Recent Hot Topics And Developments In Trade Secrets Law

• Published date: 07 June 2022
• Subject Matter: Corporate/Commercial Law, Intellectual Property, Corporate and Company Law, Trade Secrets
• Law Firm: Seyfarth Shaw LLP
• Author: Mr Robert Milligan

There have been some noteworthy recent decisions in trade secrets law. This blog post summarizes some of the significant decisions grouped by the hot topics below.

Sufficiency of Trade Secret Pleadings and Allegations of Misappropriation

In Oakwood Lab'ys LLC v. Thanoo, 999 F.3d 892 (3d Cir. 2021), the Third Circuit addressed the pleading requirements to assert a claim under Defend Trade Secrets Act ("DTSA"). In the case, a pharmaceutical company sued a former product development employee and his new employer in the District of New Jersey for misappropriation of trade secrets in violation of the DTSA. The district court dismissed plaintiff's complaint for failure to state a claim. Shortly after hiring the employee, plaintiff alleged that his new employer developed products that were substantially similar to and competitive with plaintiff's product using its trade secrets.

The DTSA requires a plaintiff to demonstrate (1) the existence of a trade secret, defined generally as information with independent economic value that the owner has taken reasonable measures to keep secret; (2) that the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce; and (3) the misappropriation of that trade secret, defined broadly as the knowing improper acquisition, or use or disclosure of the secret. The district court held that plaintiff "adequately pled the existence of its trade secrets" but failed to identify which one or more of those trade secrets defendants misappropriated. On appeal, plaintiff argued that the district court did not correctly apply the plausibility standard under the DTSA.

On appeal, defendants argued that the plaintiff's description of its trade secrets was inadequate because it did not state which secrets it claimed that the defendant had misappropriated. The court rejected defendants' argument as an "effort to blend together the identification-of-a-trade-secret element and the misappropriation element, when "only discovery will reveal exactly what the defendants are up to." Id. at 905 n.13. The Third Circuit held that plaintiff had described its trade secret "with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies." Id. at 906. The court concluded that plaintiff adequately identified its trade secrets by describing the product, process, and supporting documentation.

The district court also held below that plaintiff did not establish an "improper acquisition, disclosure, or use of a trade secret without consent." The district court reasoned that plaintiff needed to demonstrate that the corporate defendant copied plaintiff's project in order to satisfy the "use" requirement under the DTSA. The Third Circuit found otherwise, reasoning that the district court's interpretation of the word "use" was "inconsistent with the text of the DTSA and the broad meaning that courts have attributed to the term 'use' under state laws that address trade secret misappropriation." Id. at 908. The court held that "the 'use' of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as 'assist[ing] or accelerat[ing] research or development.'" Id.

The Third Circuit also held that plaintiff sufficiently alleged misappropriation based on circumstantial evidence. The court reasoned that indirect use of trade secrets can be inferred from the timing of a defendant employee's hire, deception in the employee's departure, the corporate defendant's lack of experience in the industry, low financial investment, and quick success. See id. at 912. Plaintiff's complaint was "sufficient to 'raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true.'" Id. Finally, the court held that the corporate defendant's misappropriation was an actionable harm, despite not launching a competing product, because plaintiff "lost the exclusive use of trade secret information, which is a real and redressable harm," and the misappropriation provides the corporate defendant "a jumpstart to an industry it would otherwise not have competitively joined for another decade." Id. at 914; see also ResMan, LLC v. Karya Prop. Mgmt., LLC, Case No. 4:19-CV-00402, 2021 U.S. Dist. LEXIS 145462 (E.D. Tex August 4, 2021)(injunction prohibiting use or disclosure of trade secrets does not break causation regarding defendant's continuing benefit from the misappropriation).

Similarly, in Five Star Gourmet Foods, Inc. v. Fresh Express, Inc., Case No. 19-cv-05611-PJH, 2020 WL 513287 (N.D. Cal. Jan. 31, 2020), the district court found that plaintiff stated a claim under the DTSA where the defendant was accused of misappropriating plaintiff's trade secrets and using them to replicate the plaintiff's salad production facility. The court found that touring the plaintiff's production facilities and gathering information under a non-disclosure agreement sufficiently alleged access to the trade secrets. Those allegations along with allegations that defendant copied the plaintiff's business operations down to using the same tool set to create its packaging was sufficient to allege misappropriation under the DTSA. Id. at *8; see also Payward, Inc. v. Runyon, Case No. 20-cv-02130-MMC, 2021 WL 242903, at *4 (N.D. Cal. Jan. 25, 2021) (misappropriation where defendant gave information to another employee who did not otherwise have access to the document).

Assessing Misappropriation on Summary Judgment

In Precision Indus. Contractors Inc. v. Jack R. Gage Refrigeration Inc., No. C19-5810 TSZ, 2021 WL 3472377 (W.D. Wash. August 6, 2021), a district court found that there was not sufficient evidence on summary judgment to establish misappropriation by a former employee who submitted competing bids for a competitor. The defendant former employee was provided access to plaintiff's confidential information during employment, including strategies on how to secure winning bids and information about plaintiff's existing and potential clients.

In the past, plaintiff had won about 75 percent of the bids it submitted for a specific client. Shortly after a client project was announced, defendant employee abruptly quit. Following this, plaintiff was only awarded one project for the client project even though it submitted five or six bids. Though there were other factors in play, plaintiff believed that part of the reason it lost bids was because defendant used plaintiff's confidential information to submit bids to the client. Plaintiff eventually moved for summary judgment on its federal and state trade secret misappropriation claims, arguing that the defendant improperly took plaintiff's confidential information, including bidding sheets, internal costs, manuals, and other techniques developed internally and exclusively for plaintiff's own use.

Despite this, the court found that while defendant may have had access to some of plaintiff's confidential information, that in itself did not demonstrate that he misappropriated the information. See id. at *4. Moreover, the court noted that it was undisputed that defendant had decades of "know-how and experience," including with submitting bids for industrial construction projects. See id. In addition, defendant testified that he had no idea what plaintiff's bids were going to be on the client project. In sum, there was no evidence that defendant misappropriated plaintiff's trade secrets or acquired them through improper means, that he disclosed the trade secrets to his new company, or that he used the trade secrets in connection with submitting bids for the client project. See id. Accordingly, summary judgment was denied as to plaintiff's claims for trade secret misappropriation.

Disclosure of Trade Secrets in Patent Applications

In Life Spine, Inc. v. Aegis Spine, Inc., 8 F.4th 531 (7th Cir. 2021), the defendant argued that the alleged trade secret'the exact dimensions of a patented spinal implant device for treating degenerative disc disease'was disclosed in a patent and marketing. The Seventh Circuit found that the patent did not disclose the measurements of the component parts, and prospective customers were only allowed to inspect the device under close supervision. See id. at...