The Defend Trade Secrets Act – How to Win at the Pleading Stage
Client Advisory
February 14, 2019 by Jeffrey S. Boxer, John M. Griem, Jr., Alexander G. Malyshev and Dylan L. Ruffi
When it comes to trade secrets, the pressure to innovate and compete can prompt businesses to take extreme measures. Unfortunately, these measures are not always lawful. Just ask T-Mobile, the recent alleged victim of attempted trade secret misappropriation. On January 16, 2019, Chinese telecom giant Huawei was indicted on a host of charges, including the attempted theft of T-Mobile’s trade secrets.[1] Even trusted vendors can succumb to the allure of stealing your valuable trade secrets rather than doing the hard work of creating their own independent solutions.
Although the Department of Justice may occasionally bring criminal claims against infringers, one major weapon trade secret owners have in their arsenal is the authority to prosecute their own civil claims under the Defend Trade Secrets Act of 2016 (“DTSA”).[2] The DTSA provides a powerful mechanism for redressing misappropriation anywhere in the United States.
While the DTSA aims to protect trade secret owners, a growing number of cases are dismissed at the pleading stage, before discovery.[3] It is therefore worth looking at what it takes to plead a winning DTSA claim.
Pleading a Winning Claim
Litigants asserting DTSA claims must plead: (1) the existence of a trade secret and (2) the misappropriation of that trade secret.[4] Although this directive is clear enough, parties continually fail to adequately plead both requirements.[5]
A viable pleading begins with the facts. Factual allegations should be as detailed as possible. When pleading the existence of a trade secret, for example, litigants should identify the trade secrets with specificity, distinguishing them from generally known information.[6] However, in meeting this burden, parties should ensure that they do not inadvertently disclose sensitive information that would vitiate the trade secret, removing its protections altogether. If a pleading is so thorough that it exposes the trade secret to the public, the trade secret could be forfeited.[7] Thus, balancing specificity with secrecy requires special attention to the DTSA and federal pleading standards.
Plead a Protectable Trade Secret
The foundation of any misappropriation claim is the existence of a valid, protectable trade secret. Under the DTSA, a trade secret is defined as information that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information,” for which the owner has taken “reasonable measures to keep such information secret.”[8]
More simply stated, to adequately plead the existence of a trade secret, a party must allege three categories of facts: (1) secret information, (2) that is reasonably protected, and (3) that derives value from its secrecy.
Secret Information
A trade secret can be comprised of “all forms and types of financial, business, scientific, technical, economic, or engineering information.”[9] Although this definition is expansive, the information itself must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.”[10] In most instances, this requirement will easily be met. Where it is not, there may be a cause of action under state law, but not the DTSA.[11]
To qualify as a trade secret, the information must be a secret. It cannot be generally known or ascertainable.[12] Information that can be gleaned from the public domain, without more, will not suffice. For example, compilations of public information, such as phone numbers and email addresses, are not protected unless they contain additional secret information, like customer preferences.[13]
The difference between trade secret information and confidential information is another important distinction. Trade secrets are a subset of confidential information.[14] However, confidential information can only be treated as a trade secret if it meets the other elements set forth in the DTSA.
Reasonably Protected
A party must allege that it took “reasonable measures to keep” the information a secret.[15] Reasonable measures include, most notably, the use of agreements that control the dissemination of trade secrets by containing non-disclosure provisions or restrictive covenants.[16] A pleading should describe any such agreements and assert that they were signed by the defendant(s). In addition, parties should also identify any other steps taken to maintain secrecy, such as encrypting data, password protections, and/or limits on access to trade secrets.
Courts will swiftly dismiss claims that fail to allege any measures taken to protect secrecy.[17] For example, where a trade secret owner provides the infringer with unfettered access to the trade secret, that information may lose trade secret status.[18] If the efforts themselves are not reasonable, the claim will also fail. Allegations that employees were asked to sign non-disclosure agreements, for instance, may not be reasonable unless the employees actually signed the agreements.[19]
Value Derived From Secrecy
A litigant must also allege that the trade secret derives independent economic value from its secrecy.[20] Accordingly, a party should describe the value of the trade secret to the owner’s business, as well as the advantage competitors would gain if they obtained the trade secret.[21] This description should include the amount of effort or investment the trade secret owner expended to develop the information, and the difficulty competitors would face in acquiring or duplicating that information.[22] The greater the value of the information, the more likely a court will find a valid trade secret.
Plead the Misappropriation of a Trade Secret
Once a protectable trade secret is alleged, litigants must plead a misappropriation of that trade secret. An actionable claim must set forth: (1) an act of misappropriation, (2) that occurred after the DTSA’s effective date, and (3) that the infringer knew or had reason to know was improper.[23]
Act of Misappropriation
The DTSA provides relief for three different acts of misappropriation: acquisition, disclosure, and use.[24] Misappropriation occurs where a trade secret is acquired by a “person who knows or has reason to know that the trade secret was acquired by improper means.”[25] “Improper means” is defined as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”[26] Misappropriation also occurs where one discloses or uses a trade secret without the owner’s consent. [27] To properly assert an act of misappropriation, all pleadings must contain detailed factual allegations, making it plausible that the defendant wrongfully acquired, disclosed, and/or used the trade secret.
