Fourth Time’s a Charm: The Third Circuit Reverses Dismissal of Trade Secrets Complaint and Clarifies Pleading Standard
The Third Circuit issued a precedential decision in Oakwood Laboratories LLC v. Bagavathikanun Thanoo et al. that clarified the pleading requirements for trade secrets misappropriation claims under the Defend Trade Secrets Act, 18 U.S.C. § 1836(b) (DTSA). In that decision, the Third Circuit held that the Third Amended Complaint was “so factually detailed that, on appeal, we conclude it easily meets the pleading requirements of the Federal Rules of Civil Procedure and pertinent substantive law.” Earlier, the District Court for the District of New Jersey had dismissed four of Oakwood Laboratories LLC’s (“Oakwood”) complaints on the grounds that each complaint was not specific enough to support a claim. The District Court dismissed Oakwood’s Third Amended Complaint (its most recent attempt), because it did not show precisely how defendants misappropriated Oakwood’s trade secrets, but noted that Oakwood did plead facts sufficient to identify its trade secrets and support the information’s protected status. Oakwood appealed, and the Third Circuit reversed.
Oakwood alleged that defendants Aurobindo Pharma U.S.A. and its subsidiaries misappropriated Oakwood’s trade secrets regarding microsphere technology when Aurobindo hired an Oakwood employee who specializes in this technology, Dr. Bagavathikanun Thanoo, and relied on a memorandum provided for the limited purpose of exploring a business opportunity to develop Aurobindo’s own microsphere technology.
In reversing the District Court’s dismissal of Oakwood’s Third Amended Complaint, the court explained that the complaint sufficiently identified the trade secrets at issue and made clear that the defendants were aware of the information’s protected status and had an incentive to use such information for their own gain. The court went on to say that “the District Court’s demand for further precision in the pleading is thus misplaced and ignores the challenges a trade secret plaintiff commonly faces when only discovery will reveal exactly what the defendants are up to.”
The Third Circuit first determined that the District Court erroneously required Oakwood to show that the defendants replicated or obviously incorporated the trade secret-protected material in its products. By doing so, the District Court ignored a broad range of ways one can “use” a trade secret, such as to obtain an economic benefit or competitive advantage, or to accomplish a similar exploitative purpose by assisting or accelerating research or development. The Third Circuit then analyzed whether Oakwood sufficiently alleged that the defendants “used” Oakwood’s trade secrets and concluded that it did. The Court relied on allegations in the Third Amended Complaint regarding Aurobindo’s lack of experience in developing and utilizing microsphere technology and Aurobindo’s access to Oakwood’s trade secrets by way of an Oakwood memorandum and Dr. Thanoo. The court also referenced confidentiality agreements executed by Oakwood and the defendants whereby the defendants agreed not to disclose Oakwood’s trade secret information.
The Court held that the defendants’ “use” of this trade secret information was apparent from the allegations in the Third Amended Complaint that it took Oakwood nearly 20 years and $130 million dollars to develop the microsphere technology, but took Aurobindo only a few years and a considerably smaller financial commitment. The Third Circuit criticized the District Court for requiring direct proof without permitting discovery, rather than drawing reasonable inferences based on the allegations in the complaint.
The Third Circuit also faulted the District Court for its determination that Oakwood did not sufficiently plead harm and made clear that “by statutory definition, trade secret misappropriation is harm” because the trade secret’s economic value depreciates, or is eliminated altogether, upon disclosure to a competitor that uses the information without the owner’s consent. Therefore, a plaintiff pleads cognizable harm upon adequately pleading the existence of a trade secret and its misappropriation even if the defendants have not yet launched a competing product. The Third Circuit also explained that loss of market share from Aurobindo’s rapid entry into the pharmaceutical market and Aurobindo’s considerable financial savings are additional harms sufficiently pled.
The Oakwood decision highlights the types of reasonable inferences a court should make to determine whether a plaintiff has sufficiently pled facts to support a trade secrets misappropriation claim. Although the Third Circuit declined to endorse the exacting pleading standard employed by the District Court, which required the plaintiffs to show precisely how the defendant misappropriated trade secrets, plaintiffs seeking to file misappropriation of trade secrets claims must still meet Rule 8 pleading requirements, which require sufficient facts to show, or at a minimum allow a court to infer, that a defendant used trade secrets within the meaning of the DTSA.