Pleading a Claim Under the New Defend Trade Secrets Act
By Karen E. Clarke, Of Counsel
Since the federal Defend Trade Secrets Act (“DTSA”) took effect in May 2016, a handful of district courts have had occasion to address the pleading requirements for a claim of trade secret misappropriation under the DTSA, in the context of a Rule 12 motion to dismiss or a Rule 15 motion to amend a pleading. These decisions have provided insight as to (1) how much detail is required to state a plausible claim of misappropriation under the DTSA and (2) whether a DTSA claim can be premised on allegations of ongoing use or disclosure of trade secrets where the initial misappropriation occurred prior to the DTSA’s enactment.
1. Degree of Detail Required
The recent decisions reflect that the courts assess DTSA misappropriation pleadings using the same standards and principles they have used, under the Supreme Court’s Twombly/Iqbal plausibility standard, to assess trade secret misappropriation claims under pre-existing state law. The courts’ reliance on the jurisprudence discussing state-law claims is generally appropriate because the elements of a DTSA claim are quite similar to those of most state-law claims, except that a DTSA claim requires an additional showing that “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1).
Under the DTSA, a “trade secret” is broadly defined to include various forms of information “if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value … from not being generally known to [or] … readily ascertainable through proper means by” other persons. 18 U.S.C. § 1839(3). The term “misappropriation” is defined as “(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (B) disclosure or use of a trade secret of another without express or implied consent” by a person who used improper means to acquire knowledge of the trade secret or derived knowledge of the trade secret from someone else who used improper means or had a duty to maintain the secrecy of the trade secret. 18 U.S.C. § 1839(5).
Accordingly, a viable DTSA claim needs to allege sufficient facts to show that these elemental requirements are met. In M.C. Dean, Inc. v. City of Miami Beach, Florida, 2016 WL 4179807 (S.D. Fla. Aug. 8, 2016), for example, the court evaluated plaintiff’s allegations under the DTSA and the analogous Florida statute and concluded that both claims failed. First, the allegations were insufficient to establish a trade secret, as plaintiff failed to allege that it took reasonable steps to protect the secrecy of the information at issue when it was initially disseminated to the third party who later provided it to the City. Id. at *5-7. Second, plaintiff failed to allege misappropriation, as it did “not allege the information was acquired through any improper means, such as acts of theft, bribery or a breach of a duty owed to it”; it did not plausibly allege the City had a “duty” to protect the information (and the contract referenced in the complaint negated such a duty); and plaintiff’s allegation of knowledge that the information was acquired by improper means was “wholly unsupported by any plausible facts.” Id. at *7-8.
In ChatterPlug, Inc. v. Digital Intent, LLC, 2016 WL 6395409 (N.D. Ill. Oct. 28, 2016), the court dismissed the DTSA claim (with leave to replead) because the complaint, though prolix, “does not provide Defendants with the general contours of the alleged trade secrets that ChatterPlug is seeking to protect. ChatterPlug is not required to compromise its trade secrets, but Defendants are entitled to be able to discern what trade secrets are at issue.” Id. at *3 (citing cases addressing claims under Illinois and New York law).
Recently, the court in Space Data Corp. v. X, 2017 U.S. Dist. LEXIS 22571 (N.D. Cal. Feb. 16, 2017) dismissed plaintiff’s claims under the DTSA and the analogous California statute (with leave to amend), relying on cases addressing the pleading requirements for a state-law claim. The court explained that although a plaintiff “need not ‘spell out the details of the trade secret,’” it must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies”; but plaintiff’s allegations, which provided only a “high-level overview” of its data and did not make clear which items were contained in a patent and which were secret, were insufficient. Id. at *4-5. On the misappropriation element, the court stated that “plaintiff must plead facts showing that Google had a duty not to use the information in the way alleged”; but the complaint contained only “conclusory assertions” that defendants had “engaged in other business activity based on” plaintiff’s information, and lacked adequate factual allegations to establish “a reasonable basis for this Court to infer that Google improperly used Space Data’s trade secrets.” Id. at *5.
In contrast, in Syntel Sterling Best Shores Mauritius Ltd. v. TriZetto Grp., Inc., 2016 WL 5338550 (S.D.N.Y. Sept. 23, 2016), the court found that Defendants adequately pled the elements of a DTSA counterclaim, as they had factually alleged that the information at issue fell within the scope of protected trade secrets; the reasonable measures they had taken to keep the information secret; that the information was valuable and crucial to TriZetto’s business functions and competitive position; and that Syntel had, without their consent, downloaded TriZetto’s intellectual property and used it for Syntel’s own use and financial gain. Id. at *6.
In Mission Measurement Corp. v. Blackbaud, Inc., 2016 WL 6277496, at *5-6 (N.D. Ill. Oct. 27, 2016), the court held that a plausible claim was stated under both the DTSA and the analogous Illinois statute where Plaintiff had adequately alleged specific information about the trade secrets at issue, how the defendants had acquired and used the information in their businesses, and how the plaintiff had made reasonable efforts to maintain the information’s secrecy and confidentiality. The court rejected Defendants’ argument that Plaintiff was required “to specifically identify the exact trade secrets at issue,” because prior courts have deemed trade secret allegations adequate “where the information and the efforts to maintain its confidentiality are described in general terms.” Id. at *5 (citing several cases addressing state-law misappropriation claims).
Similarly, in Chubb INA Holdings Inc. v. Chang, 2017 WL 499682 (D.N.J. Feb. 7, 2017), the court deemed a DTSA claim adequately pled where “Plaintiffs set forth factual allegations supporting an inference that Defendants did actually use misappropriated trade secrets” that they had downloaded while they were Chubb employees but were planning to work with a competitor. Id. at *9. The court noted that Plaintiffs “need not make out specific allegations as to exactly how Defendants used or disclosed Plaintiff[s’] trade secrets; there is no heightened pleading standard for a misappropriation claim, and Plaintiff[s are] entitled to seek discovery to support [their] allegations setting forth a prima facie claim.” Id. (citing a case involving misappropriation under New Jersey law).
