A recent decision from the Fifth Circuit showcased the usefulness of the “discovery rule” for trade secret plaintiffs facing statute of limitations issues.  The court reversed the dismissal of a claim for misappropriation of trade secrets because the plaintiff could not have discovered the misappropriation using reasonable diligence within the applicable statute of limitations period.

Plaintiff United Allergy Services (“UAS”) began providing allergy testing and treatment services in Texas in 2009. Their business model that allowed primary care physicians to treat allergies directly was a major disruption to standard existing practices that required doctors to refer patients to allergists for treatment. Quest Diagnostics (“Quest”) is one of the leading laboratories that receive patient referrals.

In 2012, UAS began negotiating with Quest to provide alternative methods of allergy testing. Throughout these negotiations, UAS shared its client list with Quest. Quest, without informing UAS, shared the list with another company, Phadia.

In December 2017, UAS sued Quest alleging that Quest misappropriated its client list and conspired to force UAS out of the allergy and asthma testing market, among other charges. UAS alleges that Phadia and Quest targeted its customers to convince them to cease their relationships with UAS and otherwise attempted to spread misinformation about UAS. UAS alleged they discovered the misappropriation in May 2016, when Quest produced certain discovery in response to a subpoena in another lawsuit between UAS and Phadia.

In February 2019, the district court granted Quest’s motion to dismiss UAS’s misappropriation of trade secrets claim as time-barred. Under Texas law, a plaintiff must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. Quest’s alleged misappropriation – which occurred in 2012 – was more than five years before the suit against Quest was filed. The district court found that UAS failed to explain why they could not have discovered the misappropriation through ordinary diligence in the months following February 2012.

The Fifth Circuit disagreed. The nature of the trade secrets in this case, a client list, makes the resulting injury unlikely to be discovered. The Court explained this is in contrast to misappropriation of other proprietary information like computer codes or product designs, which may be readily discoverable once the information appears in the marketplace. The Court mused that even if UAS had exercised due diligence by inquiring with their customers, it is unlikely that they would have learned that Quest shared UAS’s proprietary billing information and business records.

While plaintiffs should be vigilant about pursuing relief if they suspect their trade secrets have been misappropriated, the discovery rule can save claims that may have otherwise been time-barred.