Pleading and injunction standards are beginning to take shape in the Third Circuit courts
The case law pursuant to the 2016 enactment of the Defend Trade Secrets Act (DTSA) is developing in many Circuits across the country. My practice is particularly in the Third Circuit and here in the Western District of Pennsylvania District Court approximately 20 DTSA cases have been filed since the beginning of 2021. The law in the Third Circuit is beginning to take shape and there appear to be two principal Circuit cases, Oakwood and Mallet, at this time, which have begun to set the parameters for both pleading a DTSA claim and for seeking an injunction pursuant to a DTSA claim. The two principal rulings take somewhat different approaches, but one is clearly applicable to pleading standards and the other is applicable to the burden for seeking a preliminary injunction via the DTSA or for example, a state law like PUTSA. Both opinions, however, focus on what is perhaps the trickiest aspect of bringing a trade secret case, and that is the degree of specificity with which a plaintiff must disclose the actual trade secrets.
Trade secret law has always had a tension between the need to bring a claim or suit to protect one’s trade secrets, but at the same time dealing with the plaintiff’s oft-stated desire to keep the alleged secrets - indeed secret. Courts are charged, therefore, with determining whether or not any shortcoming or failure to be specific in disclosing a trade secret is a function merely of that tension or is highly suggestive of, or proof of, the fact that there are actually no protectable trade secrets which are actionable by the plaintiff. Courts are beginning to wrestle with this tension across the Circuits, and I will report briefly to you now on the status of the law in our Third Circuit (Pa, NJ, Del, Virgin Islands.)
On November 23, 2020, in the United States District Court for the Western District Pennsylvania, the Hon. Cathy Bissoon entered an order granting a preliminary injunction against the defendant. Mallet v. Lacayo trial court case at: Pacer Case 2:19-cv-01409-CB, Document 109, Filed 11/23/20. The Court then allowed the parties to submit a proposed injunction order along with a proposal regarding appropriate security for the injunction. The Court issued findings of fact and conclusions of law and a Court order, all of which seemed to describe, at least on their face, in infinite detail, the claimed trade secrets that were the subject of the action by the plaintiff under the DTSA. The Court did promptly, upon an application for emergency relief, deny a motion for Temporary Restraining Order, grant limited discovery on injunction issues and entering an order that governed the preliminary injunction proceedings. It allowed the parties sufficient time to get prepared and to complete some basic discovery and the Court then presided over a preliminary injunction hearing where it took extensive testimony, admitted many exhibits and considered thousands of pages of evidence. The trial Court determined that plaintiff Mallet was indeed entitled to injunctive relief on most of its claims.
Mallet’s principal claims were under the DTSA/PUTSA but there were other concurrent claims for tortious interference and various business torts. As is required for a trade secret injunction, the trial Court found that 1) plaintiff was likely to succeed on the merits of the relevant claims; 2) that plaintiff was indeed the owner of protectable trade secrets; 3) that the plaintiff had taken reasonable precautions to keep the trade secrets secret; 4) that there was indeed a misappropriation of trade secrets by the defendant and that therefore; 5) there was sufficient evidence to conclude that there was both actual and threatened misappropriation which could irreparably harm the plaintiff. As required, the trial Court weighed the balance of harms to the parties and to the public interest and ultimately the Court issued a detailed injunctive order that enjoined the defendants from a number of specific activities relating to their alleged use of the trade secrets. The trial Court found that the claim for trade secrets was sufficiently specific and the Court indeed listed numerous categories of information which the Court believed constituted actionable trade secret information. Defendant appealed.