Timing of the Misappropriation
Pleading the date of the misappropriating act is critical. Misappropriation that occurred before the DTSA’s effective date, May 11, 2016, does not give rise to liability under the statute.[28] Where the misappropriation began before the DTSA’s effective date, litigants may rely on a theory of “continuing misappropriation” by alleging that an act of misappropriation occurred after May 11, 2016.[29] Accordingly, litigants must allege post-enactment conduct with as much specificity as possible or risk dismissal.
Knowledge of Wrongdoing & Improper Means
In addition to pleading an act of misappropriation, litigants must also demonstrate that the infringer knew or had reason to know that the misappropriation was improper.[30] To do so, the litigant must plead specific facts that suggest the infringer was, to some extent, conscious of wrongdoing. Absent clear evidence, most litigants must rely on circumstantial facts.
Allegations of specific knowledge required by the DTSA must be adapted to the type of misappropriation.[31] When pleading misappropriation by acquisition, the party must allege that the infringer knew or had reason to know that the trade secret was acquired by improper means.[32] When pleading misappropriation by disclosure or use, the pleading must allege that, at the time of the disclosure or use, the infringer either acquired the trade secret by improper means, or knew or had reason to know that the trade secret was:
- derived from or through a person who used improper means to acquire the trade secret;
- acquired under circumstances giving rise to a duty to maintain secrecy or limit the use of the trade secret;
- derived from or through a person who owed a duty to the party seeking relief to maintain secrecy or limit the use of the trade secret; or
- acquired by accident or mistake with knowledge that the information was a trade secret.[33]
Not every instance of acquisition, disclosure, or use will give rise to liability. The DTSA provides an exception for reverse engineering, independent derivation, and other “lawful” means of acquisition.[34] These “lawful” acts are excluded from the DTSA’s definition of “improper means.”[35]
Other Considerations
In addition to pleading misappropriation, litigants have any number of additional issues to consider. For example, courts have expressed conflicting views as to pleading damages.[36] As a matter of best practice, every pleading should contain an assertion of damages caused by the alleged misappropriation.
The DTSA also provides for severe repercussions if a DTSA claim is brought for improper reasons. Misappropriation claims brought in bad faith expose the party to liability for attorney’s fees.[37]
It is also necessary to bear in mind that not all well-pleaded claims will find success. Indeed, there may be instances where a pleading is dismissed for other reasons, such as lack of personal jurisdiction.[38] This underscores the importance of looking beyond DTSA requirements when pleading.
Parting Thoughts
The above guidance provides only a basic framework for pleading misappropriation claims under the DTSA. One of the benefits of adequately pleading claims is not just the avoidance of dismissal, but the prospect of obtaining immediate injunctive relief in the form of a seizure, a TRO, or a preliminary injunction.[39] Defendants may exploit weaknesses in pleadings where parties fail to meet any of the requirements noted here, making it all the more critical that litigants adequately plead their claims.
For more information concerning the matters discussed in this publication, please contact the authors Jeffrey S. Boxer (212-238-8626, boxer@clm.com), Jack Griem (212-238-8659, griem@clm.com), Alexander G. Malyshev (212-238-8618, malyshev@clm.com), or Dylan Ruffi (212-238-8854, ruffi@clm.com), another member of Carter Ledyard’s Litigation and Disputes practice group, or your regular Carter Ledyard attorney.
[1] See Indictment, United States v. Huawei Device Co., Ltd., No. 19-cr-00010-RSM (W.D. Wash. Jan. 16, 2009), ECF No. 1.
[2] Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376.
[3] See, e.g., Indira v. W. Side GI, LLC, No. 1:18-cv-01005 (AT) (SDA), 2018 U.S. Dist. LEXIS 192728, at *23 (S.D.N.Y. Nov. 9, 2018) (recommending dismissal where plaintiff failed to provide “sufficient information about the nature, value and measures taken to safeguard” the alleged trade secret); Elsevier Inc. v. Doctor Evidence, LLC, No. 17-cv-5540 (KBF), 2018 U.S. Dist. LEXIS 10730, at *17 (S.D.N.Y. Jan. 23, 2018) (dismissing claims where party “fail[ed] to include allegations supporting the various factors that define the ‘contours’ of a trade secret”); Vendavo, Inc. v. Price f(x) AG, No. 17-cv-06930-RS, 2018 U.S. Dist. LEXIS 48637, at *10 (N.D. Cal. Mar. 23, 2018) (dismissing claims where litigant failed to plead the “timelines of the alleged acts of misappropriation and use of purported trade secrets”); Ultradent Prods. v. Spectrum Sols., LLC, No. 2:17-CV-890, 2018 U.S. Dist. LEXIS 3858, at *7-8 (D. Utah Jan. 8, 2018) (dismissing claims where plaintiffs’ allegations were conclusory and “wholly devoid of any well-pled facts”).
