The CH Trade Secrets Review, 2021 - Pleading Standards

Clark Hill PLC

A review of significant developments, cases, and verdicts throughout the United States in 2021 in trade secrets law

The outset of a case poses a special challenge to a plaintiff asserting misappropriation of trade secrets. The plaintiff has to sufficiently describe the information that is uniquely within its province and the elements that plaintiff contends render the information a trade secret – a concept that almost always requires a detailed factual inquiry to differentiate it from common knowledge in the industry. But if the descriptions are too narrow, it may fail to place at issue those trade secrets which were actually misappropriated. Further, a plaintiff out of necessity often has to plead its case based on information and belief because critical facts and evidence are in a defendant’s possession, without a means to ascertain them before discovery. As one court noted, such a plaintiff is in a catch-22.

In Oakwood Laboratories, LLC. v. Thanoo, et al. (3d Cir. 2021) 993 F.3d 892, the Third Circuit Court of Appeal tackled Oakwood’s claim for misappropriation of trade secrets against its former Vice President of Product Development, Thanoo, and his current employer, Aurobindo, and other affiliated companies. Oakwood’s complaint was predicated on the Defend Trade Secrets Act, which went into effect five years ago. Oakwood’s action did not progress past the pleading stage, despite two years and four iterations of its complaint. In federal courts, a complaint’s allegations cannot rest on conclusory allegations but rather, unlike many state courts, must contain well-pleaded factual allegations which plausibly give rise to an entitlement to relief. In Oakwood, the district court concluded after each motion to dismiss that Oakwood failed to state a claim for trade secrets misappropriation under the Act, conflating the plausibility standard with the level of proof needed at trial or in a summary judgment motion.

The Court of Appeal reversed the lower court’s dismissal of the action, concluding that the Third Amended Complaint easily met not only the pleading requirements of the Federal Rules of Civil Procedure but that of pertinent substantive law. The first point of disagreement with the District Court concerned whether Oakwood sufficiently identified its trade secrets. The lower court concluded that Oakwood had done so, but that Oakwood had failed to identify “which one or more of [its] trade secrets” were misappropriated to develop a product. The Court of Appeal found that Oakwood’s complaint sufficiently gave notice of the trade secret information at issue and that the details which the lower court mandated are common challenges plaintiffs face, “when only discovery will reveal exactly what the defendants are up to.”

Second, the Court of Appeal found the lower court erred in concluding that Oakwood did not allege how defendants misappropriated its trade secrets. The District Court had ruled that Oakwood not only failed to identify which trade secrets defendants misappropriated to develop a product, it also failed to describe the product development or explain how Oakwood’s trade secrets were the only source by which defendants could have developed its product. In doing so, the Court of Appeal found that the District Court erred in equating “use” of a trade secret with replication. The Act’s terminology and ordinary meaning of the term “use” are far broader.

Third, the lower court erred in concluding that Oakwood did not allege harm because the complaint failed to show that defendants launched any products using the trade secrets or that Oakwood had missed partnership or investment opportunities. The Court of Appeal struck down that overly strict reading of the Act, citing that the loss of secrecy from another’s acquisition of the information is itself sufficient harm. Plus, having the information afforded defendants “a jumpstart in an industry it would otherwise not have competitively joined for another decade.”

A trade secret misappropriation defendant has an interest to not be burdened with questionable or meritless litigation and opening its own proprietary information to a competitor in discovery. This case illustrates the challenges trial courts face in balancing these competing interests without putting the finger on the scale more heavily on one side or the other.

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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