There have been some noteworthy recent decisions in trade secrets law. This blog post summarizes some of the significant decisions grouped by the hot topics below.
Sufficiency of Trade Secret Pleadings and Allegations of Misappropriation
In Oakwood Lab’ys LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), the Third Circuit addressed the pleading requirements to assert a claim under Defend Trade Secrets Act (“DTSA”). In the case, a pharmaceutical company sued a former product development employee and his new employer in the District of New Jersey for misappropriation of trade secrets in violation of the DTSA. The district court dismissed plaintiff’s complaint for failure to state a claim. Shortly after hiring the employee, plaintiff alleged that his new employer developed products that were substantially similar to and competitive with plaintiff’s product using its trade secrets.
The DTSA requires a plaintiff to demonstrate (1) the existence of a trade secret, defined generally as information with independent economic value that the owner has taken reasonable measures to keep secret; (2) that the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce; and (3) the misappropriation of that trade secret, defined broadly as the knowing improper acquisition, or use or disclosure of the secret. The district court held that plaintiff “adequately pled the existence of its trade secrets” but failed to identify which one or more of those trade secrets defendants misappropriated. On appeal, plaintiff argued that the district court did not correctly apply the plausibility standard under the DTSA.
On appeal, defendants argued that the plaintiff’s description of its trade secrets was inadequate because it did not state which secrets it claimed that the defendant had misappropriated. The court rejected defendants’ argument as an “effort to blend together the identification-of-a-trade-secret element and the misappropriation element, when “only discovery will reveal exactly what the defendants are up to.” Id. at 905 n.13. The Third Circuit held that plaintiff had described its trade secret “with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.” Id. at 906. The court concluded that plaintiff adequately identified its trade secrets by describing the product, process, and supporting documentation.
The district court also held below that plaintiff did not establish an “improper acquisition, disclosure, or use of a trade secret without consent.” The district court reasoned that plaintiff needed to demonstrate that the corporate defendant copied plaintiff’s project in order to satisfy the “use” requirement under the DTSA. The Third Circuit found otherwise, reasoning that the district court’s interpretation of the word “use” was “inconsistent with the text of the DTSA and the broad meaning that courts have attributed to the term ‘use’ under state laws that address trade secret misappropriation.” Id. at 908. The court held that “the ‘use’ of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as ‘assist[ing] or accelerat[ing] research or development.’” Id.
The Third Circuit also held that plaintiff sufficiently alleged misappropriation based on circumstantial evidence. The court reasoned that indirect use of trade secrets can be inferred from the timing of a defendant employee’s hire, deception in the employee’s departure, the corporate defendant’s lack of experience in the industry, low financial investment, and quick success. See id. at 912. Plaintiff’s complaint was “sufficient to ‘raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true.’” Id. Finally, the court held that the corporate defendant’s misappropriation was an actionable harm, despite not launching a competing product, because plaintiff “lost the exclusive use of trade secret information, which is a real and redressable harm,” and the misappropriation provides the corporate defendant “a jumpstart to an industry it would otherwise not have competitively joined for another decade.” Id. at 914; see also ResMan, LLC v. Karya Prop. Mgmt., LLC, Case No. 4:19-CV-00402, 2021 U.S. Dist. LEXIS 145462 (E.D. Tex August 4, 2021)(injunction prohibiting use or disclosure of trade secrets does not break causation regarding defendant’s continuing benefit from the misappropriation).
Similarly, in Five Star Gourmet Foods, Inc. v. Fresh Express, Inc., Case No. 19-cv-05611-PJH, 2020 WL 513287 (N.D. Cal. Jan. 31, 2020), the district court found that plaintiff stated a claim under the DTSA where the defendant was accused of misappropriating plaintiff’s trade secrets and using them to replicate the plaintiff’s salad production facility. The court found that touring the plaintiff’s production facilities and gathering information under a non-disclosure agreement sufficiently alleged access to the trade secrets. Those allegations along with allegations that defendant copied the plaintiff’s business operations down to using the same tool set to create its packaging was sufficient to allege misappropriation under the DTSA. Id. at *8; see also Payward, Inc. v. Runyon, Case No. 20-cv-02130-MMC, 2021 WL 242903, at *4 (N.D. Cal. Jan. 25, 2021) (misappropriation where defendant gave information to another employee who did not otherwise have access to the document).
