cardit, LLC filed a formal opposition to the motion in which they also seek monetary sanctions against the defendants.

Statement of Facts

According to the allegations of the operative Fifth Amended Complaint (“FAC”), plaintiff Alex Sada (“Sada”) created plaintiff Cardit, LLC (“Cardit”) to allow customers to pay mortgages and other loans using a credit card. Sada and Cardit (“Plaintiffs”) hired defendant Philip Mikal (“Mikal”) to manage and operate Cardit, and Sada and Mikal subsequently entered into an Operating Agreement under which they agreed not to compete with Cardit if they ceased being members therein. Sada hired a number of other employees, including defendant Jake Cunningham, and held discussions with prospective investors, including defendants Tim Brinkman and Paul Warrin, and had each of them sign confidentiality/non-disclosure agreements.

Several of the Individual Defendants presented a financing proposal that would have given them a collective majority share in Cardit, but Sada rejected the proposal. The Individual Defendants then began secretly planning and taking steps to form a business that competed directly with Cardit. When their plans were sufficiently advanced, they stopped working for Cardit and used its information in violation of the Operating Agreement and the confidentiality/non-disclosure agreements to start another company, ChargeSmart, Inc. (“ChargeSmart”), that conducted the same business as Cardit. The Individual Defendants convinced Cardit’s customers to abandon their agreements with Cardit and enter into similar agreements with ChargeSmart. ChargeSmart, which was subsequently renamed as defendant VeriFone Commerce Solutions, Inc., is now a wholly-owned subsidiary of defendant VeriFone, Inc. (“VeriFone,” collectively with ChargeSmart and the Individual Defendants, “Defendants”).

On 27 June 2012, Plaintiffs filed this action, and on 2 June 2014, they filed the FAC, alleging claims for: (1) trade secret misappropriation (against all Defendants), (2) breach of contract/non-disclosure agreements (against the Individual Defendants), (3) breach of fiduciary duty (against Mikal and Jake Cunningham), (4) tortious interference with contractual relations (against all Defendants), (5) conspiracy (against the Individual Defendants), and (6) breach of contract/Operating Agreement (against Mikal).

Discovery Dispute

When Plaintiffs did not provide descriptions of their claimed trade secrets pursuant to Code of Civil Procedure section 2019.210, Defendants served special interrogatories asking Plaintiffs to describe their alleged trade secrets with particularity as required by that section. In January 2014, Plaintiffs served their initial responses, which they subsequently amended three times. Defendants maintained that each set of trade secret descriptions was inadequate.

On 18 March 2014, Plaintiffs served a business records subpoena on third party Rodney Broom (“Broom”), seeking information related to work Broom did for Cardit and ChargeSmart, and on 3 April 2014, they served similar subpoenas on third parties Rackspace, Inc. (“Rackspace”) and Billeo, Inc. (“Billeo”) (the “Subpoenas”). Plaintiffs explain that Broom is a software/web site developer retained to create Cardit’s web site, while Rackspace was retained to provide web hosting services to Cardit and Billeo was retained to provide billing and payment services. Plaintiffs assert that ChargeSmart subsequently retained Broom, Rackspace, and Billeo in connection with its competing web site.

On 31 March 2014, after being notified that Defendants intended to file the instant motion, Plaintiffs served their Fourth Amended Responses to Defendants’ interrogatories (the “FAR”), again amending their descriptions of their claimed trade secrets. While the FAR omitted certain language related to Cardit’s business methods that had been included in previous responses, Plaintiffs stated that they intended to amend the FAR to “re-introduce these general trade secret descriptors with more specific information obtained through discovery” at a later date. Defendants took issue with this reservation, and contended that the FARs were otherwise inadequate. The parties have been unable to resolve their disagreements concerning Plaintiffs’ trade secret designations through meet and confer.

On 11 April 2014, Defendants filed the instant motion to quash the Subpoenas and for a protective order staying further discovery by Plaintiffs until they have served an adequate description of their alleged trade secrets. The motion was initially noticed to be heard on 20 June 2014. On 3 June 2014, a notice of change in court date was issued and the hearing on the motion was moved to 27 June 2014. On 16 June 2014, Plaintiffs filed papers in opposition to the motion. On 20 June 2014, Defendants filed reply papers in support of the motion.

Discussion

Defendants argue that the trade secret descriptions provided by Plaintiffs do not provide the “reasonable particularity” required by Code of Civil Procedure section 2019.210, and seek an order quashing the Subpoenas and staying further discovery by Plaintiffs until they have served adequate descriptions. Plaintiffs contend that their descriptions are adequate and the Subpoenas seek information relevant to Plaintiffs’ non-trade secret claims.

