IT Company Inteliclear wins appeal against ETC Global Holdings over trade secret

Date Published: Jun 14, 2021

InteliClear Inc. (“InteliClear”) develops multiple comprehensive electronic systems and specializes in commercial IT. InteliClear develops proprietary “InteliClear System” which is an electronic system used for managing a stock brokerage firm’s accounting, securities clearance, and securities settlement services during 2004-06. ETC Global Holdings, Inc (“ETC”) operates as a holding company which obtained license from InteliClear to use its InteliClear System and thereby signed a Software License Agreement. In this agreement, it was agreed that the information provided was confidential, proprietary, and copyrighted and ETC further agreed to keep the information confidential “during and after” the terms of the agreement. In 2017, ETC terminated the contract with InteliClear and committed that it will remove the InteliClear database from its system and will develop its own system. InteliClear, after due examination, noticed similarities of its system with that of ETC’s new system. Therefore, it filed a suit against ETC in the United States District Court for the Central District of California (“District Court”). The District Court dismissed InteliClear’s unfair competition claim. The District Court held that InteliClear failed to identify its trade secrets with sufficient particularity, and thus granted ETC’s motion for summary judgment. Aggrieved by this, InteliClear moved to the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) (InteliClear, LLC v. ETC Glob. Holdings, 978 F.3d 653 (9th Cir. 2020)) and the Ninth Circuit reversed the district court’s grant of summary judgment. The Ninth Circuit held that it was reasonable for a jury to find that InteliClear was not generally known and ascertainable to other, hence qualifies for trade secret.  

InteliClear while developing it system used the Structured Query Language (SQL) which can handle millions of trades each business day. This system was developed by Martin Barretto (“Barretto”), InteliClear’s General Manager, to address a void in back office offerings. ETC obtained the Software License Agreement from InteliClear on January 9, 2008, agreeing to maintain the confidentiality of the information even after the agreement. Nevertheless, ETC terminated the contract by sending the notice of termination of the agreement on November 20, 2017 which was effective from February 28, 2018. In the notice, ETC committed to “remove the InteliClear database from its systems” by February 26, 2018 and certified on March 5, 2018 that all the files were destroyed. After the termination, ETC started building its own securities clearing software and deployed its own electronic trading system. Similarities were noticed by Barretto between ETC’s newly developed system and the InteliClear system. Similarities such as tables being used in the ETC system having the same unique names in a column as used in the InteliClear’s system were also found. 

Due to this, InteliClear contacted ETC in April 2018 about this suspicion. InteliClear asked ETC to compare the two systems and investigate. ETC agreed to the investigation, for which a computer technology and forensics expert, Capsicum Group, LLC (“Capsicum”) was hired by InteliClear. Capsicum investigated the two systems and found “abundant evidence” to prove similarity between ETC system and InteliClear system and issued a Summary Report. Capsicum’s founder and CEO, stated in his declaration: “In fact, so striking were the similarities that it appeared to us that ETC’s system had been constructed by a programmer who had one eye on the InteliClear System as it was running and the other eye on the system he was building, like a painter looking back and forth at a live model while depicting her on the canvas.” After such striking similarities, InteliClear filed the suit against ETC in the District Court alleging that ETC has misused its securities tracking system and brought three claims. The claims were (1) misappropriation under the federal Defend Trade Secrets Act (“DTSA”); (2) misappropriation under the California Uniform Trade Secrets Act (“CUTSA”); and (3) unfair competition. 

The District Court dismissed the third claim of unfair competition, under the preemption doctrine since it was preempted by CUTSA. For the remaining claims, ETC moved for summary judgment contending that InteliClear did not put substantial evidence for showing that the InteliClear system was a trade secret and the source code was accessible. Barretto submitted more detailed system features in a sealed declaration. Nevertheless, the District Court held that InteliClear failed to sufficiently identify the elements of trade secret and held that discovery would not resolve the failure to state the alleged trade secrets with sufficient particularity. Denying on the basis of insufficient evidences, it did not delved into the issue of misappropriation of damages. Aggrieved by the same, InteliClear appealed against the ruling to the Ninth Circuit. 

Since the ruling was obtained by the Ninth Circuit through a summary judgment and not after a trial, the Ninth Circuit began to review the lower court’s summary judgment ruling. The Ninth Circuit analyzed that a genuine dispute of material fact exists only “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” i.e. InteliClear. The moving party in this case was ETC where it needed to prove the absence of fact necessary for proving the essential elements of the claims. The Ninth Circuit noted that the statutory definition of trade secret is broad, wherein under the DTSA, a “trade secret” is defined as: “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” So for a trade secret, three elements needed to be proved viz. (1) information, (2) that is valuable because it is unknown to others, and (3) that the owner has attempted to keep secret.  

The Ninth Circuit held that InteliClear “described its trade secrets as `the InteliClear System’s unique design and concepts and the unique software, formulas, processes, programs, tools, techniques, tables, fields, functionality and logic by which its components interrelate and process data’.” Ninth Circuit also observed that InteliClear had put sufficient evidences to prove its trade secret by providing “specific tables, table columns, account identifies, codes and methodologies” which a reasonable jury can find in uniquely designed tables with information which is protectable as trade secret. Turning to the observation about whether InteliClear has taken reasonable care to render this information secret, Ninth Circuit noted that multiple evidences show that InteliClear encrypted their database and required licensees to agree to a confidentiality provision, which proves that sufficient care was indeed taken. Therefore, agreeing to InteliClear’s substantial evidences, Ninth Circuit concluded that the summary judgment was precipitous, premature and did not fairly permit development of the issues for resolution, since the “non-moving party did not have the opportunity to discover information that is essential to its opposition.”

InteliClear, LLC v. ETC Glob. Holdings, 978 F.3d 653 (9th Cir. 2020)