Assessing Misappropriation on Summary Judgment
In Precision Indus. Contractors Inc. v. Jack R. Gage Refrigeration Inc., No. C19-5810 TSZ, 2021 WL 3472377 (W.D. Wash. August 6, 2021), a district court found that there was not sufficient evidence on summary judgment to establish misappropriation by a former employee who submitted competing bids for a competitor. The defendant former employee was provided access to plaintiff’s confidential information during employment, including strategies on how to secure winning bids and information about plaintiff’s existing and potential clients.
In the past, plaintiff had won about 75 percent of the bids it submitted for a specific client. Shortly after a client project was announced, defendant employee abruptly quit. Following this, plaintiff was only awarded one project for the client project even though it submitted five or six bids. Though there were other factors in play, plaintiff believed that part of the reason it lost bids was because defendant used plaintiff’s confidential information to submit bids to the client. Plaintiff eventually moved for summary judgment on its federal and state trade secret misappropriation claims, arguing that the defendant improperly took plaintiff’s confidential information, including bidding sheets, internal costs, manuals, and other techniques developed internally and exclusively for plaintiff’s own use.
Despite this, the court found that while defendant may have had access to some of plaintiff’s confidential information, that in itself did not demonstrate that he misappropriated the information. See id. at *4. Moreover, the court noted that it was undisputed that defendant had decades of “know-how and experience,” including with submitting bids for industrial construction projects. See id. In addition, defendant testified that he had no idea what plaintiff’s bids were going to be on the client project. In sum, there was no evidence that defendant misappropriated plaintiff’s trade secrets or acquired them through improper means, that he disclosed the trade secrets to his new company, or that he used the trade secrets in connection with submitting bids for the client project. See id. Accordingly, summary judgment was denied as to plaintiff’s claims for trade secret misappropriation.
Disclosure of Trade Secrets in Patent Applications
In Life Spine, Inc. v. Aegis Spine, Inc., 8 F.4th 531 (7th Cir. 2021), the defendant argued that the alleged trade secret—the exact dimensions of a patented spinal implant device for treating degenerative disc disease—was disclosed in a patent and marketing. The Seventh Circuit found that the patent did not disclose the measurements of the component parts, and prospective customers were only allowed to inspect the device under close supervision. See id. at 542. Accordingly, the court held that the dimensions qualified for trade secret protection. As a result, the court affirmed the preliminary injunction ruling of the magistrate judge that blocked defendant from continuing to sell its line of spinal cages, which are marketed to surgeons and hospitals for patients suffering from degenerative disc disease and compete directly with a similar cage plaintiff sells. See id. at 543-44.
RICO and Trade Secrets
In MD Helicopters, Inc. v. Aerometals, Inc., 16-cv-02249, 2021 WL 978953, at *1 (E.D. Cal. Mar. 16, 2021), the plaintiff alleged that the defendant used the plaintiff’s manufacturer drawings to unfairly compete in the airplane parts market. The plaintiff sought leave to amend its complaint to add new claims under the DTSA and RICO, based on DTSA predicates. Id. The defendant argued that the new claims would be futile, in part, because the plaintiff purportedly failed to allege a concrete financial loss. Id. at *2, 6. The court disagreed, finding that the following allegations sufficiently pled a concrete financial loss: 1) the defendant made sales that would have otherwise been made by the plaintiff; and 2) the plaintiff had been injured by price erosion. Id. at *6.
Generally Known and Readily Ascertainable Defenses to Trade Secret Misappropriation
After a four-day bench trial in August 2021, a Texas federal judge found in the defendant’s favor in a high stakes trade secrets dispute between two energy companies. Plaintiff Vita International Inc. filed the lawsuit, case number 4:18-cv-01663, against competitor Foro Energy Inc. in the US District Court for the Southern District of Texas.
The district court ruled that the plaintiff’s conceptual drawings of a deployment wheel were “generally known” in the oil and gas industries, and thus not a trade secret. The court specifically found that plaintiff’s deployment wheel, which guides lasers into a wellbore, is “not a novel or unique concept” to qualify for trade secret protection.
