Series: Defend Trade Secrets Act | Lessons in Surviving a Motion to Dismiss

In this installment of the DTSA series, we'll take a deeper look at some samples from the rapidly-expanding set of decisions addressing motions to dismiss DTSA claims. As courts grapple with this new statute, a number of lessons have how to plead a DTSA claim to survive some common attacks. (Lessons abound for defense counsel, too.) In many cases, defects can often be cured with an amended complaint. In others, however, the dismissal of a DTSA claim could result in a federal court declining to exercise supplemental jurisdiction over any remaining state law claims, landing the parties back in state court. A perusal through some recent DTSA cases can help companies and their counsel avoid needless expense and headache.

Takeaway 1 — Allege facts sufficient to infer interstate commerce.

A DTSA claim—a federal cause of action—arises only where the alleged trade secrets are "related to a product or service used in, or intended for use in, interstate or foreign commerce." 18 U.S.C. § 1836(b)(1). Whether these magic words need to be specifically pled in a DTSA complaint is still developing, but counsel would do well to keep this requirement in mind when conducting pre-suit diligence and at least plead sufficient facts to infer interstate commerce.

For instance, in Hydrogen Master Rights, Ltd. v. Weston, 228 F.Supp.3d 320, 338 (D. Del. 2017), the court granted a motion to dismiss based on, in part, the plaintiff's failure to allege any nexus between the misappropriated trade secrets and interstate commerce. On the other hand, in Wells Lamont Industry Grp. LLC v. Mendoza, No. 17 C 1136, 2017 WL 3235682 (N.D. Ill. Jul 31, 2017), the court found that while plaintiff did not specifically plead that its goods were used in or intended for use in interstate commerce, its allegations that (1) plaintiff had a multi-year relationship with a particular customer; (2) the ex-employee defendant attended a sales meeting with that same customer in their regional office in a different state, using plaintiff's product replicas; and (3) the customer subsequently cancelled a previously-arranged meeting with the plaintiff, together sufficiently allowed the court to "reasonably infer" that the plaintiff was doing business with the customer, and that "its goods were intended to cross state lines and thus intended for use in interstate commerce."

Takeaway 2 — Make sure you can plead post-enactment conduct.

A complaint that lacks sufficient allegations showing that some form of misappropriation conduct happened after the enactment of the DTSA—May 11, 2016—may be dismissed for failing to state a claim. In Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-cv-02177, 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017), the plaintiff alleged that the defendant stole its trade secrets and used them in a 2014 client meeting. The court dismissed plaintiff's claims because they failed to make "specific allegations that defendants used the alleged trade secrets after the DTSA's May 11, 2016 enactment."

So what would suffice? A single conclusory allegation that there is "continuing use" of the trade secret may not be enough, as the plaintiff in Hydrogen Master Rights discovered. But if the facts support it, pleading that a misappropriation that occurred before May 11, 2016, continued past May 11, 2016—such as a competitor's continued use of a trade secret that was acquired pre-enactment of the DTSA—would likely get you over the bar. As Fish explained earlier in this series, courts have allowed for alternative theories of misappropriation: improper acquisition, disclosure, or use. In Adams Arms LLC v. Unified Weapon Sys. Inc., 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sept. 27, 2016), the plaintiff pled this precise scenario of pre-enactment acquisition and post-enactment use, and was permitted to proceed on a "use" theory but not an "acquisition" theory. See also Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Grp. Inc., No. 15-cv-211, 2016 U.S. Dist. LEXIS 130918 (S.D.N.Y. Sept. 23, 2016).

Adams Arms was particularly interesting because it directly tackled the application of the phrase "a continuing misappropriation constitutes a single claim of misappropriation" in 18 U.S.C. § 1836(d), the subsection dealing with the period of limitations. While the language of § 1836(d) states that this particular phrase is "for purposes of this subsection"—i.e., for purposes of calculating whether the 3-year statute of limitations has accrued—the defendant in Adams Arms attempted to argue that this also applied to limit recovery under the DTSA altogether, such that a DTSA claim would fail if an act of continuing misappropriation began before the DTSA. The court rejected this reading and expressly limited the subsection to determining when a claim accrues for statute of limitations purposes.