On appeal, The United States Court of Appeals for the 3rd Circuit vacated the preliminary injunction entered by the trial Court and remanded the case for further proceedings. Mallet and Co. Inc. v. Ada Lacayo at Civil Action No 19 – 1409. 16 F. 4th at 381. Principally, the Circuit Court held that although the trial Court had listed numerous categories of information which [could] contain protectable trade secret materials, the categories were too general and broad and not indeed specific enough to allow the District Court (or Circuit Court) to opine on whether the injunction was permissible. “The injunction order’s statement of protected material is better characterized as a list of general categories of business and technical information, a list that could be used to describe documents found in any number of corporations.” Opinion at page 34. The Circuit Court cited to its own prior opinion in Oakwood Laboratories LLC v. Thanoo, 999. F.3rd 892 (2021) wherein the 3rd Circuit Court overturned a trial Court ruling dismissing a DTSA claim for lack of specificity. The Circuit Court held here in the Mallet appeal that district Courts must engage with the specific facts of the case and consider the degree of specificity necessary, in light of the particular industry–based context and stage of litigation – whether that be a motion to dismiss, a discovery dispute, a motion to preliminarily enjoin a defendant from competing with the trade secret plaintiff, or a summary judgment motion. Id. Mallet. Ultimately the Mallet Court concludes “that the approach taken in one dispute may have been perfectly appropriate in that case, but may be inappropriate in another. In other words, the proper approach is clearly fact dependent.” Id. Mallet.
The Circuit Court remanded the case back to the district Court for further proceedings consistent with the opinion. In doing so it noted that it was not deciding that there were indeed no trade secrets to be protected and claimed. In fact, they directed that the district Court could issue new findings of fact and conclusions of law that dealt with the issue of specificity at a more detailed level. This was consistent with their opinion that every case is different, that all are fact dependent, but that trade secrets must be specifically enumerated especially if they are to be the basis of an injunction. One particular take away from this case is that the Circuit Court was impliedly critical of the plaintiff in taking an “all in approach” and perhaps over-pleading or over-claiming its trade secret claim. This is a classic mistake that has occurred in many famous trade secret cases, where Courts have been critical of plaintiffs who merely say “everything that we do, and all of our confidential information is a trade secret and all of our processes are governed by trade secret protections.” The better practice for a plaintiff is to be strategic and specific while considering the tension between sufficient proof and the need to keep trade secrets secret.
It appears from the docket as of 4-23-23, that the Motion for Injunction by Mallet has not been renewed and parties appear to be working through merits phase fact and expert witness discovery.
In what has become something of a companion case to Mallet, the earlier Oakwood case from the Third Circuit appears at first blush to take an opposite approach, but is distinguishable on the grounds that in Oakwood the issue was whether or not the initial pleading was sufficiently specific in pleading the trade secret claim to survive a Rule 12 Motion to Dismiss the claims. Therefore, the distinction is between the pleading of a DTSA claim in light of Twombly and Iqbal, versus the seeking of an injunction for trade secret misappropriation, as we saw in Mallet. In Oakwood, we have what would have typically been referred to as an “information submission” trade secret case. Naturally, the defendant with whom the alleged trade secret information was shared rejected the proposal, hired an employee from the plaintiff, and began producing a competing product – a relatively classic trade secret scenario.
Oakwood sued former employee Thanoo and his new employer and alleged co-conspirator Aurobindo, for trade secret misappropriation under the DTSA. Plaintiff’s initial complaint was dismissed, by the District Court of New Jersey for lack of specificity in pleading the trade secrets and not only was dismissed one time, but four times. Each time plaintiff attempted to add more and more specificity to the amended complaints, but the district Court continued to hold the pleadings to be insufficient and dismissed each one. The Third Circuit disagreed. The appellate Court vacated the district Court’s dismissal and remanded the case for further proceedings.