Citing plaintiff’s own 1998 patent, the court reasoned that the earlier patent “explicitly disclosed” the side-loading process and any reasonably skilled artisan could have developed plaintiff’s deployment wheel concept, which he said was not a “complex” piece of equipment.
“Vita’s relatively simple deployment wheel concept was disclosed in numerous prior art references and could have been created by one with reasonable skill in the art,” the court reasoned. “Accordingly, the concept was readily ascertainable by proper means, and Vita cannot establish that its conceptual design was a trade secret.” The court also found that a patent filed by another company in November 2014, contained features depicted in plaintiff’s conceptual drawings
The court concluded that plaintiff’s conceptual drawings were not trade secrets because the “essential characteristic” of the design was publicly disclosed by plaintiff’s own expired patents, and they illustrate a “generally known” concept in the oil and gas industry.
The court also found that the side-loading process of plaintiff’s deployment wheel cannot be a trade secret, as it was explicitly disclosed in at least two patents. These features appeared in defendant’s own patent and could be seen in a variety of commercially available alternatives that were created prior to plaintiff’s conceptual design.
The court reasoned that anyone reasonably skilled in the art could have developed the deployment wheel concept that plaintiff delivered. The court credited testimony that a deployment wheel is not considered to be a sophisticated or complex piece of equipment. The court also noted that engineers experienced with using similar deployment mechanisms in the field testified that they did not consider plaintiff’s conceptual design to be an involved one.
Sealing and Access to the Courts in Trade Secret Cases
Courts continue to demand strict compliance with procedural rules in connection with motions to seal confidential material even in trade secrets cases. See Hebert v. Unum Group, Case No. 4:18-CV-00910-SDJ-KPJ, 2020 WL 4922117 (E.D. Tex. Aug. 21, 2020) (“Ultimately, the decision whether to allow public access to court records is left to the ‘sound discretion of the trial court … to be exercised in light of the relevant facts and circumstances of the particular case.’” (quoting Nixon v. Warner Commc’ns, Inc., 435 U.S. 589, 599 (1978))). In Binh Hoa Le v. Exeter Fin. Corp., 990 F.3d 410 (5th Cir. March 5, 2021), the court found “[t]he growing practice of parties agreeing to private discovery and presuming that whatever satisfies the lenient protective-order standard will [not] necessarily satisfy the stringent sealing-order standard,” and the courts must still consider “whether the substantive requirements for filing documents under seal have been met.” In DePuy Synthes Prods. v. Veterinary Orthopedic Implants, Inc., 990 F.3d 1364 (Fed. Cir. 2021), the court denied a motion to seal to protect alleged confidential information about the identity of a manufacturer. The court found that there was no contract establishing confidentiality, despite arguments that company policies protected the information from disclosure.
In HouseCanary, Inc. v. Title Source, 622 S.W.3d 254 (Tex), the Texas Supreme Court held that state procedural rules are not displaced by the Texas Uniform Trade Secrets Act provision requiring courts to protect alleged trade secrets. In Bader Farms v. Monsanto Co., Case No. 1:16-cv-00299-SNLJ, 2021 U.S. Dist. LEXIS 16308 (E.D. Mo January 28, 2021), the court denied a sealing request after plaintiff failed to comply with a pretrial order requiring document-by-document review of confidentiality of the trial exhibits.
Reasonable Secrecy Efforts/Confidentiality to Protect Trade Secrets
In MBS Engineering Inc. et al. v. Black Hemp Box LLC et al., case number 3:20-cv-02825 (N.D. Cal. June 16, 2021), the court ruled that plaintiff’s DTSA claim could proceed despite the defendants’ assertions that the company did not do enough to secure the technology’s secrecy when it sold the hemp dryers at issue without prohibiting buyers from reverse-engineering them. “It may be that the ease of reverse engineering bears on the question of what secrecy efforts were reasonable under the circumstances, but defendants cite no authority indicating that the mere possibility of reverse engineering by a third-party purchaser necessarily invalidates a trade secret,” the court stated. Id. at 3. The court concluded, “[a]t most, this raises a fact question that should be resolved at summary judgment or trial.” Id.