2. Post-Enactment Conduct
A particular area of debate relates to whether the alleged misappropriation occurred before or after the effective date of the DTSA. The private cause of action created by the DTSA applies only “with respect to any misappropriation of a trade secret … for which any act occurs on or after the date of the enactment of this Act,” which was May 11, 2016. Pub. L. No. 114-153 § 2(e), 130 Stat. 376 (2016). Thus, a plaintiff must be able to point to some “act” of misappropriation – that is, an acquisition, disclosure, or use, 18 U.S.C. § 1839(5)(A)-(B) – that “occur[red] on or after” May 11, 2016.
Absent such an allegation, there can be no DTSA claim. See Champions League, Inc. v. Woodard, 2016 WL 8193292, at *6 (S.D.N.Y. Dec. 15, 2016) (adding a DTSA claim would be futile because there were no post-enactment “acts of misappropriation” and plaintiff did not allege that defendants continued to use its purported trade secrets to directly compete with plaintiff, so the alleged wrongful act could not be treated as continuing to occur post-enactment).
In most of the cases reported to date, the principal wrongful acquisition of trade secret information occurred pre-enactment and the question is whether allegations of continuing use or disclosure of the information post-enactment suffice to state a DTSA claim.
In Adams Arms, LLC v. Unified Weapon Sys., Inc., 2016 WL 5391394 (M.D. Fla. Sept. 27, 2016), the plaintiff alleged two theories of misappropriation, wrongful acquisition and wrongful disclosure. The court observed that the DTSA’s “language suggests that when an ‘act’ occurs after the effective date, a partial recovery is available on a misappropriation claim”; and therefore plaintiff “may state a plausible claim for relief, if [plaintiff] sufficiently alleges a prohibited ‘act’ occurring after May 11, 2016.” Id. at *6. The court concluded that plaintiff’s acquisition theory failed because “[e]ven taking the available inferences in Adams Arms’ favor, the facts indicate that Defendants acquired all information well prior to May of 2016.” Id. at *7. However, plaintiff’s disclosure claim survived, as it sufficiently alleged that the defendants entered into a design contract that used the allegedly misappropriated designs and specifications, which “supports an inference that Defendants disclosed Adams Arms’ trade secrets after the effective date.” Id. at *6.
Similarly, in Syntel Sterling, although all the improper downloading of information occurred well before the DTSA’s effective date, the court found that the proposed DTSA counterclaim sufficed because “[t]he plain language of the Act defines misappropriation to include ‘disclosure or use of a trade secret without the consent of another,’ and accordingly, as it was alleged that “Syntel continues to use [the downloaded information] to directly compete with Trizetto, the wrongful act continues to occur after the date of the enactment.” 2016 WL 5338550 at *6.
And in Chubb, the DTSA claim survived because although the former employees had initially misappropriated the information prior to the DTSA’s effective date, “Plaintiffs further allege that, subsequent to their resignations …, the Former Chubb Employees retained large volumes of documents containing Confidential Information after May 11, 2016, with the intent to disclose and/or use that information for the benefit of Endurance,” which suggested “a clear link between that information and subsequent solicitation of Chubb’s customers by Defendants”; and the inference of misuse was further supported by factual allegations in declarations plaintiffs submitted (in connection with a preliminary injunction motion). 2017 WL 499682 at *9.
See also High 5 Games, LLC v. Marks, 2017 WL 349375, at *6 (D.N.J. Jan. 24, 2017) (proposed amended claim was not clearly futile, as “there are different theories available under the statute, including consideration of continuing post-enactment conduct,” and the pleading included allegations of continuing acquisition and use of trade secrets, whose sufficiency should be assessed on a motion to dismiss rather than a motion to amend).
On the other hand, a purely conclusory allegation of continuing use or disclosure will not suffice. In Hydrogen Master Rights, Ltd. v. Weston, 2017 WL 78582 (D. Del. Jan. 9, 2017), the court dismissed the misappropriation claims (without prejudice) because (1) the complaint “fails to allege any nexus between interstate or foreign commerce and the [documents containing the alleged trade secret information],” and (2) the “complaint does not allege any acts on or after May 11, 2016 other than a conclusory allegation of continuing use and disclosure.” Id. at *10.
In addition, one California district court has recently taken the view that an allegation of continuing disclosure is not legally viable. In Avago Techs. U.S. Inc. v. NanoPrecision Prod., Inc., 2017 WL 412524 (N.D. Cal. Jan. 31, 2017), the court dismissed defendant’s DTSA counterclaims alleging that a continuing disclosure occurred through plaintiff’s continuing prosecution of patent applications that disclosed the secret information. The court stated:
Significantly, nPP does not suggest that any new information was disclosed in the course of the patent prosecutions that had not been disclosed prior to DTSA’s effective date. Rather, it alleges that “Avago again disclosed such information to the world by its continued prosecution of the Avago Applications.” … [T]he confidential information at issue was disclosed when the Avago Applications were published, before the DTSA came into effect. … Simply alleging that the same information was disclosed “again” is not sufficient to avoid this result as “disclosure,” by definition, implies that the information was previously secret. … Because nPP has failed to allege any facts showing that acts of misappropriation occurred after DTSA came into effect, its DTSA claim fails on the pleadings.
Id. at *8-9 (but repleading was allowed).
Conclusion
Parties seeking to craft or respond to DTSA claims must be attentive to the elements of the claim and the federal pleading requirements, as well as any nuanced differences from state-law misappropriation claims.