In another interesting decision we also blogged about earlier, Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-cv-03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a plaintiff overcame the defendant's motion to dismiss argument that "no acts occurred after the effective date of the Act" via the inevitable disclosure doctrine. Using this doctrine, the court held that "[i]f it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that [defendant] would be continuing to use them."

Takeaway 3 — Consider what extrinsic evidence is out in the public domain when assessing whether an alleged trade secret was publicized.

While the conventional practice is to confine motion to dismiss arguments to the facts pled in the pleadings and any documents that are attached to the complaint, remember that courts may also take judicial notice of facts that can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned. See Fed. R. Evid. 201(b)(2). In practice, courts have taken judicial notice of the fact that certain information appears in press coverage or other publications, without regard to its truth. Because trade secret information must "derive[] independent economic value . . . from not being generally known," 18 U.S.C. § 1839(3)(B), evidence that alleged trade secret information has been made public may be fertile ground for defense counsel to explore even at the motion to dismiss stage.

Fish has already briefly discussed Veronica Foods Co. v. Ecklin, No. 16-cv-07332, 2017 U.S. Dist. LEXIS 101325 (N.D. Cal. June 29, 2017), where the court dismissed a complaint alleging theft of customer and supplier lists based, in part, based on evidence that the alleged trade secret was already publicized. A closer look at the mechanics the defendant used to persuade the court is instructive. Plaintiff Veronica Foods had pled that its "full Customer List" was a trade secret and that it was not available from any non-public source. The defendant moved to dismiss, requesting the court to take judicial notice of Veronica Foods' website and social media posts, as well as media reports and pages from third party websites, all of which reflected at least a portion of Veronica Foods' customers. The court took judicial notice of the plaintiff's own disclosures, but declined to take judicial notice of media reports or third party websites because it was unable to determine the veracity of those exhibits at the motion to dismiss stage. But based on the evidence that was accepted, the court held that the plaintiff's original allegation that the "full" list of customers was its trade secret could not be reconciled with the partial disclosure given the absence of other allegations. In dismissing the claim, the court wrote that "[i]n light of that disclosure, Veronica Foods' allegations that the full' list of customers is kept secret means only that some of its customer relationships are secret, and there is no specific allegation to support the conclusion that Veronica Foods' relationships with the particular stores poached by [defendant] . . . were trade secrets."

Takeaway 4 — Plead factual allegations supporting reasonable measures to protect the trade secret.

Pleadings should allege specific facts that support a finding that reasonable measures were taken by plaintiff to protect the trade secret—conclusory allegations here will likely come under fire. In Raben Tire Co., LLC v. McFarland, 16-cv-00141, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017), the court granted the defendant's motion to dismiss because the complaint was "entirely devoid of any allegations of how [plaintiff] protected the information in question from dissemination," beyond merely stating that the information was "confidential and proprietary." Similarly, in Singer v. Stuerke, No. 2:16-cv-02526, 2017 U.S. Dist. LEXIS 92773 (D. Nev. June 14, 2017), the plaintiffs did not allege that they had used reasonable measures to keep the information at issue secret and were ordered to re-plead. The court noted that the original complaint had failed to allege any provisions or agreements—whether written or oral—that would have "established a duty to maintain the secrecy of the trade secret or limit the use of the trade secret." See also 18 U.S.C. § 1839(5)(B)(ii)(II).

Conclusion

In sum, taking care when pleading a DTSA claim will not only help a complaint survive, it will also help narrow the number of issues the parties can fight over, build credibility with the court, and conserve the parties' time and resources. Based on the lessons parties have learned so far, the diligence to be invested upfront certainly seems worth it.

Authors: Claire Collins, Caroline K. Simons