In EMC Outdoor, LLC v. Stuart, Civil Action No. 17-5172, 2021 U.S. Dist. LEXIS 63438 (E.D. Pa March 31, 2021), summary judgment entered for defendant where the nondisclosure agreement made defendant’s confidentiality provisions applicable post-employment only if she resigned. Because she was fired from the position, the district court held that plaintiff could not state a claim for misappropriation.
In Bladeroom Group, Ltd. v. Emerson Elec. Co., 11 F.4th 1010 (9th Cir. 2021), the Ninth Circuit reversed a $60 million verdict on the grounds that the district court should not have ignored the plain language in an NDA providing that confidentiality obligations would terminate after two years. The court rejected the district court’s reasoning that the two-year limit controlled because it was contrary to the parties’ intent and would lead to an absurd result.
Personal Jurisdiction in Trade Secret Cases
In M3 USA Corp. v. Hart, No. 20-cv-5736, 2021 WL 308162 (E.D. Pa. Jan. 29, 2021), plaintiff employer sued its former employee and her new employer for misappropriation of trade secrets. The employee was a New Jersey resident who worked for plaintiff remotely. Her new employer was based in Georgia. Plaintiff’s principle place of business was in Pennsylvania.
Defendants moved to dismiss for lack of personal jurisdiction. The district court concluded that it could exercise specific personal jurisdiction over the employee and new employer for misappropriation of trade secrets. To establish specific personal jurisdiction, the court must consider the totality of the circumstances, “[i]n short, all of the essential functions that allowed [the employees] to earn a living were channeled through Pennsylvania … underscoring [the employees’] connection to the Commonwealth is more than incidental.” Id. at 493. “Though a close call,” the court found that the defendant employee directed purposeful contacts at Pennsylvania, in part because she visited the Pennsylvania office several times a year, requested key fob access to the Pennsylvania office, and even “marketed herself as a Pennsylvania resident.” Id. at 494.
When applying the “effects test” set forth in Calder v. Jones, 465 U.S. 783 (1984), the court determined that: (i) the employee committed an intentional tort (misappropriation of trade secrets); (ii) plaintiff “felt the brunt of the harm” in Pennsylvania; and (iii) employee “expressly aimed h[er] tortious conduct at” Pennsylvania (for example, by using her employer-issued “devices to access confidential customer data after resigning”). Id. at 499. The court held that it also could exercise specific personal jurisdiction over the corporate defendant because it “has clients in Pennsylvania,” including the new clients from the employee. The corporate defendant also met the requirements of the “effect test” from Calder for similar reasons set out for the employee.
Forum Non Conveniens of Foreign Defendants in Trade Secret Cases
In Inventus Power, Inc. v. Shenzhen Ace Battery Co., Ltd., Case No. 20-cv-3375, 2021 WL 1978342, (N.D. Ill. May 18, 2021), an Illinois federal court addressed the burden faced by a trade secret defendant requesting dismissal on forum non conveniens grounds in favor of a Chinese court. The plaintiff brought claims for trade secret misappropriation under the Defend Trade Secrets Act and the Illinois Trade Secrets Act in the Northern District of Illinois. Plaintiff is headquartered in the district and the defendants are Chinese corporations.
The defendant moved to dismiss based on forum non conveniens, arguing that China was the more appropriate forum. The district court denied the motion. In its decision, the court analyzed whether “an alternative and adequate forum is available and then go on to balance the interests of the various participants, as well as the public.”
As to availability and adequacy, the district court found that the defendant had failed to show that China was an available and adequate forum for the plaintiffs’ trade secret claims. The court questioned whether Chinese trade secret law provided an adequate remedy. The court found that defendants failed to provide any evidence, such as affidavits or expert testimony, concerning the significance or operation of Chinese civil procedure law.
The court remarked that while Chinese law authorizes conduct preservation measures that are “functionally equivalent (or at least similar to) injunctive relief in the United States,” the court observed that the defendant had only identified one Chinese case in which such a measure had been implemented. Id. at *5. The court was “not particularly convinced as to the availability of injunctive relief to the plaintiffs in China.” Id. Lastly, the court stated that it could not conclude “with any confidence that the plaintiffs would have a viable avenue of relief in China were the Court to dismiss this action.” Id.