[4] See, e.g., Par Pharm., Inc. v. QuVa Pharma, Inc., No. 17-cv-6115-BRM-DEA, 2018 U.S. Dist. LEXIS 43612, at *18 (D.N.J. Mar. 16, 2018) (“A party asserting a claim under the DTSA . . . must show: (1) the existence of a trade secret and (2) the misappropriation of that secret.” (citing 18 U.S.C. § 1839(3), (5))).
[5] See supra note 3.
[6] See, e.g., Medidata Sols., Inc. v. Veeva Sys., No. 17 Civ. 589 (LGS), 2018 U.S. Dist. LEXIS 199763, at *8-9 (S.D.N.Y. Nov. 26, 2018) (“[D]istrict courts in this circuit routinely require that plaintiffs plead their trade secrets with sufficient specificity to inform the defendants of what they are alleged to have misappropriated.”); Keyssa, Inc. v. Essential Prods., No. 17-cv-05908-HSG, 2019 U.S. Dist. LEXIS 5735, at *5 (N.D. Cal. Jan. 11, 2019) (the language should be “sufficiently particular to place Defendant on notice of what information is at issue in th[e] case at the pleading stage”).
[7] While a pleading should put the other party on notice of what was allegedly misappropriated, the trade secret should not be disclosed, because doing so “would mean that the complainant would have to destroy the very thing for which he sought protection by making public the secret itself.” Keyssa, 2019 U.S. Dist. LEXIS 5735, at *6 (citation omitted).
[8] 18 U.S.C. § 1839(3)(A)-(B).
[9] Id. § 1839(3).
[10] Id. § 1836(b)(1).
[11] Id. (imposing “interstate or foreign commerce” requirement).
[12] Id. § 1839(3)(B).
[13] See Art & Cook, Inc. v. Haber, No. 17-cv-1634 (LDH) (CLP), 2017 U.S. Dist. LEXIS 164366, at *7-9 (E.D.N.Y. Oct. 3, 2017) (“Where, however, the contact list contains little more than publicly available information, even if it takes considerable effort to compile, it is not accorded protection under the DTSA.”).
[14] See Elsevier, 2018 U.S. Dist. LEXIS 10730, at *17 (“Ultimately, [counterclaimant’s] pleading conflates the concept of a ‘trade secret’ with ‘confidential information.’ These are not one and the same—trade secrets are a subset of confidential information.”).
[15] 18 U.S.C. § 1839(3)(A).
[16] See, e.g., Art & Cook, 2017 U.S. Dist. LEXIS 164366, at *10-11 (finding it unlikely that owner took reasonable measures after failing to obtain employee signatures on non-disclosure agreements).
[17] See, e.g., Indira, 2018 U.S. Dist. LEXIS 192728, at *23, 25 (“nowhere does [plaintiff] delineate sufficient information about the nature, value and measures taken to safeguard the [alleged trade secret] to support an inference that [it] qualifies as a trade secret”).
[18] Id. at 24 (plaintiff alleged she provided the trade secret to defendant).
[19] See Art & Cook, 2017 U.S. Dist. LEXIS 164366, at *10-11.
[20] 18 U.S.C. § 1839(3)(B).
[21] See, e.g., Elsevier, 2018 U.S. Dist. LEXIS 10730, at *10 (noting factors considered in delineating the contours of a trade secret).
[22] Id.
[23] See generally 18 U.S.C. §§ 1836, 1839 (setting forth requirements for valid misappropriation claim).
[24] See id. § 1839(5).
[25] Id. § 1839(5)(A).
[26] Id. § 1839(6)(A).
[27] Id. § 1839(5)(B).
[28] See Camick v. Holladay, Nos. 18-3065, 18-3074, 2018 U.S. App. LEXIS 35410, at *8-10 (10th Cir. Dec. 18, 2018) (“The DTSA only applies to ‘any misappropriation of a trade secret, (as defined in [the DTSA]) for which any act occurs on or after the date of the enactment of [the] Act’ on May 11, 2016.” (citing DTSA, 130 Stat. at 381-82)).
[29] See id.
[30] See 18 U.S.C. § 1839(5).
[31] Id.
[32] Id. § 1839(5)(A).
[33] Id. § 1839(5)(B).
[34] Id. § 1839(6)(B).
[35] Id.
[36] See, e.g., Blue Star Land Servs., LLC v. Coleman, No. CIV-17-931-R, 2017 U.S. Dist. LEXIS 202396, at *10 n.2 (W.D. Okla. Dec. 8, 2017) (“pleading” damages “is not required” at the motion to dismiss stage, but noting that other courts have adopted state law damages requirements for DTSA claims).
[37] 18 U.S.C. § 1836(b)(3)(D).
[38] See, e.g., Mitek Corp. v. Diedrich, No. 18 C 1453, 2018 U.S. Dist. LEXIS 179099, at *20 (N.D. Ill. Oct. 18, 2018) (dismissing defendant for lack of personal jurisdiction).
[39] See, e.g., 18 U.S.C. § 1836(b)(2)-(3).