I. Legal Standard

The court may, “upon motion reasonably made by a [party] … make an order quashing [a] subpoena entirely, modifying it, or directing compliance with it upon those terms or conditions as the court shall declare, including protective orders.” (Code Civ. Proc. (“CCP”), § 1987.1, subds. (a) and (b)(1).)

The court may also make any order that justice requires to protect the party from unwarranted annoyance, embarrassment, or oppression, or undue burden and expense, including a protective order providing that certain writings or tangible things designated for production not be produced. (CCP, § 2025.420, subds. (b) and (b)(11).)

II. Sufficiency of Trade Secret Designations

“A trade secret is ‘information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.’” (Perlan Therapeutics, Inc. v. Super. Ct. (NexBio, Inc.) (2009) 178 Cal.App.4th 1333, 1342-1343 (hereinafter, “Perlan”), quoting Civ. Code, § 3426.1, subd. (d)(1) and (2).) In an action alleging the misappropriation of a trade secret, the party alleging the misappropriation must identify the trade secret with reasonable particularity before commencing discovery related thereto. (CCP, § 2019.210.) The pre-discovery designation serves four purposes: (1) it promotes well-investigated claims and dissuades the filing of meritless trade secret complaints, (2) it prevents plaintiffs from using the discovery process as a means to obtain defendants’ trade secrets, (3) it assists the court in framing the appropriate scope of discovery and determining whether the plaintiff’s discovery requests fall within that scope, and (4) it enables defendants to form complete and well-reasoned defenses, ensuring that they need not wait until the eve of trial to effectively defend against charges of trade secret misappropriation. (Perlan Therapeutics, Inc. v. Super. Ct., supra, 178 Cal.App.4th at p. 1343.)

A trade secret must be identified with sufficient particularity to distinguish it from matters of general knowledge in the trade or special knowledge of those persons who are skilled in the trade. (Advanced Modular Sputtering, Inc. v. Super. Ct. (Mishin, et al.) (2005) 132 Cal.App.4th 826, 835.) However, reasonable particularity does not require the party alleging misappropriation to define every minute detail of its claimed trade secret. (Id.) Rather, it requires some showing that is “reasonable, i.e., fair, proper, just and rational under all of the circumstances” to identify the alleged trade secrets in a manner that advances the underlying purposes of the designation, as set forth above. (Id. at pp. 835-836.)
Here, Plaintiffs have identified their claimed trade secrets as follows:

(1) Cardit’s basic business model of facilitating credit card payments, through a website, to entities that normally did not accept payment by credit card, including mortgage lenders, auto financing companies, utilities, debt servicing companies, and banks holding student loans,

(2) Cardit’s website interface, computer code, content, and functions,

(3) Access to and control of Cardit’s website,

(4) The identities of participants and prospective participants in Cardit’s business, including clients, customers, business contacts, business partners, lenders, credit card companies, credit card processing companies, consultants, vendors, investors, funding sources, employees, officers, and LLC members,

(5) Information and data related to participants and prospective participants in Cardit’s business,

(6) The existence and terms of Cardit’s prospective and actual agreements with participants in its business, and

(7) All combinations of the above. (Ex. A to the Declaration of Michael L Gallo ISO Defendants’ Motion, FARs, Response to Interrogatory No. 1.)

These designations appear collectively to describe nearly every aspect of Cardit’s business, and do not enable the reader to distinguish Cardit’s claimed trade secrets from matters of general knowledge in the trade or publicly-available information. Descriptions such as “Cardit’s basic business model,” unspecified web site “functions,” and “information” related to any conceivable “participants” in Cardit’s business are so broad that Plaintiffs’ identifications as a whole are rendered meaningless. Consequently, Plaintiffs have failed to identify their claimed trade secrets with reasonable particularity as required by CCP section 2019.210. (See Brescia v. Angelin (2009) 172 Cal. App. 4th 133, 140, 150 [agreeing in dicta that trial court correctly found designations that grouped the alleged secrets into the categories of “Marketing Strategies,” “Budget and Finance,” “Formula,” and “Manufacturing Process” were inadequate, even where citations to supporting documents were provided]; Whyte v. Schlage Lock Co. (2002) 101 Cal. App. 4th 1443, 1452 [description “Information about Schlage’s new products” too broad, although affirming order denying preliminary injunction in trade secrets case on other grounds].)