Remedies for Trade Secret Misappropriation: Disgorgement
In AMS Sensors USA Inc. v. Renesas Electronics America Inc., case number 4:08-cv-00451, (E.D. Tex. December 14, 2021), a Texas federal judge found that light sensor maker Renesas Electronics America Inc. is liable for approximately $8.5 million in disgorgement to AMS Sensors USA Inc. in a trade secret and contract suit.
The jury initially found that $8.55 million of Renesas’ profits should be disgorged and paid to AMS for the use of the trade secret, although that had been just an advisory verdict. The Federal Circuit ruled disgorgement was an issue for the judge, so US District Judge Amos L. Mazzant III was tasked with determining the final amount.
Judge Mazzant ruled that “the record supports the inclusion of all profits attributable to” Renesas’ sales of its ISL29003 product, an integrated light sensor” for smartphones and other devices and the [t]he record supports plaintiff’s calculation of defendant’s profits.” The court reasoned that Texas courts apply a “flexible and imaginative” approach to the calculation of monetary relief for trade secret misappropriation. Id. at 36. Texas’s approach imposes no specific burden on a plaintiff to apportion a misappropriating defendant’s profits. A trade secret plaintiff “need only prove misappropriation of its valuable trade secret and that it was put to some commercial use.” “Whether the full amount of the defendant’s profits is attributable to the misappropriation of trade secrets is for the [fact-finder] to decide.” However, the court agreed with the advisory jury’s implied rejection of defendant’s apportionment arguments.
The court found that the nature of defendant’s “commercial use” of plaintiff’s trade secret entitled plaintiff to recover the benefits defendant received from that commercial use. Id. at 38. The record confirmed that plaintiff’s trade secret was valuable to customers and critical to the performance of the ISL29003. Defendant’s own internal documents confirmed the value of plaintiff’s trade secrets. The court found that it was necessary and equitable to include in plaintiff’s disgorgement remedy sales arising from design wins achieved by defendant during the head-start period—even if sales arising from those design wins continued beyond March 2008 [after the use allegedly stopped]. Id. at 43.
In an early decision in the case, Judge Mazzant ruled that under Texas law, AMS could only seek $17 million of the $64 million in exemplary damages a jury awarded it following a retrial on damages in the case.
A jury in a previous trial in 2015 found that Renesas misappropriated AMS trade secrets and breached a confidentiality agreement after the two companies, which have both made light sensors for a smartphone, met to discuss a merger but never reached a deal. The Federal Circuit vacated the damages award in that case in 2018, leading to a retrial solely on damages.
Sufficient Trade Secret Identification and Dissolving Overly Broad Injunctions
In Mallet & Co. Inc. v. Ada Lacayo et al., 16 F.4th 364 (3d Cir. October 15, 2021), the Third Circuit reversed an order blocking the defendants from making certain products—non-stick baking agents—and employing former plaintiff’s workers, finding that plaintiff must identify the particular trade secrets defendants allegedly misappropriated and demonstrate that they are protectable.
The court found that since a lower court did not identify specifics concerning plaintiff’s secrets, the panel cannot decide if the plaintiff’s claims have merit. The court reasoned that there is no basis to uphold the decision granting injunctive relief “since its irreparable harm determination appears to depend entirely on the defendants’ misappropriation of Mallet’s trade secrets.” Id. at 380. “The bottom line is this: without knowing what particular information Mallett claims as trade secrets, we cannot assess its likelihood of success in establishing that the information the defendants acquired, disclosed, or used is trade secret information or that misappropriation of a trade secret has occurred.” Id. at 387.
The court reasoned a trade secret’s owner must meet the burden of showing that the secrets they claim are actually protected, rather than being common industry knowledge. Defendants denied that they used anything other than generalized knowledge that they have gained during employment.
The court found that since plaintiff’s generalizations did not adequately identify information that is claimed as a trade secret, the injunction must be dissolved. “Just how much specificity a court should require of the plaintiff-owner is again a context-specific matter,” the panel wrote. “We cannot provide a bright-line rule.” In remanding the case, the court indicated that injunctive relief may still be appropriate, if specific examples are provided with regard to the trade secrets. In addition to the purported trade secrets being adequately identified, plaintiff must also point to evidence that links the defendants’ actions “to the taking of those trade secrets.” Id. at 387.
