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Requirements for pleading trade secrets theft set out

The owners of a dance studio in Clemmons will not be able to sue a rival studio in Charlotte for misappropriating its trade secrets because its descriptions of those secrets in its pleadings were too vague, the North Carolina Supreme Court has ruled. The court set out for the first time the requirements for pleading a trade secrets case in state court.

Happy Dance Inc. alleges that two of its former dancers, who came to the U.S. on a work visa to work at the company’s studio, violated the terms of their work contracts by moonlighting at Metropolitan Ballroom in Charlotte. It also claims the dancers told Metropolitan about Happy Dance’s “ideas and concepts for dance productions, marketing strategies and tactics,” and shared customer lists containing contact information. It sued the dancers and Metropolitan, alleging multiple claims.

In 2016, Business Court Judge Louis Bledsoe granted the defendants’ motions to dismiss most of the claims, including the claim for misappropriation of trade secrets. Bledsoe ruled that Happy Dance failed both to identify the alleged trade secrets with sufficient particularity and to allege the specific acts of misappropriation in which the defendants engaged.

Happy Dance appealed, and on April 8 the Supreme Court affirmed, albeit for slightly different reasons. Justice Barbara Jackson, writing for the court, said that the Supreme Court hadn’t previously considered the requirements for pleading a claim for misappropriation of trade secrets, but it found the reasoning of the state’s Court of Appeals, which mirrors the notice-pleading standard set forth in the state’s Rules of Civil Procedure, persuasive.

The appeals court has stated that to plead misappropriation of trade secrets, a plaintiff must “identify a trade secret with sufficient particularity so as to enable a defendant to delineate that which he is accused of misappropriating and a court to determine whether misappropriation has or is threatened to occur.” This standard also has been applied by federal courts in the state.

This serious moonlight

Jackson wrote that Happy Dance provided no further detail about the “ideas, concepts, strategies, and tactics” allegedly misappropriated that were sufficient to put the defendants on notice as to the precise information at issue. That made their claim too general for the court to determine whether essential elements of the claim of misappropriation had been properly alleged.

The complaint also failed to show that Happy Dance’s customer lists contained any information that would not be readily accessible to Metropolitan, prompting Jackson to write that “there is no presumption that a thing is a secret.”

The court noted the concern inherent in any misappropriation of trade secrets claim that, in pursuing litigation, the alleged trade secret not be revealed in a public document such as the complaint. But Jackson said there was a “wide gulf” between Happy Dance’s vague descriptions of its alleged trade secrets and anything that would expose or compromise critical details of those secrets.

“If plaintiffs had provided additional descriptors to put defendants and the courts on notice as to which ‘original ideas and concepts for dance productions’ and ‘marketing strategies and tactics,’ were allegedly misappropriated, then we would have a different claim before us with the potential for a different outcome,” Jackson wrote.

Further, the only allegation of secrecy in Happy Dance’s complaint was that it shared the information with the dancers in confidence, and the complaint did not mention any act by which the company tried to keep the secrets secure. As a result, it couldn’t establish that the information was the subject of reasonable efforts to maintain its secrecy, another required element of misappropriation.

The court also affirmed the rest of the Business Court’s decision dismissing many of Happy Dance’s other claims, some of which were dependent upon the misappropriation claim.

One judge sees a misstep

Justice Cheri Beasley wrote a lone dissent disagreeing with the trade secrets portion of the ruling. She said that the majority opinion highlighted the “problematic and muddled standards” for North Carolina plaintiffs seeking to properly plead a claim for misappropriation of trade secrets, and would have found the complaint sufficient under liberal pleading standards to put defendants on notice. She said that majority had relied on opinions from cases that were in a variety of procedural stages.

“With this case this Court had an opportunity to correct the faulty logic that for over a decade has resulted in the substitution of a preliminary injunction standard for our general pleading standard governing this particular claim,” Beasley wrote. “Instead, the majority has validated a heightened pleading standard for a misappropriation of trade secrets claim with no discussion as to why it believes it is necessary to do so.”

Renner St. John of Brock & Scott in Charlotte represented the defendants. St. John said that she believed that the court’s ruling followed the existing law in the state, but declined to comment further, citing the ongoing nature of some aspects of the lawsuit.

Erin Blackwell and Nichole Hatcher of Hatcher Legal in Durham represented the plaintiffs. The firm did not reply to a phone call seeking comment on the decision.

The 33-page decision is Krawiec v. Manly (Lawyers Weekly No. 010-033-18). The full text of the opinion is available online at nclawyersweekly.com.

Follow David Donovan on Twitter @NCLWDonovan

 

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