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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

New York Federal Court Rejects Heightened Specificity Pleading Standard for Breach of Confidentiality and Non-Disclosure Claim

Posted in Trade Secrets, Unfair Competition

By Joshua Salinas and Jessica Mendelson

The secret is out, Tic Tacs and bubblegum have the most valuable and desirable real estate in the entire grocery store.

On September 27, 2012, a district court for the Eastern District of New York granted in part and denied in part a motion to dismiss in a commercial dispute arising out of the home of these consumables–grocery checkout displays. Dorset Industries, Inc. v. Unified Groceries, Inc, 2012 WL 4470423 (E.D.N.Y. Sept. 27, 2012).

The dispute arose when the defendant, inter alia, allegedly misappropriated the plaintiff’s trade secrets and confidential information to allegedly create a competing business program that marketed checkout areas, which also allegedly “cut out” the plaintiff from their alleged exclusive business arrangement.

Plaintiff Dorset Industries develops and implements “checkout programs,” which allegedly allow grocers to maximize their sales opportunities by utilizing the front end of checkout areas. These areas are believed to be the most desirable real estate in the store as the volume of foot traffic is unmatched. To capitalize on this valuable marketing opportunity, Dorset allegedly uses its “knowhow, experience, and intellectual property” to design and manufacture display units for the grocers, and accordingly leases space in those displays to manufacturers of grocery products (e.g. candy, magazines, and health and beauty products).

Defendant Unified Groceries is allegedly one of the largest retailer-owned grocery cooperatives, and allegedly the largest wholesale grocery distributor in the Western United States. Unified allegedly signed agreements with Dorset to implement Dorset’s checkout programs. Under the alleged agreements, Unified would be responsible for finding retail grocers within its member stores to sign up for Dorset’s checkout program; Dorset would be exclusively responsible for providing the displays and leasing the spaces out to manufacturers. Both parties would share in the resulting income stream.

Unified also signed confidentiality and non-disclosure agreements that restricted the use and disclosure of any business information provided by Dorset concerning the business methods and procedures of its checkout programs.

A dispute arose when Unified allegedly attempted to circumvent the parties’ business arrangement by creating its own checkout program and dealing directly with the manufacturers to lease the checkout display space. Consequently, Unified was allegedly able to “cut out” the intermediary (i.e. Dorset) and contract with the manufacturers directly–thereby obtaining 100% of the income stream. Unified also allegedly notified Dorset that it was terminating their program agreements, although the timing and sufficiency of that notification was disputed.

Dorset sued Unified in New York state court, alleging breach of contract, breach of the confidentiality agreement, usurpation of corporate opportunity, and unfair competition. Dorset also sought a declaratory judgment that the agreement’s termination was invalid. Unified subsequently removed the case to the Eastern District of New York and filed a motion to dismiss the entire lawsuit pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The significance of this case concerns the Court’s analysis of the third cause of action–breach of confidentiality and non-disclosure provisions. Unified contended that (1) Dorset failed to identify any confidential information allegedly used by Unified in creating its competing checkout program, (2) any such information was not confidential, and (3) Dorset failed to adequately allege that Unified misappropriated any confidential information. The Court disagreed.

The Court recognized that under New York law, a combination of characteristics and components in the public domain could be a protectable trade secret when uniquely combined into a unified process or product. The Court found that Dorset had set forth facts plausibly alleging that the information allegedly utilized by Unified constituted confidential information and/or trade secrets when Dorset identified this information as “checkout counter programs and its business model, plan-o-grams and designs, methods and procedures … including creating and designing the specific Program for Unified.”

Additionally, the Court found that Dorset adequately alleged that it took reasonable efforts to guard the secrecy of its trade secret, confidential, and proprietary information because Dorset alleged that it (i) restricted access to certain information within the company, (ii) utilized passwords to protect its computer system, (iii) limited remote access to those with authority, and (iv) limited access to certain documents containing confidential information within the company. The Court also underlined Dorset’s use of confidentiality and non-disclosure agreements, which defined such confidential and proprietary information and which also contained several express restrictive covenants, including specific covenants of non-disclosure of trade secrets and confidential and proprietary information.

The Court emphatically rejected Unified’s argument that Dorset’s complaint required a greater level of specificity at the pleading stage.

This case is also noteworthy considering the fact that Dorset allegedly admitted that it does not even know whether Unified had actually used or disclosed any confidential information, or whether it was merely speculating that it might do so at some unspecific future date. Unified contended that, at most, Dorset had alleged that Unified misappropriated a single form used for entering into agreements with vendors, and that the form did not constitute trade secret or confidential information because it was a one page five line form that contained nothing more than basic contact information.

The Court explained that it could plausibly infer that the confidentiality provisions were violated by Unified when it allegedly created its competing checkout program. Specifically, the court reasoned that (1) the form supported the inference that Unified created a checkout program that utilized the same methods and procedures as the Dorset program, (2) Unified had previously admitted to Dorset its intent to take over Dorset’s program after observing it for several years, and (3) the subsequent decline of customers that signed up for Dorset’s program compared to previous years implied that Unified began enrolling customers into its competing program. Thus, the Court found a reasonable inference from Dorset’s allegations that Unified had created a checkout display program that would replicated the allegedly confidential “methods or procedures” used in operating Dorset’s program.

Accordingly, the court denied Unified’s motion to dismiss as to Dorset’s claim for breach of confidentiality and non-disclosure provisions. The court also granted Unified’s motion to dismiss on the unfair competition and usurpation of opportunities claims, and granted in part and denied in part the claims for declaratory judgment and breach of implied covenant of good faith and fair dealing.

This case reminds us of the importance of non-disclosure and confidentiality agreements when conducting business with third parties. The existence of these agreements is often the deciding factor when analyzing whether the trade secret holder took reasonable efforts to maintain and protect the secrecy of the information. This case also reiterates that allegations for misappropriation of trade secrets and confidential information (at least in this Court) are not subject to a heightened level of specificity at the pleading stage. Indeed, as with other claims, the Court accepted as true the factual allegations set forth in the complaint and drew all reasonable inferences in the plaintiff’s favor. As illustrated in this case, a plaintiff that lacks direct evidence of misappropriation of trade secrets or confidential information should plead all corresponding facts that support a plausible inference that misappropriation occurred.