The Third Circuit stated quite clearly that “we endeavor to clarify the requirements for pleading a trade secret misappropriation claim under the Defend Trade Secrets Act, 18 U. S. C. Section 1836 et seq. (DTSA). Id. Oakwood. The Circuit Court held that with regard to the complaint, and considering the plausibility standard of the Twombly and Iqbal precedents, “the subject matter of the trade secret must be described with sufficient particularity to be separated from matters of general knowledge in the trade, or of special knowledge of those persons who are skilled in the trade (POSITA), and to permit the defendant to ascertain at least the boundaries within which the secret lies. Beyond those outer boundaries, however, deciding whether a plaintiff has sufficiently disclosed its trade secrets is a fact-specific question to be decided on a case-by-case basis.” Id. Oakwood
The Circuit Court focused on the district Court’s dismissal on the grounds that plaintiff had failed to specifically allege the identity of the trade secrets that were misappropriated. Acknowledging that there are three ways to establish misappropriation under the DTSA: improper acquisition, disclosure, or use of a trade secret without consent, the Court found that the district Court had essentially excluded the broad category under the DTSA of “use” of a trade secret. The Circuit Court found that indeed there was “use” and that it had been pled with sufficient specificity. The Court also reiterated that a defendant cannot escape discovery in an action if the plaintiff’s allegations sufficiently indicate the plausibility of trade secret misappropriation. In conducting its case-by-case analysis, the Circuit Court herein found that the pleadings were sufficient. Oakwood’s claims were returned to the District Court on remand for further action pursuant to the Circuit Court’s opinion. Here, there appears to be a take away that the appellate Court clearly focused on the “bad acts” of the defendants which has been historically true in many trade secret cases. The presence of bad acts by the accused misappropriator will generally tip the scales in favor of finding that the case should proceed beyond pleadings and into fact-finding and discovery. Id. Oakwood
District Court Application of Oakwood and Mallet
Since the publication of the Oakwood and Mallet cases, there have been several District Court references to these precedential cases. There have been decisions both in favor of and against the granting of motions to dismiss a plaintiff’s trade secret complaint for lack of specificity or “failure to identify trade secrets”. In IQVIA, Inc. v. Erica Breskin and Slipstream IT, LLC, 2023 WL 2588450 in the USDC for the EDPA, decided on March 20, 2023, the Court granted the former Iqvia employee Defendant Breskin’s (and her new employer Slipstream’s) motion to dismiss the trade secret claims (without prejudice to amend) for failure to identify the alleged trade secrets. The Court, in relying on both the Oakwood and Mallet the cases, held in relevant part as follows:
“In Counts I and II, IQVIA brings claims for misappropriation of trade secrets under the Federal Defend Trade Secrets Act (the “DTSA”), 18 U.S.C. § 1836, et seq., and the Pennsylvania Uniform Trade Secrets Act (the “PUTSA”), 12 PA. CONS. STAT. § 5301, et seq., against both Defendants. “The DTSA and the PUTSA are substantially similar” and contain “almost identical” definitions of the term “trade secret.” Mallet & Co. Inc. v. Lacayo, 16 F.4th 364, 381 n.19 (3d Cir. 2021). Accordingly, the Court will apply the same analysis to IQVIA's claims under both laws. See id. (“Thus, although our discussion focuses on the DTSA, we conclude that the same analysis applies to [plaintiff's] claims under the PUTSA and the same outcome results.”). Because IQVIA has failed to sufficiently identify the information it claims as trade secrets, the Court cannot assess if a trade secret exists, and these claims will be dismissed with leave to amend.
To bring a claim for misappropriation of trade secrets under the DTSA, a plaintiff must show “(1) the existence of a trade secret ... (2) that ‘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[.]” Oakwood Labs., 999 F.3d at 905 (second alteration in original) (citations omitted). Slipstream challenges IQVIA's claims under the first and third elements, arguing IQVIA did not sufficiently identify the alleged trade secrets nor take reasonable measures to protect those trade secrets, and has not plausibly pled misappropriation by Slipstream. Def. Slipstream's Br. Supp. Mot. Dismiss 5-6, ECF No. 27-2.
