A recent decision by the Second Circuit reminds litigants that a party asserting a trade secret misappropriation claim under the federal Defend Trade Secrets Act (DTSA), or New York law, must detail in a pleading “the “reasonable measures” employed to maintain the secrecy of the alleged trade secret. In Turret Labs USA, Inc. v. CargoSprint, LLC, No. 21-952, Dkt. No 106-1 (2nd Cir. Mar. 9, 2022), the Second Circuit affirmed the District Court’s grant of a motion to dismiss, concluding that plaintiff Turret Labs failed to adequately allege that reasonable measures were taken because, although there was an agreement giving the plaintiff’s customer exclusive access to the alleged trade secret, this agreement (as well as all surrounding security policy documents) failed to contractually obligate the customer to maintain confidentiality of the alleged secret.
Among other statutory requirements, the DTSA requires that the purported trade secret owner establish that it “t[ook] reasonable measures to keep such information secret.” 18 U.S.C. § 1839(3)(b). As noted by the District Judge, the DTSA “does not provide further guidance on what constitutes ‘reasonable measures’ to keep the information secret.” Turret Labs USA, Inc. v. CargoSprint, LLC, No. 19-cv-793EKRML at 4 (E.D.N.Y. Feb. 12, 2021), aff’d, No. 21-952 (2nd Cir. Mar. 9, 2022). And, prior to the ruling by the Second Circuit in this case, the Second Circuit had not construed the meaning of the DTSA’s “reasonable measures” requirement. Id. In granting CargoSprint’s motion to dismiss, the District Court concluded that because the trade secret consisted of “the product’s functionality – functionality that is made apparent to all users of the [software] program,” the “reasonable measures” analysis focuses less on physical security and more on the questions of access, i.e., who is given access, under what circumstances, and under what confidentiality agreements. Id. Crucially, because every customer would “be privy to the functions that Turret calls a trade secret” the District Court observed that it was critical that Plaintiff allege that such customers were required to keep such functionality a secret. By failing to allege specific provisions of the exclusive licensing agreement imposing confidentiality obligations on the plaintiff’s customer, or any other facts requiring customers of plaintiff’s customer to agree to non-disclosure of the alleged secret, the District Court concluded that Turret Labs failed to allege “reasonable measures” sufficient to survive a motion to dismiss.
The Second Circuit affirmed this dismissal, noting that although “[t]he DTSA gives scant guidance on what constitutes ‘reasonable measures’ to keep information secret,” the reasonableness analysis for the type of alleged secret at issue in the case “will often focus on who is given access, and on the importance of confidentiality and nondisclosure agreements to maintaining secrecy.” No. 21-952, at 5. The Second Circuit found that Turret Labs’ failure to execute a contract with a nondisclosure obligation (or otherwise sufficiently allege the existence of such an obligation) was fatal to its trade secret misappropriation claim: “[W]ithout confidentiality or nondisclosure agreements in this context, it is not apparent from the [Second Amended Complaint] that any user could not simply replicate the software after using it.”. Id. at 6 (emphasis in original). Because of the nature of the alleged trade secrets, the Court further determined that any of the specifically alleged security measures in place such as servers in restricted areas and software access restricted by usernames and passwords were largely irrelevant, because all customers of plaintiff’s customer would have the ability to view (and replicate) the functionality because these customers were not bound by confidentiality agreements. Id. at 7.
This recent Second Circuit decision serves as a reminder that where trade secrets are being shared, courts will consider, in determining whether a plaintiff has met the pleading requirements of trade secret misappropriation under the DTSA, whether there are executed non-disclosure agreements or confidentiality agreements with those who receive the secrets in determining whether there are plausible allegations of reasonable efforts to maintain the alleged secret.