On Equipoise, Knowledge, and Speculation: a Unified Theory of Pleading Under the Defend Trade Secrets Act -- Jurisdiction, Identification, Misappropriation, and Inevitable Disclosure

• Publication year: 2020

On Equipoise, Knowledge, and Speculation: A Unified Theory of Pleading Under the Defend Trade Secrets Act -- Jurisdiction, Identification, Misappropriation, and Inevitable Disclosure

William Lynch Schaller
Schaller Law Lectures, LLC

On Equipoise, Knowledge, and Speculation: A Unified Theory of Pleading Under the Defend Trade Secrets Act - Jurisdiction, Identification, Misappropriation, and Inevitable Disclosure

Cover Page Footnote

William Lynch Schaller is a principal with Schaller Law Lectures, LLC, Oak Brook, Illinois, where he writes and lectures on trade secrets and related matters. From 1982 until his retirement in 2016, Mr. Schaller served as an associate, partner and principal with Baker & McKenzie, LLP (now BakerMcKenzie LLP), Chicago, Illinois, where his practice focused on trade secret and related litigation. Mr. Schaller is a member of the Sedona Conference Working Group on Trade Secrets. Mr. Schaller's views expressed here are not made on behalf, and do not necessarily represent the views, of BakerMcKenzie, the Sedona Conference, or their respective members or clients.

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ON EQUIPOISE, KNOWLEDGE, AND SPECULATION: A UNIFIED THEORY OF PLEADING UNDER THE DEFEND TRADE SECRETS ACT—JURISDICTION, IDENTIFICATION, MISAPPROPRIATION, AND INEVITABLE DISCLOSURE

William Lynch Schaller^{* † ©}

"In nature's infinite book of secrecy a little I can read."
- William Shakespeare, Antony and Cleopatra, act 1, sc. 2, lines 8-9

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TABLE OF CONTENTS

I. DEFINITIONS AND THE RULE OF LENITY.................................142

II. RULE 12(B)(1) - JURISDICTION..........................................................148

III. RULE 12(B)(6) - FAILURE TO STATE A CLAIM.............................150

A. TWOMBLY, IQBAL AND EQUIPOISE.................................................................151
B. ALLEGING A TRADE SECRET..............................................................................159
C. IDENTIFICATION......................................................................................................160
D. ECONOMIC VALUE...................................................................................................168
E. REASONABLE SECRECY EFFORTS....................................................................177
F. ALLEGING MISAPPROPRIATION.......................................................................183
G. ALLEGING DISCLOSURE OR USE — AND "INEVITABILITY"...............187
H. INEVITABLE DISCLOSURE AND THE DTSA.................................................193

IV. PLEADING UNDER THE DTSA: A UNIFIED THEORY AND ITS CONSEQUENCES..................................................................199

A. PROPER PLEADING..................................................................................................199
B. CONSEQUENCES OF IMPROPER PLEADING...............................................203

V. CONCLUSION .........................................................................................206

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I think it's fair to say every business lawyer and every business client knows trade secrets are vital to business success. I think it's also fair to say every business lawyer and every business client knows trade secret law is in flux. Congress' 2016 passage of the Defend Trade Secrets Act (DTSA),¹ a largely general law creating the first federal private right of action for trade secret misappropriation, gives federal courts an opportunity to critically re-examine the field of trade secret regulation. And they'll certainly get their chance: more than 825 DTSA cases were filed in federal district courts in the two years following the DTSA's enactment.² However, few have reached the United States Courts of Appeals and even fewer have resulted in published appellate opinions.³ As our federal appeals courts are fond of reminding us, federal district court opinions are not precedential,⁴ so development of DTSA jurisprudence will likely take years, if not decades, as cases "percolate" through the Courts of Appeals on their way to the Supreme

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Court.⁵

To be sure, Congress did not write on a blank slate in fashioning the DTSA. All states except New York now have some type of trade secret statute,⁶ and judicial decisions abound both before and after these statutes' passage. Congress seems to have borrowed bits and pieces from these and other sources while adding a few specialty provisions of its own, such as the DTSA's search and seizure section,⁷ its prohibition on injunctions barring employment based on mere knowledge alone,⁸ and its whistleblower and anti-retaliation protections.⁹ Even though the DTSA and virtually all state trade secret statutes are modeled on the Uniform Trade Secrets Act (UTSA), the DTSA does not contain a "uniformity" provision commanding consistency with these state trade secret laws - perhaps because these state laws are themselves inconsistent, or perhaps because the DTSA sits in the midst of a criminal statute and hence triggers the rule of lenity requiring ambiguous criminal statutes to be read narrowly to protect the accused.¹⁰ Either way, the DTSA does not preempt state law,¹¹ so state trade secret and DTSA claims can be paired in federal court under diversity or supplemental