The panel added that the scope of a preliminary injunction must be specific, rather than overly broad, if one is granted by the trial court. It explained that the current injunction order “is problematic” since its scope extends to what might be lawful conduct. “It would take a truly extraordinary showing—one not made here—to justify an order ejecting a competitor from the marketplace altogether,” the court found. “Injunction orders should not restrain competitors from engaging in lawful business activities.” Id. at 390-91.
The court also addressed the $500,000 bond that plaintiff was required to post to secure the preliminary injunction. It stated the bond amount was not supported by the record and recommended that the trial court consider a new amount if it decides to grant a preliminary injunction on remand.
Continued Large Trade Secret Jury Verdicts
In Proofpoint Inc. et al. v. Vade Secure Inc. et al., case number 3:19-cv-04238 (N.D. Cal. August 24, 2021), a California federal jury found that a cybersecurity technology company was entitled to about $14 million after finding that a former employee and a French technology company misappropriated trade secrets concerning technology related to identifying malicious emails and filter methods.
The jury entered the verdict against the plaintiff’s former vice president of gateway technology and the company he went to. The jury said the plaintiffs were owed $13,975,659. Specifically, the jury found that defendants misappropriated most of the trade secrets at issue, and that both infringed at least one copyright. The jury also found that the corporate defendant’s misappropriation was willful and malicious. The court found, however, that there was no basis to award exemplary damages.
Recently in Virginia, a Fairfax County Circuit Court jury awarded Appian $2.04 billion in damages for trade secret misappropriation by software rival Pegasystems. Appian alleged that Pegasystems retained an employee of a government contractor to access its software, helping it to improve its own products and better train its sales force. We expect that the large jury verdict will be appealed.
Bad Faith in Trade Secret Cases
In Multimedia Sales & Marketing, Inc. v. Marison Marzullo, et al., 2020 IL App (1st) 191790, the state appellate court affirmed the award of attorneys’ fees incurred by defendants under the bad faith fee shifting provision of the Illinois trade secrets statute. Plaintiff sued one of its competitors and three of its former employees who joined the corporate defendant, alleging that the former employees misappropriated trade secrets and used such information to solicit plaintiff’s customers. Plaintiff and corporate defendant compete to sell radio advertising time to businesses. The alleged trade secrets at issue were sales lead lists of potential and former purchasers of such advertising time.
Plaintiff’s former employees admitted to taking the sales leads and using them at the corporate defendant, but disputed that such information was confidential, let alone a trade secret. The former employees were right. Plaintiff’s owner and president, as well as its director, both testified that the sales lead lists were disclosed to the radio stations for which plaintiff sought to sell air time. Based on this undisputed testimony, the trial court entered summary judgment and awarded defendants their attorneys’ fees under the bad faith fee shifting provision of the ITSA.
On appeal, the court affirmed the decision of the lower court. Pertinent to the award of attorneys’ fees, the appellate court borrowed from Illinois Supreme Court Rule 137, which allows the court to penalize claimants who bring vexatious, false and/or frivolous filings. Applying Rule 137, the appellate court affirmed the trial court’s holding that plaintiff’s trade secret claims were “never well-grounded in fact or warranted by existing law or an argument to extend existing law.”
Preemption in Trade Secret Cases
In 250ok, Inc. v. Message Sys., Inc., C.A. No. 2020-0588-JRS (Del. Ch. Jan. 22, 2021), the Delaware Chancery Court found that Delaware’s version of the Uniform Trade Secrets Act expressly preempts common law claims based on the misappropriation of trade secrets. The Court of Chancery dismissed a claim for unjust enrichment based on defendant’s alleged misappropriation and use of plaintiff’s confidential and proprietary data because Delaware’s trade secret statute “occupies the filed” and preempts claims for common law unjust enrichment.
This case involved a proprietary sensor network created by plaintiff. This technology helps email marketers avoid spam traps designed to block their email marketing efforts. Plaintiff entered into a “Reseller Agreement” with defendant to market and sell its product with defendant’s own products and services. Approximately 4 years later, defendant allegedly reverse engineered plaintiff’s technology and offered its own competitive product. Not surprisingly, plaintiff sued defendant, alleging that it had misappropriated its proprietary information.