Under the DTSA, a trade secret is “defined generally as information with independent economic value that the owner has taken reasonable measures to keep secret[.]” Oakwood Labs., 999 F.3d at 905 (citing 18 U.S.C. § 1839(3)). As a threshold matter, the plaintiff “must sufficiently identify the information it claims as a trade secret and allege facts supporting the assertion that the information is indeed protectable as such.” Id. (citing 18 U.S.C. §§ 1836(b), 1839(3)). Evaluating the existence of a trade secret “is a fact-specific question to be decided on a case-by-case basis.” Id. at 906 (internal quotation marks and citation omitted). The Court must consider the facts of IQVIA's claim, as well as “the degree of specificity necessary in light of the particular industry-based context and the stage of litigation[.]” Mallet, 16 F.4th at 382 n.22. At the motion to dismiss stage:
“information alleged to be a misappropriated trade secret must be identified with enough specificity to place a defendant on notice of the bases for the claim being made against it. But a plaintiff need not spell out the details of the trade secret to avoid dismissal. Rather, the subject matter of the trade secret must be described 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.”
Oakwood Labs., 999 F.3d at 906 (internal quotation marks and citations omitted). Further precision is unnecessary because “only discovery will reveal exactly what the defendants are up to.” Id. at 907.
(IQVIA Cont.) Two groups of documents are at issue herein, and neither is described with enough specificity to survive the motion to dismiss. First, prior to her final day of employment with IQVIA, Breskin downloaded nearly 10,000 files to a two-terabyte hard drive, emailed an unspecified number of files to her personal email account, and downloaded an additional, unspecified number of files to a second hard drive. Compl. ¶¶ 89, 95, 105, ECF No. 1. Though the Complaint describes the different types of confidential and proprietary information found on the hard drives, the descriptions do not distinguish between information claimed to be trade secrets and information simply claimed to be confidential. Id. ¶¶ 95, 105. The Court acknowledges the difficulty in identifying the alleged trade secrets given the volume of documents at issue, but IQVIA must still distinguish between these two groups of information. See, e.g., Mallett, 16 F.4th at 382 (“While some information falling within those categories may very well include trade secrets, there is a fair probability that many of the categories – and perhaps all of them – also include information that does not qualify for trade secret protection.”). In addition to this first group of documents, Breskin later accessed nine documents through Smartsheet: “three items which included client-specific information that IQVIA used on client projects and six items that were developed by IQVIA and used across its SDA [Solutions Delivery and Assurance] business on various projects.” Compl. ¶ 78, ECF No. 1. The Court cannot assess if a trade secret exists based on these threadbare descriptions. Accordingly, Slipstream's motion to dismiss IQVIA's misappropriation claims will be granted based on the Complaint's failure to identify the alleged trade secrets.”
The law in the Third Circuit relating to the DTSA is beginning to take shape. There will likely be additional cases on the issue of the degree to which trade secrets need to be identified in a complaint and the degree to which the plaintiff must be able to allege misappropriation with specificity prior to discovery. At this stage, the courts appear to be establishing a “case-by-case” basis for review of these issues in light of Rule 12 motions to dismiss DTSA complaints. Please feel free to contact the author Henry M. Sneath at Houston Harbaugh https://hh-law.com/professionals/henry-sneath-houston-harbaugh-business-litigation-ip/ for more information on the DTSA.
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Co-Chair of Houston Harbaugh’s Litigation Practice, and Chair of its Intellectual Property Practice, Henry Sneath is a trial attorney, mediator, arbitrator and Federal Court Approved Mediation Neutral and Special Master with extensive federal and state court trial experience in cases involving commercial disputes, breach of contract litigation, intellectual property matters, patent, trademark and copyright infringement, trade secret misappropriation, DTSA claims, cyber security and data breach prevention, mitigation and litigation, probate trusts and estates litigation, construction claims, eminent domain, professional negligence lawsuits, pharmaceutical, products liability and catastrophic injury litigation, insurance coverage, and insurance bad faith claims. He is currently serving as both lead trial counsel and local co-trial counsel in complex business and breach of contract litigation, patent infringement, trademark infringement and Lanham Act claims, products liability and catastrophic injury matters, and in matters related to cybersecurity, probate trusts and estates, employment, trade secrets, federal Defend Trade Secrets Act (DTSA) and restrictive covenant claims. Pittsburgh, Pennsylvania Business Litigation and Intellectual Property Lawyer. DTSALaw® PSMNLaw®