A court decision from the Third Circuit clarified requirements for making a trade secret misappropriation claim under the Defend Trade Secrets Act (”DTSA”).
At the pleading stage (the beginning phase of a lawsuit), the Court allowed a plaintiff to pursue its claims under a less demanding threshold of proof of the actual trade secrets and evidence of misappropriation than the lower court had required.
Trade secret plaintiffs will still need to provide the detailed factual support required to maintain a trade secret misappropriation claim, but that measure of proof can come later in the lawsuit.
While good for plaintiffs, this is not good news for trade secret defendants. This is because defendants will likely expend more legal fees and resources in discovery before moving to dismiss DTSA claims, including weak or even frivolous DTSA claims.
In 2017, Oakwood Laboratories, L.L.C. sued its former Vice President of Product Development, Dr. Thanoo. It also sued Dr. Thanoo’s new employer, Aurobindo Pharma U.S.A., Inc., and its parent and affiliated companies (collectively Defendants). Oakwood sued these Defendants for trade secret misappropriation under DTSA and related claims.
However, over the next two years, the district court dismissed Oakwood’s complaint and three other iterations for “failure to state a claim.” Dismissals, for this reason, relate to sometimes complex civil procedural issues; essentially, a plaintiff failed to provide sufficient factual support needed to establish the legal elements of a claim.
On that point, Oakwood stumbled in showing two elements needed to make its DTSA claim:
- the existence of a trade secret — information with independent economic value that the owner has taken reasonable measures to keep secret (18 U.S.C. § 1839(3)); and
- the misappropriation of that trade secret involves showing the defendant knew about the improper acquisition, use, or disclosure of the secret (§ 1839(5)).
On appeal, the Court reversed the district court’s decision. The Court found Oakwood had sufficiently alleged the identity of its trade secrets claimed to have been misappropriated. It also reversed the lower court’s decision that Oakwood failed to offer direct proof of how the competitor’s product used Oakwood’s trade secrets without permitting the discovery essential to uncovering the evidence for proper consideration of the merits.
Here is a copy of the Court of Appeals decision, Oakwood Labs. LLC v. Thanoo (3d Cir. June 8, 2021).
Trade Secret Litigation Trends:
As the Lex Machina Report confirms, DTSA litigation is not going away; during the pandemic, it made up 72.9% of trade secret suits in 2020, compared with 72.5% in 2019.
And the Oakwood case is not an anomaly. Instead, it echoes significant trends highlighted in Lex Machina’s 2021 report on the DTSA and other trade secret litigation insights. Specifically, Lex Machina identified from 2016 to 2020, that courts found in 114 cases a failure to identify a trade secret such that the claim could not go forward. And in 63 cases, courts found a failure to maintain secrecy as the reason to dispose of the trade secret claim.
Next Actions for Companies:
Even under a lower evidentiary standard like that provided for in the Oakwood opinion, trade secret plaintiffs still must support their DTSA claims even if they get past the pleading stage. Yet successful trade secret litigation begins before suits are filed. Accordingly, proactive companies should act now to shore up the company’s trade secret protections and policies. Such actions are needed if (or when) your intellectual property is misappropriated.
Use this link to contact Michigan attorney Jason Shinn if you have questions about this article or complying. Since 2001, Mr. Shinn has collaborated with companies and entrepreneurs to perform trade secret audits and implement protection plans for such intellectual property. He also litigates these disputes in federal and Michigan Courts, including recently getting a DTSA and Michigan trade secret claimed dismissed for his clients.