Plaintiff asserted three claims: (I) breach of the Reseller Agreement; (II) misappropriation of trade secrets under the Delaware Uniform Trade Secrets Act (the “DUTSA”); and (III) unjust enrichment. Defendant moved to dismiss Count III—for unjust enrichment—as preempted by the DUTSA. The issue presented by defendant’s motion was whether a common law claim could be dismissed as preempted before the court determined that an actual trade secret exists. The court recognized that Delaware had “joined the ‘majority view’” that preemption under the DUTSA includes common law claims based on misappropriation of business information, even in cases in which the claim does not meet the statutory definition of trade secret and in which the term “trade secret” is not explicitly mentioned in the common law claim. As the court explained, “[u]nder our settled law, what matters for preemption purposes is whether the trade secrets and unjust enrichment claims are based on the ‘same alleged wrongful conduct.’” Id. at *6.
Plaintiff’s claims all arose under the same common nexus of facts: defendant allegedly took plaintiff’s confidential information to develop its own competitive product. As the claim for unjust enrichment was based on the same facts and wrongdoing, the court dismissed the claim for unjust enrichment with prejudice.
Plaintiff fell into a common trap—by opting for trade secret protection, it abandoned any possible common law claims (aside from those based on contract). Plaintiffs should be aware and consciously make the decision to either pursue misappropriation claims under the UTSA, or pursue common claims that lack the statutory benefits but also do not require proving the existence of a trade secret.
Similarly, other courts have found trade secret preemption where plaintiffs’ claims arise from the same nexus of facts as the trade secret claims. See Pro Flexx LLC v. Hiroshi Yoshida, No. 20-00512 SOM-KJM, 2021 U.S. Dist. LEXIS 17858 (D. Haw. 2021)(defining the “same proof” standard for claim preemption by the HUTSA: if a non-HUTSA claim would simultaneously establish a claim for trade secret misappropriation, it is preempted, regardless of if additional elements are necessary to establish the non-HUTSA claim); VibrantCare Rehab., Inc. v. Deol, No. 2:20-cv-00791-MCE-AC, 2021 U.S. Dist. LEXIS 79718 (E.D. Cal. 2021) (noting that the CUTSA preempts any claim based entirely on the same factual allegations that form the basis of a trade secret claim); NW Monitoring LLC v. Hollander, No. C20-5572 RSM, 2021 U.S. Dist. LEXIS 73193 (W.D. Wash. 2021) (stating that under the “strong” form of preemption under the WUTSA, a plaintiff may not rely on acts that constitute trade secret misappropriation to support another cause of action, even if the other claim requires proof of additional elements).
Trade Secret Attorneys’ Fees Denial Not Immediately Appealable Order
In Dr. V Prods., Inc. v. Rey, 68 Cal. App. 5th 793 (2021), a California appellate court found that an order denying a motion for attorneys’ fees under CUTSA is not an appealable order. In the case, plaintiff filed suit against a former employee, alleging the former employee converted and destroyed documents belonging to the plaintiff, which contained “proprietary company information.” Id. at *1. After discovery, the plaintiff voluntarily dismissed its trade secret misappropriation claim, and the defendant moved for an award of attorneys’ fees under CUTSA which the court denied. Id. The defendant appealed, and the plaintiff moved to dismiss on the grounds that a denial of a motion for attorneys’ fees under CUTSA is not an appealable order. Id. at *2.
The defendant argued that “if a collateral order directing the payment of attorneys’ fees is appealable, by parity of reasoning the opposite should be true.” Id. at *2. The appellate court disagreed, citing to case law which made no mention of an order denying the payment of money being appealable. Id. The court also cited other examples where “statutes are not always reciprocal to parties” and where “some authorize an appeal by one side but deny that right to the other side.” Id.
The defendant argued that an order denying fees under CUTSA is collateral to the litigation. The court disagreed and cited authority that a party may not normally appeal from a judgment on one cause of action if determination of other causes of action is pending. Defendant’s underlying motion addressed only one of respondent’s causes of action and six remained. Id. at *3. The appellate court also stated that because the core of the lawsuit concerned destruction and conversion of corporate documents, the trade secret misappropriation claim was intertwined with the other claims and therefore not collateral. Id. Accordingly, in California, an attorneys’ fees claimant must litigate all claims to conclusion at the trial level, before appealing the fees’ order.
