Motions to Dismiss in Texas Trade Secrets Litigation

I’m not big on motions to dismiss, for reasons I’ll explain later.

Still, I often handle lawsuits with trade secrets claims, and sometimes those claims are a little questionable, even on their face. So maybe I should give motions to dismiss another look.

It’s an important issue, because if you represent the defendant, you may be able to get the trade secrets claim dismissed before your client has to pay an arm and a leg fighting over production of documents and other discovery issues. Conversely, if you represent the plaintiff in a suit for misappropriation of trade secrets, you need to know how to adequately plead the  claim so you can survive a motion to dismiss.

That’s true of any kind of lawsuit, but it’s especially important in a trade secrets lawsuit. To understand why, let’s look at a cousin of a trade secrets claim: a claim for breach of a non-compete.

It’s not hard to plead a claim for breach of a non-compete. You allege, for example, that Dawn Davis signed an employment agreement with Paula Payne Windows that includes a non-compete, that Dawn quit and went to work for a competitor, and that she has breached the non-compete by bringing her customers to the new company.

Dawn’s lawyer is going to have a hard time getting that suit dismissed at the pleading stage. In federal court, Dawn could file a Rule 12(b)(6) motion to dismiss, but good luck with that. To overcome a Rule 12(b)(6) motion, all the plaintiff has to do is plead facts that are sufficient on their face. At that point the plaintiff doesn’t have to prove the facts.

It’s even easier for the plaintiff in state court in Texas, where I practice. Traditionally, there was no “motion to dismiss” in Texas procedure. The best you could do was to file “special exceptions” asking the plaintiff to plead the claim more specifically.

That has changed to some degree. Texas now has “Rule 91a” motions to dismiss and “TCPA” motions to dismiss. There was a short, glorious era when you could move to dismiss a trade secrets claim under the Texas Citizens Participation Act, but those days are gone. (See Shrinkage: TX Legislature and 5th Circuit Cut the TCPA Down to Size.)

So that leaves us with Rule 91a motions in Texas state court practice. Rule 91a is sort of the Texas equivalent of federal Rule 12(b)(6). I say “sort of” because it’s similar in some ways, different in others. Maybe I’ll cover that in a future post, but for now just Google it and you’ll probably find some decent articles.

Anyway, the point of that detour was that in both state and federal court, it’s not going to be hard for Paula Payne Windows to plead a case for breach of the non-compete. We’re not talking about whether Paula Payne ultimately wins the case, just whether it can plead enough facts to avoid getting dismissed at the outset.

Pleading problems in trade secrets cases

Adequately pleading a trade secrets claim can be more difficult. In a typical departing employee scenario, you often run into three problems.

First, you don’t always know what documents the employee took.

Second, even if you have evidence the employee took documents containing the alleged trade secrets, you may not have any direct evidence that the employee has already used the trade secrets or disclosed the trade secrets to the new employer.

Third, specifically identifying the trade secrets in your pleading may be difficult, or undesirable, or both.

Here’s an example. Suppose a company called Phazr developes cutting-edge millimeter wave (mmwave), virtualized Radio Access Network (vRAN), and Radio Frequency (RF) technology for 5G wireless communications networks. Just hypothetically.

Three of Phazr’s engineers leave the company and go to work for Mavenir, a company that competes with Phazr but does not have the capacity to develop or produce these particular technologies.

Suppose you are Phazr’s outside litigation counsel. Phazr’s general counsel calls you, freaking out. “Mavenir took our three key guys,” she says. “I’m talking about our principal wireless systems engineer, a vice president, and our principal RF engineer.”

“But did they have access to your trade secrets,” you ask.

“Absolutely,” she says. “They had access to the password-protected database and knew everything about our proprietary technology. We’ve got to get an injunction before they give Mavenir everything!”

Trouble is, Phazr doesn’t yet have any evidence that the engineers took documents containing the secret technology, nor does it have evidence that the former employees disclosed the technology to Mavenir or used it to compete with Phazr.

So you do the best you can. You plead the facts about the importance of the secret technology, the positions the employees held, their knowledge of the technology, and their access to the confidential information.

And to establish “misappropriation,” you allege that each employee “misappropriated Plaintiff’s trade secrets by taking trade secrets learned during his employment and stored on a password-protected shared database and has or will potentially use them during his employment with Mavenir to Plaintiff’s detriment.”

These were essentially the facts in the recent case Phazr, Inc. v. Ramakrishna, No. 3:19-CV-01188-X, 2019 WL 5578578, at *1-2 (N.D. Tex. Oct. 28, 2019).

Were these allegations sufficient to state a claim for misappropriation of trade secrets?

Everything I learned was wrong

If this had been a question on my first-year Civil Procedure exam in law school, it would have been easy. Sure, the pleading is not very specific about how and when the employees allegedly used the trade secrets, but the allegations are more than sufficient to give the defendant “fair notice” of the basic nature of the claim. Unless it’s a claim for fraud, which must be pled with “particularity,” that’s all the Federal Rules of Civil Procedure require.

