A recent decision by the North Carolina Business Court raises a significant question of whether a plaintiff can effectively plead a trade secret claim without disclosing its trade secret in the complaint to avoid dismissal under N.C.R.C.P. 12(b)(6).
In AECOM Technology Corp. v. Keating, 11 CVS 9225, the North Carolina Business Court granted a motion to dismiss a claim brought under North Carolina’s Trade Secrets Protection Act, 66-152 et seq. (the “Act”). In granting the motion to dismiss, the Court found that the alleged trade secret — consisting of customer lists, customer contract information, pricing information and product information – was pled too generally to state a claim for misappropriation. The Court arrived at this conclusion relying largely upon the Court of Appeals decision in Washburn v. Yadkin Valley Bank and Trust Company, 660 S.E.2d 577 (N.C. App. 2008), and the more recently decided opinion in AKZO Nobel Coatings, Inc. v. Rogers, 2011 NCBC 41 (November 3, 2011). While the AECOM Court’s decision was certainly well grounded in this precedent, the decision seems to perpetuate a problem first created in Washburn.
In Washburn, the appellate court affirmed the trial court’s dismissal of a counterclaim brought under North Carolina’s Trade Secrets Protection Act, finding that the “sweeping and conclusory statements [in the counterclaim], without specifically identifying the trade secrets allegedly misappropriated, [were] ‘insufficient to state a claim for misappropriation’” (citing Analog Devices, Inc. 157 N.C.App. at 469-70, 579 S.E.2d 454). However, in arriving at this conclusion, the Washburn court failed to acknowledge the point that Analog Devices and VisionAIR, Inc. v. James, 167 N.C. App. 504, 606 S.E.2d 359 (2004), also relied upon by the Court, involved motions for preliminary injunctions, not motions to dismiss under Rule 12(b)(6). Indeed, the Court of Appeals in Analog Devices simply affirmed the denial of a preliminary injunction due to the plaintiff failing to meet its burden of showing a likelihood of success on the merits on its trade secret claim:
“Analog invites this Court to acknowledge the existence of trade secrets in the submitted information without bearing the burden of identifying those trade secrets. We will not read into Analog’s claims specific identification of devices worthy of trade secret protection when it is Analog’s burden to come forward with evidence of such devices.”
Similarly, the Court of Appeals in VisionAIR simply concluded:
“Because VisionAIR has failed to identify specific trade secrets allegedly misappropriated, VisionAIR has not demonstrated likely success on the merits as to its claim for misappropriation of trade secrets.”
The problem here seems to rest with a single sentence articulated by the Court of Appeals, first in Analog Devices and then again in VisionAIR:
“It is generally accepted that a plaintiff must identify a trade secret with sufficient particularity so as to enable a defendant to delineate that which he is accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur.”
This language has been adopted and restated in Washburn, and then again in AKZO and AECOM, but this time in the context of a motion to dismiss. In employing this language, but now in the context of a motion to dismiss, the question is raised whether the North Carolina courts have effectively imposed a heightened pleading standard for a trade secret claim.
The AECOM Technology decision raises some basic questions. First, the plaintiffs there pled that the defendants misappropriated customer lists which they claimed to be confidential and trade secrets. The Business Court was not persuaded and believed this general allegation insufficient for Rule 12(b)(6). Yet, North Carolina courts have found such information to be protected as trade secrets. See, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equipment, LLC, 00 CV 10358 (N.C. Business Court, May 2, 2003), aff’d 174 N.C.App. 49, 620 S.E.2d 222 (2005); Drouillard v. Keister Williams Newspaper Services, Inc., 108 N.C. App. 169, 423 S.E. 2d 324 (1992). The question then becomes, if North Carolina recognizes customer lists as trade secrets, what more was required of the plaintiff to plead a claim of trade secret misappropriation of such information? Must the plaintiff actually attach the documents and information to the complaint to have its complaint survive a motion to dismiss? Must affidavits of expert opinion be submitted to the court at the time of the filing of the Complaint? Such result would be onerous and inconsistent with pre-trial procedure in the state courts. Of course, a plaintiff can always try to add more specificity to its allegations to identify the trade secret — and this may be what the AECOM decision had in mind — but one is left to ask what level of detail is required at that early stage of the case to avoid dismissal. AECOM does not answer that question.
Second, nothing in the North Carolina trade secret statute imposes a heightened pleading requirement for a trade secret. In fact, it is curious that the Washburn case cites the Act nearly in its entirety and then, without commenting on the absence of such a requirement in the Act, quotes Analog Devices recitation of what is incumbent upon a plaintiff in identifying a trade secret. Similarly, the North Carolina rules of civil procedure impose no such heightened pleading requirement for a trade secret claim. See N.C.R.C.P. 9. Of course, as with fraud, libel or slander, the legislature could have imposed such a requirement but has chosen not to do so. Indeed, the Court’s apparent articulation of a heightened pleading standard for trade secrets runs counter to North Carolina’s notice pleading. N.C.R.C.P. 8.
Finally, have the North Carolina courts equated the likelihood of success on the merits under N.C.R.C.P. 65 to the sufficiency of pleading a claim under N.C.R.C.P. 12(b)(6)? As the courts have seemingly ignored the distinction between the two contexts in Analog Devices and VisionAIR, it would stand to reason that if a plaintiff survives a motion to dismiss, nothing else is required of it in establishing a likelihood of success in proving that it has a trade secret. Although a natural outcome of the current situation, such a result would be problematic to a defendant that wishes to challenge the validity of the claim before an injunction is entered. This certainly cannot be the intended result.
The AECOM Technology case is another in the line of authority perpetuating this dilemma. In bringing a claim under the Act, are plaintiffs to be put to the Hobson’s choice of disclosing their trade secrets in the complaint to avoid dismissal, thereby undermining their very claim and effectively destroying the value of the information, due to their disclosure, or not bringing the claim in the first place, conceding the trade secret to the misappropriator? While a plaintiff may add more detail and specificity to its pleading to avoid AECOM, the better choice may be not to require such extremes in the first place. Rather, perhaps the better course is to not require heightened pleading and instead let discovery reveal the validity or invalidity of the claim which can then be resolved at summary judgment or trial. Until this issue is resolved, plaintiffs will be well-served to pay careful attention to the detail of their pleading.
