Last week I learned from Houston litigator Jason Sharp that a federal court in Florida recently issued an opinion concerning the new federal Defend Trade Secrets Act (DTSA). This is a big deal if you are a trade secrets litigation nerd. It’s probably kind of like how my mom felt as a teenager when a new Beatles record came out.

In M.C. Dean, Inc. v. City of Miami Beach, the federal district court dismissed a trade secrets lawsuit because the plaintiff failed to plead a plausible case that it made reasonable efforts to maintain the secrecy of the information and that the information was “misappropriated” by the defendants.[1]

This new case teaches us some important things about federal trade secrets litigation:

  1. It’s good to know people who keep up with new DTSA cases so you don’t have to.
  1. For Texas lawyers, who now have the option to file trade secrets lawsuits in state or federal court, the higher pleading standard in federal court is a factor to consider, but not that big a deal (as I will explain).
  1. No one should file a trade secrets case in federal court without using my essential checklist for properly pleading a DTSA claim.

Let’s break this down.

Lesson 1: Follow people who follow recent trade secret cases.

This one is self-evident.

Lesson 2: Federal pleading standards are a factor, but not a big factor, in deciding where to file a trade secrets lawsuit.

Lesson 2 arises from the difference in pleading standards between Texas state court and federal court. Most lawyers learned in law school that both state and federal courts allow “notice pleading,” meaning that it is sufficient to file a pleading that gives the other side “fair notice” of your claim. However, in the famous pair of cases Twombly and Iqbal, the U.S. Supreme Court held that what law school professors had been teaching all those years was wrong. It turns out that in federal court you have to plead specific facts sufficient to establish a “plausible” basis for your claims. The defendants in M.C. Dean used this principle to their advantage by arguing the plaintiff failed to plead a “plausible” trade secrets claim.

Beach
The City of Miami Beach argued the plaintiff failed to plead a plausible trade secrets claim

Texas state courts, in contrast, still allow notice pleading. Or do they? As hypothesized in this interesting post on a recent Texas Supreme Court case, Texas courts may be moving towards the higher “factual plausibility” standard of federal court. But for now it is probably safe to assume that pleading standards are higher in federal court.

Why does the difference in pleading standards matter for trade secrets cases? As I wrote in this earlier post, the Defend Trade Secrets Act is very similar to the Uniform Trade Secrets Act that most states have adopted, but it does not preempt state trade secrets law. Thus, as Sharp and I discussed in a webcast for TexasBarCLE, the primary practical effect of the DTSA is to give plaintiffs the option to file trade secrets lawsuits in federal court (as long as there is a sufficient connection to interstate or foreign commerce).

So when deciding whether to file a trade secrets claim in state or federal court, the M.C. Dean case shows that the higher pleading standard in federal court favors filing in state court, right?

Well, not so much. M.C. Dean was an unusual case in two ways. First, it was not the typical trade secrets case where an employee leaves a company and goes to work for a competitor, taking alleged trade secrets with him. Rather, it was a case where the plaintiff voluntarily provided the alleged trade secrets to another party pursuant to a contract. In the more typical case, it is easier to allege misappropriation.

Trade Secret File
Does M.C. Dean, Inc. v. City of Miami Beach show that it is better to file a trade secrets lawsuit in state court?

Second, the reason for dismissal in M.C. Dean was not that the plaintiff failed to plead sufficient facts to support the trade secrets claim. The problem was that undisputed facts—namely, the contract at issue—affirmatively negated the plaintiff’s trade secrets allegations. Specifically, the key fact that doomed the plaintiff’s trade secrets claim was that the plaintiff, a sub-contractor on a City construction project, signed a contract providing that the information at issue was the property of the City and could be used by the City without restriction. It is hard to see how pleading more facts would have saved the case from this fundamental defect.

In most cases, it’s really not that hard to plead a plausible trade secrets claim. So, if filing in federal court is otherwise a good strategy for your trade secrets case, the higher pleading standard in federal court is unlikely to change your decision.

M.C. Dean does provide a good reminder that lawyers who file trade secrets claims in federal court need to be careful to plead enough specific facts to state a plausible basis for the essential elements of the claim. If you find yourself struggling to plead facts establishing a plausible claim, that is a good sign that maybe you shouldn’t be filing the lawsuit in the first place.

Lesson 3: Use a checklist to make sure you adequately plead your federal trade secrets claim.

So, if you are filing a lawsuit in federal court under the Defend Trade Secrets Act, how can you make sure that you are alleging facts sufficient to avoid having your case dismissed? The only way to be certain is to use my special checklist, available for free here.

I’m kidding, of course (sort of). You can get the same points by reading the key provisions of the statute and making your own checklist.

But hey, like the Beatles said, “I need a job, and I want to be a paperback writer.”

_________________________________________________________________

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Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. His wife does the graphics (at least the good ones).

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] M.C. Dean, Inc. v. City of Miami Beach, 2016 WL 4179807, at *7-8 (S.D. Fla. Aug. 8, 2016).

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