Series: Defend Trade Secrets Act | Pleading A Claim Under the DTSA

by Fish & Richardson
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Courts have had over a year to address the pleading requirements under the federal Defend Trade Secrets Act (“DTSA”), after it took effect in May 2016.  The general pleading standard remains the plausibility test under the Supreme Court’s Twombly/Iqbal decisions.  The specific pleading requirements come from the scope and definitions of the DTSA and have been tested over the past fifteen months.  In short, the plaintiff needs to allege “(1) that the plaintiff owned a trade secret; (2) that the defendant acquired, disclosed, or used that trade secret through improper means; and (3) that the defendant’’ actions harmed the plaintiff.”  E.D.C. Techs., Inc. v. Siedel, No. 16-CV-03316-SI, 2016 WL 4549132 at *7 (N.D. Cal. 2016).

Identification of trade secret:

The DTSA defines trade secrets broadly:  “All forms and types of financial, business, scientific, technical, economic, or engineering information,” “whether tangible or intangible,” and “whether or how stored.”  18 U.S.C. § 1839(3)(A)(B).

One issue is how much detail to plead to support the existence of a trade secret without risking to disclose the secret, particularly if the outcome of a motion to seal is uncertain.  The DTSA does not contain any requirement for identifying the trade secret with any particularity, whether at the pleading stage or during discovery.  A lot of courts accept a fairly general description of trade secrets under the DTSA in public pleadings.

At least one court found the identification sufficient because it permitted the defendant to prepare a defense and enabled the court to craft limits on discovery.  See Space Data Corp. v. X, No. 16-CV-03260-BLF, 2017 WL 3007078, at *3 (N.D. Cal. July 14, 2017).  This language echoes the case law that interpreted the “reasonable particularity” requirement for the identification of trade secrets under California Civil Code § 2019.210.  Although the requirement stems from the discovery provisions of the California Uniform Trade Secret Act (“CUTSA”), which is state law, it was adopted by a large enough number of federal courts when dealing with CUTSA claims.  There do not appear to be any publicly available decisions specifically on the interplay between § 2019.210 and pleading requirements under the DTSA.

The Complaint must also allege that the trade secret owner “has taken reasonable measures to keep such information secret,” and that the “information derives independent economic value, actual or potential, from not being generally known” or “ascertainable through proper means.”  For example, a trade secret claim based on misappropriation of a customer list may be dismissed where the plaintiff argues that the “full” list of customers is kept secret but admits that some of the customer relationships are publicized.  Veronica Foods Co. v. Ecklin, No. 16-CV-07223-JCS, 2017 WL 2806706, at *14 (N.D. Cal. June 29, 2017).  In this situation, the scope of the alleged trade secret may need to be tailored to reflect the information that has been maintained as confidential.

Relation to interstate or foreign commerce:

DTSA imposes an additional requirement—the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  18 U.S.C. § 1836(b)(1).  This requirement needs to be remembered as a matter of jurisdiction but does not appear to present any difficulty in pleading.

Misappropriation:

DTSA provides for three theories of liability for misappropriation: improper acquisition, disclosure, or use.  18 U.S.C. § 1839(5).  Courts have also treated these theories as alternative.  “Nothing suggests that the DTSA forecloses a use-based theory simply because the trade secret being used was misappropriated before the DTSA’s enactment. Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-CV-02177-SI, 2017 WL 1436044, at *4 (N.D. Cal. Apr. 24, 2017).

Timing of misappropriation claim and applicability of the DTSA:

The above issue of what constituted the specific instance of misappropriation—acquisition, disclosure, or use—often comes up in connection with whether the conduct falls under the DTSA.  The DTSA was enacted on May 11, 2016, and covers only acts occurring “on or after the date of the enactment of this Act.”

Under the DTSA, “a continuing misappropriation constitutes a single claim of misappropriation.”  18 U.S.C. § 1836(d).  In addition, Congress omitted from DTSA the following language from Section 11 of the Uniform Trade Secret Act: “With respect to a continuing misappropriation that began prior to the effective date, the [Act] also does not apply to the continuing misappropriation that occurs after the effective date.”  Adams Arms, LLC v. Unified Weapon Sys., Inc., 16-1503, 2016 WL 5391394, at *6 (M.D. Fla. Sept. 27, 2016). Therefore the applicability of the DTSA will depend on when the misappropriation began.

Importantly, the acquisition and disclosure or use of the same trade secret may provide separate bases for a trade secret claim.  For example, a misappropriation claim based on the acquisition of a trade secret that occurred before the DTSA effective date will not be viable.  But a claim based on the use or disclosure of the same secret that occurred after the effective date, even though the acquisition may have occurred before, should be viable.

It is also important to remember that a trade secret, by definition, may be disclosed only once.  At least one court dismissed a plaintiff’s attempt to allege that the same trade secret was disclosed once before the effective date of the DTSA and “disclosed again” after the effective date: “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.”  Avago Techs. U.S. Inc. v. Nanoprecision Prod., Inc., No. 16-CV-03737-JCS, 2017 WL 412524, at *9 (N.D. Cal. Jan. 31, 2017).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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