That’s the answer I would have scribbled in my blue book. And I knew a guy like Prof. Mike Tigar wasn’t big on nit-picky pleading standards. And if you had asked me the same question in my second-year Texas Civil Procedure class, it would have been even more of a no-brainer.

That’s because the Texas pleading standard was “fair notice” on steroids. If the pleading isn’t specific enough, file some special exceptions. Or serve some contention interrogatories and take a deposition. This ain’t federal court. I can just imagine Prof. Jack Ratliff saying this in his Texas twang.

But that was a long time ago. Before the dark times. Before Twombly and Iqbal.

Turns out that “fair notice” stuff was all wrong. After I graduated law school, the U.S. Supreme Court decided a pair of cases affectionately known as Twiqbal, holding that a plaintiff has to plead enough specific facts to state a claim for relief that is “plausible” on its face. And plausible means more than merely “probable.” Fair notice isn’t enough.

Technically that’s just for federal court. Texas is still Texas. But the Texas Rules of Civil Procedure are becoming more “federalized” all the time. See Federal-Style Motions to Dismiss May Come to Texas.

Mind you, the “plausible” standard is still a fairly low bar, and it leaves a lot of room for interpretation. But you know if the defendant’s lawyers can make a plausible case that the plaintiff’s allegations are implausible, they’re likely to file a motion to dismiss, even if the chance of success is low.

Why BigLaw likes motions to dismiss

Motions to dismiss are especially popular in the BigLaw world. Big law firms often defend big lawsuits filed in federal court. And a Rule 12(b)(6) motion to dismiss is the perfect assignment for a BigLaw associate. You study the petition, research the law that applies, write a nice legal research memo, and then draft the motion. The partner revises the motion, and then you file it. The plaintiff files a response, you file a reply, and if you’re lucky you even get a hearing with the judge. It’s good for at least 20 billable hours.

Chances are, you will lose the motion, but that’s ok. In addition to the billable hours, this approach suits the standard BigLaw defense playbook: delay. Stop the plaintiff’s momentum. Drive the cost of the litigation up for the plaintiff. Plus, you want to try to put off the time and expense of discovery to your client as long as possible.

Besides the billable hours, motions to dismiss are often important in the lawsuits big law firms like to defend, like securities fraud class actions against big public companies. The pleading standard is even higher for such cases, especially in the Fifth Circuit, so beating a motion to dismiss is a huge win for the plaintiff. There’s a decent chance the case will then settle because of the cost of discovery to the defendant. So the motion to dismiss is often the key event in the lawsuit.

In my litigation practice, not so much. In a typical case I’m representing a smaller business, a startup, an entrepreneur, or an individual executive or salesperson. The damages are more often in the low to mid six figures, not the millions. So like a lot of small-firm lawyers, I’m not looking to delay things and drive up the cost. I usually want to get right to the merits and either settle or duke it out in court.

So like I said, I’m not big on motions to dismiss.

But two developments may change my mind. First, I see increasing use of contrived trade secrets claims to try to impose a “de facto” non-compete on departing employees. I touched on this issue in When Is a Customer List a Trade Secret?

Second, I’m seeing cases like Phazr that can be cited in support of a motion to dismiss.

The Phazr Case

The complaint in Phazr stated a pretty plausible case that the three employees had access to the company’s confidential technology. But the pleading fell short because it did not state enough facts to make a plausible case for the misappropriation element of the claim. Phazr, 2019 WL 5578578 at *4. There were three reasons for this.

First, while the complaint said the right words–“misappropriated and used or disclosed”–this was insufficient, because the “formulaic recitation of the elements of a cause of action will not do.” Id.

Second, the the complaint only speculated that the three employees misappropriated trade secrets. While the complaint alleged the employees took trade secrets stored on a password-protected database, it “fail[ed] to identify what trade secrets the individual defendants took from the database.”

Even aside from that, the plaintiff did not allege facts establishing that the defendants disclosed or used the alleged trade secrets:

Even if Phazr had identified the trade secrets the individual defendants took from its database (which it did not), it still fails to adequately allege that the individual defendants ever disclosed the trade secrets to Mavenir or used them at Mavenir. Indeed, Phazr has failed to show that Mavenir ever acquired the trade secrets from the individual defendants. In short, Phazr at best pleads possibility rather than plausibility.

The court added that Mavenir’s mere employment of three former Phazr employees did not establish that Mavenir acquired and used Phazr’s trade secrets. Id. This was obviously a nod to my post The “Inevitable Disclosure” Doctrine in Texas Trade Secrets Litigation.

Third, the allegation that Mavenir lacked the capacity to develop competing technologies before it hired the three employees did not establish “actual causation,” i.e. that Mavenir gained the capacity to develop the technologies by hiring the employees. Id. at *5.

