Further refinement of the pleading standard for trade secret misappropriation claims

Eastman Chemical Company is a manufacturer of fibers, plastics and other chemicals. In March 2008, Eastman and the defendants, subsidiaries of Indorama, entered into a licensing agreement covering some of Eastman’s PET technology. (PET is a thermoplastic polymer resin used in synthetic fibers, liquid containers for beverage manufacturing, and other engineering applications.) Under the terms of this agreement, Eastman licensed its PET technology, and transferred assets and employees, to Indorama, an EU-based manufacturer. The employees at issue allegedly had knowledge of both the licensed PET technology, and of an unlicensed melt-to-resin PET technology also owned by Eastman, “IntegRex.” The agreement authorized Indorama to make PET only in its EU facilities. Certain Eastman trade secrets, related to the composition and manufacture of PET, were also licensed, and as alleged in the complaint, “with a few exceptions,” their use was “restricted” to the EU plants. Later, Indorama set up a plant in Alabama, where its subsidiary AlphaPet operated a “melt-to-resin PET manufacturing process.”

Eastman’s Complaint

Eastman filed a complaint in the United States District Court for the District of Delaware in December 2009, against Indorama companies located in the United States, Europe, and Thailand, alleging unauthorized use of IntegRex PET manufacturing technology. The complaint alleged patent infringement, breach of contract, and trade secret misappropriation. The patent infringement claims relate to three Eastman patents that “encompass PET manufacturing technology.” The breach of contract and trade secret claims arise from Indorama’s “unauthorized disclosure and use of information covered by a license agreement between Eastman and several European Indorama entities.”

The Complaint alleged “on information and belief” that former Eastman employees disclosed trade secrets “relating to the manufacture of PET during the design, start-up and/or operation” of the AlphaPet plant in Alabama. It was not pleaded whether the allegedly infringed patents were licensed or not, or whether any of the pleaded patents cover the Eastman IntegRex technology.

These facts raise several issues related to the elements of trade secrets claims. First, proving that an employee or licensee acquired the trade secret by “improper means” may be difficult. The Uniform Trade Secrets Act refers to acquisition by one “who knows or has reason to know that the trade secret was acquired by improper means,” which it defines to include “breach of a duty to maintain secrecy.” This can be difficult to show for an employee who allegedly breach an agreement or duty of confidentiality, especially when the recipient of the trade secret was a licensee - a license can sometimes provide a complete defense.

The patent infringement claim further complicates the claim of trade secret misappropriation. Whatever the patent makes publicly known can no longer be a trade secret. If the patents that “encompass PET manufacturing technology” teach the technology transferred to the licensee or otherwise disclose the trade secrets, the claim for misappropriation may fail the “secrecy” prong.

Motion to dismiss for failure to state a claim of trade secret misappropriation

In its amended complaint, Eastman again alleged that its former employees had improperly disclosed Eastman’s “confidential, proprietary, and trade secret information” related to the manufacture of certain products in violation of a technology license agreement. AlphaPet and various other Indorama subsidiaries, named as defendants, moved to dismiss, arguing that the claim for trade secret misappropriation failed to state a claim; the complaint did not contain sufficient factual information to provide adequate notice of the plausible grounds for Eastman’s misappropriation claim under the Twombly/Iqbal standard.

In general, there is no heightened pleading standard for trade secret cases after Twombly/Iqbal; a plaintiff is not required “to plead all of the relevant facts in detail.” However, a plaintiff can’t simply point to an area of technology or refer generally to information or business methods. The goal of the pleading standard is to provide notice to defendants of the substance claims against them. In the context of claims for trade secret misappropriation, this goal must be balanced with the need to maintain secrecy. Disclosure of the actual trade secret is not required, simply because that would controvert the secrecy requirement.

Here, the defendants argued that Eastman’s claim for trade secret misappropriation failed to satisfy the pleading standard of Rule 8 in three primary ways.
First, the defendants argued that the amended complaint failed to identify which of the defendants allegedly obtained Eastman’s trade secrets, and which individual employees were involved in the allegedly illicit disclosure and use of that information.
The court rejected defendants’ proposition, based on Spear Pharm. v. Blair, that the identity of the individual alleged to have disclosed confidential information is “core information” under the Twombly analysis. Instead, it noted that, in their complaint, plaintiffs had focused on a “finite universe” of (1) individuals who were transferred from Eastman to Defendants, who also (2) worked on the IntegRex technology in connection with Eastman’s South Carolina facility, and who also (3) traveled to Alabama as part of the development of AlphaPet’s Alabama facility. It concluded that a reliance on these inferential steps to identify the allegedly responsible individuals was not grounds to dismiss the complaint for failure to state a claim.

Second, the description of the trade secrets allegedly used or disclosed was “so broad as to be meaningless,” argued the defendants.
The court found fourteen references in the complaint to Eastman’s IntegRex technology, the specific “information relating to the manufacture of PET” that was at issue in the complaint. It compared that level of specificity to the reference to “business methodologies, formulas, devices, and compilations of information” that was found to be insufficiently specific or clear in Medafor. The court cited precedent in the Third Circuit for the proposition that misappropriation claims should not be dismissed when trade secrets are identified by reference to a trade name, such as IntegRex here.

Third, defendants contended that “Eastman failed to adequately plead that any particular defendant actually used or disclosed” any trade secrets.
The complaint alleged a specific illicit pathway, involving its former employees, through which confidential information flowed, and alleged the time period and a set of relevant events (the mid-2009 start-up of the Alabama plant) that was the impetus for the alleged wrongful disclosure and use. The court found that the plain language of the complaint clearly alleged both use and disclosure of trade secret information relating to the IntegRex technology, and that it did so with “sufficient specificity in light of the other allegations in the Amended Complaint” to meet the Twombly/Iqbal standard; it was not necessary to identify by name the specific individuals who allegedly leaked the prohibited information, due to the totality of the information provided by plaintiffs.

Altogether, after considering the Uniform Trade Secrets Act and decisions from other states applying it, the Magistrate Judge found that the misappropriation claim should not be dismissed; the defendants had been given sufficient factual information to provide adequate notice of the plausible grounds for the plaintiffs’ misappropriation claim under the Twombly/Iqbal standard.

November 10, 2011: Motion to Dismiss Granted Only as to Breach of Contract Claims

The Hon. Christopher Burke entered a Report and Recommendation regarding the defendants’ motion to dismiss. The Magistrate Judge recommended that the claims of breach of implied contract be dismissed against all defendants, the breach of contract claim against one of two defendants be dismissed, but that the motion be denied as to the patent infringement and trade secret misappropriation claims as to all defendants. This recommendation was adopted by the District Court.

This suggests that pleadings for trade secret misappropriation claims need not be absolutely granular. Identifying a finite group of employee-defendants, without specifying which among the named defendants or employees had allegedly used or disclosed the secrets, was sufficient to meet Rule 8 standards. Similarly, using a trade name to refer to an alleged trade secret, and setting forth a timeline of events during which that trade secret was allegedly used or disclosed, set forth a plausible claim for trade secrets misappropriation.

To be continued: Plaintiffs filed a second, amended complaint

Plaintiffs removed the breach of contract claims but retained the patent infringement claims against two defendants and the trade secret misappropriation claims against all defendants and filed an amended complaint on December 16, 2011.