Customer Information/Protectable Trade Secrets
In Peterson Machinery Co. v. May, 313 Or. App. 454 (2021), an Oregon appellate court held that basic customer information, such as customer identities and email addresses, without more, does not give rise to a trade secret claim under Oregon’s trade secrets statute. Plaintiff must present evidence that alleged the trade secret information derives economic value from not being generally known and was subject to reasonable efforts to maintain its secrecy.
According to plaintiff, defendant accessed a sales database 12 times in his final month of employment, and sent an email to 139 of plaintiff’s customers using the autofill feature from defendant’s address book before departing from the company. Additionally, plaintiff alleged that defendant had retained a list of customers contained in a copy of a performance improvement plan and took and destroyed a notebook with information that should have been entered into sales database.
Defendants brought a motion to dismiss the trade secret claims, arguing that plaintiff on had failed to identify any trade secrets and that there was insufficient evidence of misappropriation. The trial court granted the motion and dismissed plaintiff’s misappropriation claim. On appeal, the Oregon appellate court affirmed the trial court’s decision, finding that plaintiff had failed to show that the information at issue qualified as “trade secrets” within the meaning of Oregon statute. To constitute a trade secret under ORS 646.461(4), information must both (1) gain value because it is not generally known and (2) be the subject of reasonable efforts to maintain that secrecy. Each of those determinations must be made on the basis of historical facts and circumstances of the parties, such as whether the information is generally known within the relevant community, whether it becomes more valuable by not being generally known, and what efforts were made to keep it secret.
The court found that the mere names of customers and potential customers were not protectable trade secrets. See id. at 468. The court indicated that the record showed that the customers at issue were already known in the industry. The court pointed to over 300 crossover customers or prospective customers between the two competitors. With respect to contact information such as email addresses, the court found that plaintiff did not sufficiently demonstrate that the email addresses (or how many) were not publicly known, how long it would take someone to compile such information, or what the economic value of those email addresses was as compiled by plaintiff. See id. at 470.
The court observed that there was evidence that the defendant employee had kept some handwritten notes about customers and retained in his memory certain other information like sales preferences and history. The court reasoned, however, that plaintiff had failed to present evidence from which a reasonable fact finder could determine that defendants had actually misappropriated—i.e., used or disclosed—such information. See id. at 471. Absent an enforceable restrictive covenant agreement, the defendant employee was entitled to solicit plaintiff customers while working for the corporate defendant, and the mere fact that he had retained certain information about plaintiff’s customers in his memory was insufficient to support a misappropriation claim. The court observed that, in the end, “equity has no power to compel a man who changes employers to wipe clean the slate of his memory.” Id. at 474.
In contrast, in Glam & Glits Nail Design, Inc. v. #NotPolish, Inc., Case No.: 21-cv-0052-GPC-DEB, 2021 WL 2317410, at *5 (S.D. Cal. June 7, 2021), the district court found that plaintiff had stated a claim for trade secret misappropriation based upon the alleged theft of a customer list. The plaintiff was a nail care products manufacturer and vendor focusing in part on nail salons owned and operated by Vietnamese Americans. Plaintiff sued its former employee and her new employer alleging misappropriation of confidential customer information. The court found that the information could qualify as trade secret. According to the court: “the Information is more than just a ‘client list.’ It includes non-public personal cellphone numbers of the owners and operators of G&G’s customers and distributors who prefer conducting business in Vietnamese, the customers’ and distributors’ account purchasing histories, their corresponding pricing tiers, and their product and billing preferences … [T]he CEO of G&G himself compiled them over many years and took various measures to keep the Information exposed as little as possible … And it is easy to see how knowing private cellphone numbers of the owners/operators and their preferences to the most intricate detail would provide a competitive edge.” Id. at *5. Allegations that, among other things, the defendants began contacting the plaintiff’s Vietnamese speaking customers to solicit their business using their private cell phone numbers were sufficient to allege misappropriation. Id.