The court concluded that Phazr had failed to adequately alleged misappropriation of trade secrets and therefore failed to state a claim. Id.

This conclusion was consistent with precedent, the court said. The court acknowledged that plaintiffs have survived motions to dismiss by “identifying specific trade secrets that defendants used to assist competitors in stealing clients.” Id. (citing BRG Ins. Sols., LLC v. O’Connell, No. 3:16-CV-2448, 2017 WL 7513649, at *8 (N.D. Tex. July 18, 2017)).

In another case, the plaintiff avoided dismissal by alleging that employees emailed themselves confidential data and that, when they joined a competitor, the competitor acquired the data and used it to bid against the first employer. Id. (citing Clean Energy v. Trillium Transp. Fuels, LLC, No. CV H-19-244, 2019 WL 1522521, at *3 (S.D. Tex. Mar. 22, 2019)).

But this was not such a case. When the complaint lacks factual content showing that a defendant took or participated in using specific information, dismissal of a trade secrets claim is appropriate. Id. (citing Red Ball Tech. Gas Servs., LLC v. Precise Standards & Sols., Inc., No. 4:17-CV- 2090, 2018 WL 276467, at *4–5 (S.D. Tex. Jan. 3, 2018)).

In short, “Phazr fail[ed] to allege particular acts of acquisition, disclosure, or use of its trade secrets that would constitute actual—and not merely possible—misappropriation.” Id. See also DISA Global Solutions, Inc. v. ASAP Drug Solutions, Inc., No. 4:18-CV-2849, 2019 WL 13030151, at *4 (S.D. Tex. Sept. 27, 2019) (“the Email fails to plausibly show that ASAP or Gilbert is in possession of or has used DISA’s confidential or trade secrets information . . . such that DISA has been harmed in some tangible manner. . . . And while Plaintiff has pleaded facts suggesting that Cavazos may be in possession of the Playbook and related DISA materials, Plaintiff’s First Amended Complaint fails to allege facts showing that Cavazos shared the Playbook or related DISA materials with ASAP or used them while at ASAP.”)

*Update: In the words of Leslie Knope, the court gave Phazr “one chance to make a third impression,” but Phazr’s Second Amended Petition still failed to allege plausible facts showing that the defendants actually used Phazr’s trade secrets. 2020 WL 5526554, at *4 (N.D. Tex. Sept. 14, 2020). Phazr failed to allege how defendants’ knowledge was incorporated into Mavenir’s 5G products. Id.

But if you represent the defendant in a trade secrets case, don’t get too excited about Phazr. Every case turns on the specific facts. The plaintiff only needs enough facts to plead a plausible case that the trade secrets were used or disclosed. See, e.g., Computer Sciences Corp. v. Tata Consultancy Servs., Ltd., No. 3:19-cv-970-X(BH), 2020 WL 2487057, at *6 (N.D. Tex. Feb. 7, 2020) (denying motion to dismiss where plaintiff alleged facts sufficient to plausibly allege misappropriation by unauthorized disclosure and use to develop a competing software platform).

The philosophical divide

Maybe next time I feel like a trade secrets claim against my client is especially weak, I’ll file a motion to dismiss and cite Phazr and the other cases it cites.

But the response I’ll get from the plaintiff’s lawyer is obvious: we don’t yet have specific evidence of how the defendants used or disclosed our trade secrets because they have hidden that information from us. We need discovery to find that out.

It’s at least a reasonable argument, and it points to the fundamental philosophical divide over pleading standards and motions to dismiss. One side thinks that you should not have the right to file a lawsuit and open the floodgates of discovery unless you already have evidence to support your allegations. The other side thinks you should only need a reasonable basis for pleading the claims, and the purpose of discovery is to allow you to obtain evidence to support the claims.

There’s enough wiggle room in the pleading standards to allow judges of either school of thought to decide whether they think a particular trade secrets claim is strong enough to proceed. There’s also enough room for interpretation to allow judges to block trade secrets claims they think are contrived and without merit. And maybe that’s how it should be.

For litigators like me, the bottom line is that cases like Phazr identify some common pitfalls to try to avoid when drafting the complaint (or petition), and conversely, opportunities to move to dismiss lawsuits that fall short.

*2nd Update: Broad allegations of trade secret status may not be sufficient to withstand a motion to dismiss, especially if the plaintiff itself alleges disclosure to third parties. In Weinfuse, LLC v. Infuseflow, LLC, No. 3:20-CV-1050-L, 2021 WL 1165132, at *3 (N.D. Tex. March 26, 2021), the court granted a motion to dismiss the plaintiff’s claim that its software for infusion center management was a trade secret. The court said the plaintiff’s description of the software’s features as “far too broad to qualify as trade secrets,” where the plaintiff failed “to point to specificities that convey the unique capabilities of the Software,” and the plaintiff alleged that it pitched the software to potential customers, without alleging any protective measures. Id. at *4. 

_______________________________

Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.