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Alleging the Existence of a Trade Secret in a Misappropriation Case

By Daniel R. Saeedi
November 01, 2018

In today's strong economy, where employee mobility is common, courts are finding their case dockets crowded with misappropriation lawsuits under the Defend Trade Secrets Act (DTSA) (18 U.S.C. §1836 et seq.) and state trade secret laws. Many of these cases have the same fact pattern: an unhappy employee decides to leave for a better job, but not before downloading from his or her work computer company information and walking out the door with it. The former employer files a lawsuit against the employee (and often the new employer) in federal court under the DTSA. The defendants then elect to file a motion to dismiss the complaint, alleging that the plaintiff did not sufficiently allege the existence of a trade secret.

In analyzing whether to grant the motion to dismiss, the court is faced with some fundamental questions: How much detail does it take to allege a trade secret under federal pleadings standards? Can the alleged trade secret be described generally in the complaint? Or must it be described in detail, so as to give the defendant notice of what exactly is at stake in the case? Courts are often inconsistent in the answers, and many decisions across the federal districts are in conflict. This article analyzes the various considerations that inform a court's viewpoint on the issue; ultimately, one of these viewpoints tends to make its way to the final written opinion. Lawyers who litigate trade secret cases should be well-aware of these considerations.

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Start with the Rules: FRCP 8

The starting place for understanding what this article calls the trade secret pleadings “detail dilemma” are the Federal Rules of Civil Procedure. Rule 8 merely requires “a short and plain statement of the claim showing the pleader is entitled to relief.” Under the pleadings standard set forth by the United States Supreme Court in Ashcroft v. Iqbal, a complaint “must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. 662, 678 (2009). Under the Iqbal standard, a mere conclusion as to a trade secret does not suffice for “sufficient factual matter”; a plaintiff cannot merely allege that it “has a trade secret” that “is valuable” and was ultimately “stolen.” But, how much more factual detail is required?

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The Language of the DTSA and Inconsistent Judicial Approaches

In order to answer this question, one must understand the DTSA's language. The DTSA defines a “trade secret” as “all forms and types” of “financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes. …” Often, a plaintiff will use these DTSA statutory buzzwords in the Complaint. For example, a plaintiff may allege that its proprietary trade secret consists of “business strategic plans, formulas and procedures regarding its secret customer pricing processes.” This sentence, arguably nonsensical, uses five different DTSA trade secret buzzwords. It is a good example of many complaints that are filed today, where little more than the DTSA statutory catchphrases are listed as “examples” of the plaintiff's trade secrets. Certainly, this is more than a bald conclusion as to the existence of a trade secret, but perhaps not much more. Is it enough to merely allege categories of information as the alleged trade secret?

For some courts, the answer is yes, and for other courts, the answer is no. And this inconsistency is often manifested within the same judicial district. Compare, McNamee v. MinXray, Inc., No. 17 C 02057, 2017 WL 6039960, at 4 (N.D. Ill. Dec. 6, 2017) (“With regard to the proprietary information at issue, courts in this District have held that trade secrets need not be disclosed in detail in a complaint.”) (internal quotations omitted); with GlobalTap LLC v. Elkay Mfg. Co., No. 13 C 632, 2015 WL 94235, at 6 (N.D. Ill. Jan. 5, 2015) (“The court cannot analyze whether a piece of information was sufficiently secret to derive economic value or whether [the plaintiff] took reasonable efforts to keep information secret without first knowing, with particularity, what information comprises the secret.”). And, to make matters more confusing, certain courts take a hybrid approach: not requiring a party to describe the actual trade secret in detail, but the party must use more than DTSA statutory catchphrases and describe the subject matter of the trade secret with particularity. See, Nelson Bros. Prof'l Real Estate LLC v. Jaussi, No. SACV170158DOCJCGX, 2017 WL 8220703, at 5 (C.D. Cal. Mar. 23, 2017) (“A party in a trade secrets case does not have to spell out the details of the trade secret, but the party does need to describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade … and to permit the defendant to ascertain at least the boundaries within which the secret lies.”) (internal citations omitted).

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The Public Policy Battle: Confidentiality vs. the Burden on Employees

The competing judicial approaches to the trade secret “detail dilemma” undoubtedly balance important public policy concerns for each side in a DTSA case. For plaintiff employers, there is a public policy in favor of protecting a business' intellectual property and not putting a burden on the employer to publicly share details about its private, closely-guarded trade secrets. After all, the essence of a trade secret is two things according to the DTSA: 1) the information derived economic value from not being “generally known”; and 2) the “owner has taken reasonable measures to keep such information secret.” 18 U.S.C. §1839(3). Courts that allow broad, general allegations as to the trade secret often invoke this principle. See, e.g., You Fit, Inc. v. Pleasanton Fitness, LLC, No. 8:12-CV-1917-JDW-EAJ, 2012 WL 12905186, at 8 (M.D. Fla. Dec. 20, 2012) (“[C]ourts are in general agreement that trade secrets need not be disclosed in detail in a complaint alleging misappropriation for the simple reason that such a requirement would result in public disclosure of the purported trade secrets.”) (Internal citations omitted).