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jurisdiction principles. As an alternative, if plaintiffs prefer, they can proceed solely on state law theories in state court.¹²

Unfortunately, like the states, Congress has left the hard questions to the courts. Which questions will emerge first is anyone's guess, but I think the beginning is a good place to start: establishing jurisdiction and pleading claims under the DTSA. What should be the consequences of failing to show federal jurisdiction in a DTSA case? Of failing to show a trade secret exists? Of failing to identify it with specificity at the outset? Of failing to show it's been stolen? Of failing to show the theft was knowing? Of failing to show the stolen secret was disclosed or used? Of failing to show the stolen secret was knowingly disclosed or used? In short, who can be sued for what?

These issues may seem elementary, but I suspect they may prove more daunting than many expect. As I discuss in Part I, given their location in a criminal statute, the DTSA's definitions of "trade secret" and "misappropriation" may be given narrower readings than their counterparts in the UTSA.¹³ The Supreme Court has invoked the rule of lenity in other cases involving statutes sharing the same definitions for criminal and civil purposes, and the DTSA fits this description. Narrow statutory construction may also control close jurisdictional questions if the DTSA's jurisdiction grant is challenged under Rule 12(b)(1) in purely local disputes, an issue I discuss with other jurisdictional questions in Part II.¹⁴

The role of Rule 12(b)(6) in DTSA cases is the topic of Part III.¹⁵ I stress there that very few trade secret cases have reached the Courts of Appeals on Rule 12(b)(6) dismissals, so a number of assumptions about proper pleading are open to question, among them whether trade secrets should be alleged with particularity and fully disclosed in sealed appendixes accompanying DTSA complaints. I also examine the implications of the DTSA's "economic value" and "reasonable secrecy measures" requirements from a pleading standpoint. I end Part III with everyone's favorite trade secret bête noire, inevitable disclosure. The DTSA seems to expressly bar this controversial doctrine in injunction actions "brought under" the DTSA, and it may operate to bar it for state law injunction claims

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brought together with DTSA claims. But the DTSA might be read as prohibiting inevitable disclosure for all purposes - not just injunctions - if the Courts of Appeals focus on the "knowledge" requirement found in the DTSA's definition of "misappropriation," as inevitable disclosure claims arguably dispense with "knowledge" as an element. Here, too, the rule of lenity may turn out to play a prominent role.

Part IV discusses a unified theory of pleading under the DTSA and its consequences.¹⁶ The upshot there is that district courts should demand proper pleading and should mete out sanctions in appropriate cases that fall short of the mark. Part V offers some closing comments to the effect that property is not the only thing that matters.¹⁷ Employee mobility and market innovation count too, and courts should police DTSA pleadings with these competing interests in mind.

There are many other issues and sub-issues when it comes to trade secrets, of course, but all depend upon the foundational matters of establishing jurisdiction and stating a claim. The DTSA does not directly answer the questions I've posed above, so I explore each below as a matter of first principle. My thesis is that DTSA claims should initially be subject to strict scrutiny from a pleading standpoint, so as to protect both competitors and competition. I have generally organized my discussion around two representative district court DTSA decisions, Plastronics Socket Partners Ltd. v. Highrel Inc.¹⁸ and Molon Motor and Coil Corp. v. Nidec Motor Corp.,¹⁹ to illustrate how pleading should and should not work under the DTSA. My purpose is more to examine than to determine, and to that end I offer illustrative rather than exhaustive case law.²⁰ At times I quote at length from key sources to enhance reader understanding, as I think paraphrasing frequently undercuts analytic clarity. Throughout I emphasize practice and policy in the hope of encouraging business lawyers and their business clients to participate in shaping this critical law.

I. DEFINITIONS AND THE RULE OF LENITY

Too often we overlook the obvious: almost anything can be a trade secret and almost anyone can be sued for stealing it. These far-reaching implications call for care in assessing trade secret claims; competitors don't like being sued and courts don't like curbing competition. Making baseless claims, or simply overclaiming, may spell...