III. Defendants’ Requests for Relief

In light of Plaintiffs’ inadequate trade secret designations, Defendants seek an order quashing the Subpoenas and staying further discovery by Plaintiffs until this deficiency is corrected. Plaintiffs contend that they require discovery to enable them to formulate more specific descriptions and should be permitted to conduct discovery on their non-trade secret claims, including the discovery sought by the Subpoenas, without the need to provide code-compliant designations.

As to their first contention, Plaintiffs explain that they lack information about the trade secrets at issue, particularly those related to Cardit’s web site, because they were developed by the Individual Defendants and third party service providers rather than by Sada or anyone still associated with Cardit. However, the court in Perlan was presented with the same argument and rejected it. (See Perlan Therapeutics, Inc. v. Super. Ct., supra, 178 Cal. App. 4th at p. 1343 fn.7 [noting that Perlan’s asserted difficulty “of trying to determine what its former employees worked on without having access to its former employees … is not a unique scenario in trade secret claims, and section 2019.210 nevertheless precludes commencement of discovery pertaining to the trade secrets prior to their identification with reasonable particularity”].) As demonstrated by the discussion in their opposition papers at pages 8-10, Plaintiffs can provide more specific descriptions of the categories of information they claim are their trade secrets without having access to the information itself. More importantly, Plaintiffs “[are] not entitled to include broad, ‘catch-all’ language as a tactic to preserve an unrestricted, unilateral right to subsequently amend [their] trade secret statement. If [Plaintiffs do] not know what [their] own trade secrets are, [they have] no basis for suggesting defendants misappropriated them.” (Id. at p. 1350.)

With respect to Plaintiffs’ second contention, CCP section 2019.210 applies not only to misappropriation causes of action, but also to any cause of action that hinges entirely upon the factual allegations of misappropriation. (Advanced Modular Sputtering, Inc. v. Super. Ct., supra, 132 Cal.App.4th at pp. 834-835.) Nevertheless, it has been suggested that discovery unrelated to the alleged trade secrets may proceed where there are causes of action that are not dependant upon the allegations of misappropriation. (See Perlan Therapeutics, Inc. v. Super. Ct., supra, 178 Cal.App.4th at pp. 1337-1338, fn. 2 [noting the court was not presented with the question of whether the plaintiff’s other causes of action included claims that were not dependent upon proof of trade secret violations].)

Here, each cause of action asserted by Plaintiffs arises from the same set of operative facts concerning Defendants’ alleged misappropriation of information. Consequently, there is no basis to distinguish between discovery issued in connection with Plaintiffs’ various claims, whether propounded via the Subpoenas or otherwise, and it is appropriate to stay discovery entirely until Plaintiffs serve trade secret identifications in compliance with section 2019.210. (See Advanced Modular Sputtering, Inc. v. Super. Ct., supra, 132 Cal.App.4th at p. 834 [claim alleging defendants breached confidentiality agreements by disclosing trade secrets dependant on misappropriation allegations, as were several other unspecified claims].)
In accordance with the above, Defendants’ motion is GRANTED.

IV. Plaintiffs’ Request for Monetary Sanctions
In their opposition, Plaintiffs seek monetary sanctions against Defendants pursuant to CCP sections 2023.010 and 2023.030. As an initial matter, there is no basis to award sanctions against Defendants for bringing a successful motion. Further, section 2023.010 merely defines actions that constitute “misuses of the discovery process,” and section 2023.030 provides that sanctions may be imposed for misuses of the discovery process “[t]o the extent authorized by the chapter governing any particular discovery method or any other provision of this title.” Thus, sections 2023.010 and 2023.030 do not provide an independent basis for the award of sanctions, and Plaintiffs fail to identify a complimentary provision of the Discovery Act that provides for sanctions under the circumstances.

Accordingly, Plaintiffs’ request for sanctions is DENIED.

Conclusion and Order

Defendants’ motion is GRANTED. All discovery by Plaintiffs in this action is hereby stayed. Within 20 calendar days of the filing of this order, Plaintiffs shall serve trade secret designations that comply with CCP section 2019.210. If the parties agree that these designations are code-compliant, the stay shall be lifted and discovery by Plaintiffs may resume. If Defendants believe these designations are deficient, the parties shall meet and confer in a good faith attempt to agree to code-compliant designations. Should these efforts fail, Defendants should file a motion to compel further designations. If such motion is not filed within 30 calendar days of the service of Plaintiffs’ designations pursuant to this Order, the stay shall be lifted. The Subpoenas are hereby quashed without prejudice to Plaintiffs’ ability to serve them again once discovery resumes.
Plaintiffs’ request for sanctions is DENIED.