Regarding departing employees, there is a strong public policy concern in favor of allowing employees to leave freely and pursue new employment in their chosen field. As some courts recognize, if a plaintiff is merely allowed to allege broad categories of technology or information as the particular trade secret, then former employers are given broad power to embroil employees in litigation and expensive discovery without fear of having the case dismissed early. In some states, such as California, this public policy battle is even codified into the elements of a trade secret action. See, e.g., Weco Supply Co. v. Sherwin-Williams Co., No. 1:10-CV-00171 AWI BA, 2012 WL 1910078, at 6 (E.D. Cal. May 25, 2012) (stating that a plaintiff bringing a trade secret claim must show that “the public policy in favor of the protection of the complainant's interest in maintaining the secret outweighs the interest of the employee in using his knowledge to support himself in other employment.”).

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Tying the Trade Secret to the Theft

Faced with minimal pleadings standards and the broad categories of information under the DTSA, defendants in recent years have chosen a different strategy: argue that the trade secret must be alleged specifically enough for a defendant to understand if it was the subject of an alleged theft. The case of Segerdal Corp. v. Ferruzza, 2018 WL 828062 (N.D. Ill. Feb. 10, 2018), is a prime example of this concept. In Segerdahl, the plaintiff employer filed a trade secrets complaint against a former employee, and described the trade secret in general DTSA statutory-category terms. The court dismissed the claim, and held that none of the trade secret allegations related to what the defendant actually misappropriated: “Although Segerdahl makes more definite allegations of what constitutes trade secrets elsewhere in the complaint, none of those allegations relate to the alleged misappropriation by Dante.” Id. at 3. In other words, and according to the approach in Segerdahl, a plaintiff must describe in detail what was actually taken by the defendant; mere buzzwords cannot establish this connection. The Segerdahl approach shows a valuable strategy for defendants when challenging the sufficiency of trade secret allegations.

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End with the Rules: FRCP 9 and Fraud

One final interesting nuance: Suppose the plaintiff alleges that the defendant engaged in fraudulent acts during the taking of a plaintiff's trade secrets. This can be in the form of fraudulent statements made to an employer, a peer or a customer. The DTSA does not require any showing that the defendant engage in fraudulent activity; rather, the defendant must only take a trade secret without authorization and with “improper means,” a showing that is much less than a fraudulent intent requirement. However, if a plaintiff opens the “proverbial door” in a complaint by alleging fraudulent conduct, then it must walk through Federal Rule of Civil Procedure 9(b). Under Rule 9(b), a plaintiff that alleges fraud must state “with particularity the circumstances constituting fraud or mistake.” In other words, where fraud is alleged, the wrongful taking of the trade secret must be alleged in specific detail, and one can argue that this pleadings requirement extends to all elements of a trade secret claim, including the actual trade secret itself. See, Choi v. 8th Bridge Capital, Inc., No. 217CV08958CASAFMX, 2018 WL 3469053, at 6 (C.D. Cal. July 16, 2018) (“Thus, Rule 9(b) requires a plaintiff to identify the 'who, what, when, where and how of the misconduct charged,' as well as what is false or misleading about [he purportedly fraudulent conduct, and why it is false.”) (internal citations omitted).

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The Importance of the Detail Dilemma

The above factors are what courts use to consider how to construe a plaintiff's trade secrets allegations in a misappropriation case. As attorneys play legal chess and maneuver around these pleadings requirements, they should understand the importance of the game. Pleadings put into place the parameters of the issues to be ultimately litigated at trial. While some courts allow for a plaintiff to later amend its pleadings and add new trade secrets, other courts require that the case be confined to the trade secrets alleged in the complaint. See, e.g., Combined Metals of Chicago Ltd. P'ship v. Airtek, Inc., 985 F. Supp. 827, 832 (N.D. Ill. 1997) (plaintiff would be held to the trade secrets alleged in the complaint and would “not be permitted to change or narrow them as the case progresses.”). The scope of a complaint's trade secrets allegations also dictates the parameters of written and oral discovery that will be relevant in the case. This affects legal fees, litigation posture, forensic analyses by third parties, and the ultimate duration of a case; the more broad the alleged trade secrets, the more issues there are to be probed during the course of discovery. Ultimately, attorneys should be aware of the various factors that guide a court's pleadings analysis, and position their client well in the early stages of litigation under the DTSA.

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Daniel R. Saeedi is a partner in the Chicago office of Taft Stettinius & Hollister LLP. He focuses his practice on issues relating to employment law and unfair competition and represents clients nationwide in the realm of trade secret theft, non-competition and non-solicitation agreements, and breaches of fiduciary duties. He can be reached at [email protected].

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