On June 8, 2021, the Third Circuit clarified the requirements for making a trade secret misappropriation claim under the Defend Trade Secrets Act (“DTSA”) in a decision vacating the District of New Jersey’s dismissal of a trade secret misappropriation lawsuit against a former employee and his current employer. In short, the Third Circuit’s decision took a more relaxed view than the District Court, finding that a trade-secret plaintiff need not “spell out the details of its trade secret” or have direct allegations of misappropriation and harm to avoid dismissal.
The Third Circuit decision stemmed from a 2017 lawsuit by pharmaceutical company Oakwood Laboratories, LLC (“Oakwood”) against its former Vice President of Product Development, Dr. Bagavathikanun Thanoo, and Dr. Thanoo’s current employer, Aurobindo Pharma U.S.A., Inc. (“Aurobindo”). Oakwood alleged Dr. Thanoo and Aurobindo misappropriated the technology surrounding sustained release injectable drugs using microsphere systems. Oakwood had invested more than $130 million over two decades in its trade secret Microsphere Project. Oakwood and Aurobindo had entered talks about collaboration, during which Aurobindo obtained information, pursuant to a confidentiality agreement, about Oakwood’s trade secrets. Aurobindo decided not to move forward with the collaboration, but, about six months later, hired Dr. Thanoo and allegedly used his work to misappropriate Oakwood’s trade secrets, because, as Oakwood argued, Aurobindo would not have otherwise been able to develop its microsphere initiative as quickly as it did. The District Court for the District of New Jersey dismissed four successive versions of Oakwood’s complaint for failure to state a claim.
On appeal, the parties agreed that the plausibility standard should be applied to trade secret misappropriation claims, but they disagreed over whether the District Court correctly applied the standard. The Third Circuit sought to clarify the pleading standards for the existence and misappropriation of a trade secret with its ruling.
First, the District Court dismissed Oakwood’s complaints because, although Oakwood adequately pled the existence of a trade secret, it failed to identify which trade secrets were misappropriated. The Third Circuit held that trade secrets must be identified with sufficient specificity to place the defendant on notice of why a claim is being made against it, but the trade secrets do not need to be described in extreme detail: “The District Court was correct that information alleged to be a misappropriated trade secret must be identified with enough specificity to place a defendant on notice of the bases for the claim being made against it. . .But a plaintiff need not ‘spell out the details of the trade secret to avoid’ dismissal. . .Rather, the subject matter of the trade secret must be described ‘with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.’” Here, the Third Circuit found that Oakwood “plainly” identified its trade secrets and put the defendants on notice of what trade secrets they were referring to. However, the district court had erred in requiring a more precise identification of which trade secrets were misappropriated because “the only reasonable inference” would be that the trade secrets identified in the complaint were the ones claimed to be misappropriated.
Next, the District Court erred in finding that Oakwood failed to allege how the defendants misappropriated its trade secrets, in part by improperly equating “use” with replication. The District Court had mandated a heightened pleading standard, requiring direct proof how trade secrets were used in a competitor’s product development, rather than allowing the facts to come out during discovery. The Third Circuit held the factual allegations were more than sufficient because Aurobindo’s “‘use’ of Oakwood’s trade secrets can be readily understood from the circumstantial evidence: Aurobindo’s lack of experience in the highly specialized field of microsphere technology, the timing of Dr. Thanoo’s employment with Aurobindo, Dr. Thanoo’s deception in informing Oakwood about the work he would do at Aurobindo, Aurobindo’s access to Oakwood’s trade secret information, Aurobindo’s rapid success in developing four microsphere products that took Oakwood nearly 20 years to develop, and the comparatively insignificant financial investment Aurobindo put into its development.” The Third Circuit further held that trade secret misappropriation is harm in and of itself, and that the District Court erred in dismissing Oakwood’s complaints for failing to demonstrate harm.
The Third Circuit’s decision will be useful to trade-secret plaintiffs in future cases who can identify their trade secrets with “reasonable particularity,” but not with the exacting level of detail sometimes required at an early stage, and for those trade-secret plaintiffs who have circumstantial but not direct evidence of misappropriation. Whether this decision inspires other circuits to follow the Third Circuit and clarify trade secret misappropriation pleading standards under the DTSA is something we will monitor closely.