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May 20, 2014

Pleading Plausible Trade-Secret Claims under Twombly and Iqbal

Ronald T. Coleman Jr.

Pleading a claim for misappropriation of trade secrets is always a challenge. A plaintiff cannot include too much detail for risk of disclosing the trade secret itself, or at least giving competitors more information about the plaintiff's business than it otherwise would like to disclose. But a plaintiff must describe the nature of the trade secret and the circumstances of the misappropriation in enough detail to give the opposing party and the court notice of what is at issue in the dispute.

Recently, the U.S. Supreme Court's decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), imposed enhanced pleading standards for federal cases. These decisions direct trial judges to scrutinize pleadings to determine whether the allegations show not just a possibility of liability but the "plausibility of entitlement to relief."  Iqbal, 556 U.S. at 678.  Although the notice pleading requirements of Federal Rules of Civil Procedure 8 remain, plaintiffs must allege enough specific facts supporting their claims for relief in order to meet the "plausibility" standard of Twombly and Iqbal.

Courts have not hesitated to apply Twombly and Iqbal to dismiss trade-secret claims that merely recite the statutory language or make generalized allegations regarding the existence of the trade secret or misappropriation.  For example, in Putters v. Rmax Operating, LLC, 2014 WL 1466902 (N.D. Ga. Apr. 15, 2014), the Northern District of Georgia recently dismissed a counterclaim by a former employer against a departed employee because the former employer alleged merely that the employee possessed certain allegedly confidential information, but made no particularized allegations regarding whether or how the employee had used the information or disclosed it to his new employer. Citing Iqbal, the court held that Rmax must do more than allege the "sheer possibility that [Putters] acted unlawfully," and the conclusory allegation that Putters disclosed confidential information to his new employer, without more, was not sufficient.  See also American Petroleum Institute v. Technomedia International, Inc., 2010 WL 1233496 (D.D.C. Mar. 30, 2010) (dismissing trade-secret counterclaim where party did not adequately plead that the trade secrets allegedly misappropriated were not the same as trade secrets admittedly disclosed to other parties with authorization); Medafor, Inc. v. Starch Medical, Inc., 2009 WL 2163580 (D. Minn. July 16, 2009) (granting motion to dismiss trade secret claim where complaint merely described trade secrets at issue as "business methodologies, formulas, devices, and compilations of information, including suppliers and customers . . . ," which court held to be "so broad as to be meaningless").

Recent Cases Denying Motions to Dismiss

Fortunately, however, other recent trade-secret cases demonstrate ways to meet the "plausibility" standard of Twombly and Iqbal without having to prove your case in the complaint or disclose the underlying proprietary information.  In Marsteller v. ECS Federal Inc., 2013 U.S. Dist. LEXIS 126927 (E.D. Va. Sept. 5, 2013), the court denied a motion to dismiss ECS's trade-secret counterclaim.  The court held that ECS adequately described the trade secrets at issue by identifying documents relating to its ISO certification, documents showing ECS's business development pipeline, and documents reflecting templates for government infrastructure contracts. It was sufficient that ECS identified particular documents containing allegedly proprietary business information; ECS was not required to describe the proprietary details contained in those documents. The court held that ECS adequately alleged the economic value element of its trade-secret claims by explaining that disclosure would allow a competitor to "know ECS's business development and bidding plans," "target ECS's contracts upon re-competition," and access "ECS's unique format for summarizing a new contract opportunity."  ECS also alleged that it spent significant time, effort and expense in developing the information and systems reflected in the identified documents.

The Marsteller decision also contains helpful analysis regarding allegations of misappropriation.  ECS alleged that on two separate occasions Marsteller transferred proprietary documents to an external storage device, which the court found sufficient to state a claim for acquisition by improper means.  The court also found significant ECS's allegations that her new employer received ISO certification within just a few months of her beginning to work there, which the court held created a reasonable inference that Marsteller had used ECS's trade secrets for the benefit of her new employer.

Similarly, in TE Connectivity Networks Inc. v. All Systems Broadband Inc., 2013 WL 6827348 (D. Minn. Dec. 26, 2013), the court rejected the defendant's motion to dismiss a trade-secrets claim arising out of the defendant's hiring of several TE employees. The court noted that TE was understandably vague about specifically what constituted its trade secrets, but held that TE's allegations were not merely generalized or conclusory. TE specifically identified by trade name those products containing the trade secrets at issue, and described the nature of its trade secrets as "technical specifications, design parameters, performance criteria, [and] testing data" relating to those identified products. TE further alleged that the defendant did not market competing, functionally similar products until after it had hired TE's employees.  The court held that these allegations met the "plausibility" standard as to the existence of trade secrets and the element of misappropriation.  See also Events Media Network, Inc. v. The Weather Channel Interactive Inc., 2013 WL 3658823 (D.N.J. July 12, 2013) (denying motion to dismiss trade-secrets claim for misappropriation of a database compilation which defendant had previously licensed from plaintiff, holding that plaintiff had sufficient alleged economic value and efforts to maintain secrecy).

Practical Tips

From these recent cases, trade-secret practitioners can derive some practical pointers to increase the likelihood that their pleadings will survive a motion to dismiss. In identifying the trade secrets at issue, it helps to reference particular documents or other sources that contain or manifest the trade secrets.  Also, identifying by trade name the particular products containing the trade secrets can help meet the specificity requirement.

To establish the economic value element, describe how the trade secret allows the plaintiff to obtain a business advantage—e.g., obtain higher profits, provide better service, derive increased market share, etc. Conversely, describe how disclosure of the trade secrets to a competitor would allow the competitor to compete more effectively against the plaintiff —e.g., learn the plaintiff's bidding strategies, marketing strategies, or product-development plans. Evidence of the time, effort, and expense it took to develop the trade secret can also be persuasive.

Pleading misappropriation requires more than simply reciting that the defendant improperly acquired the trade secrets, or making the conclusory allegation that the defendant is using the trade secrets for its benefit.  Describe any improper or unauthorized activity by which the defendant obtained the trade secret materials, such as unauthorized downloading of company computer files to an external storage device, emailing proprietary documents to a private email account before departure, or failing to return company property containing trade-secret information. 

To make a plausible allegation of the defendant's use of the trade secrets, describe how the defendant altered its business activities, such as quickly developing functionally similar products or otherwise becoming a more effective competitor without going through the normal product development cycle or expected learning curve. Also, show how the defendant's newly competitive conduct likely was not the result of using general industry knowledge or business experience, but rather was based on information related to the plaintiff's trade secrets.  Evidence of the defendant's continuing use of the plaintiff's proprietary information after authorization has ceased, such as after expiration of a license agreement, can also help meet the "plausibility" standard.

Keywords: litigation, intellectual property, trade secrets, misappropriation claims, Twombly, Iqbal, plausibility standard

Ronald T. Coleman Jr. – May 30, 2014