Fourth Circuit revives trade-secret claim in software dispute

In a recent decision, the 4th U.S. Circuit Court of Appeals reinstated a federal trade-secret claim after concluding that the plaintiffs plausibly alleged ownership of proprietary software and adequately described the steps they took to protect it. The ruling sends the case back to the U.S. District Court for the Eastern District of North Carolina for further proceedings.

According to the complaint, the plaintiff corporation, a captive insurance company, developed specialized software for internal use. The plaintiffs alleged that an employee hired as Chief Technology Officer was responsible for creating and maintaining this software and that all three defendants, who also served as minority shareholders and officers, were bound by agreements requiring them to keep company information confidential. The complaint stated that the proprietary program was the exclusive property of the corporation, that employees were contractually barred from disclosing confidential information, and that any inventions or developments created in the course of employment belonged solely to the company.

The plaintiffs asserted that the defendants misappropriated the software in violation of the Defend Trade Secrets Act. The district court dismissed the claim, concluding that the pleadings were insufficient and, having dismissed the federal claim, declined to retain supplemental jurisdiction over the remaining state-law causes of action.

The 4th Circuit disagreed. Taking the allegations as true, the court held that the complaint adequately described a trade secret that was subject to reasonable confidentiality measures and plausibly alleged misappropriation. It emphasized that the software was repeatedly identified as confidential property and that the employment agreements included explicit nondisclosure and invention-assignment provisions.

Finding the DTSA claim sufficiently pleaded, the court reversed the dismissal and remanded for further proceedings.

The 12-page opinion is Samuel Sherbrooke Corporate Ltd. v. Mayer, Lawyers Weekly No. 001-181-25.