DTSA claim shouldn’t have been dismissed, 4th Circuit rules

A corporation plausibly alleged that its proprietary software was covered by the confidentiality provision of an employment agreement to sufficiently plead a Defend Trade Secrets Act (DTSA) claim against former employees, the 4th U.S. Circuit Court of Appeals has ruled, reversing dismissal of the complaint.

On June 5, 2018, Samuel Sherbrooke Corporate was incorporated as a captive insurance company in North Carolina. Sherbrooke insures only nursing homes and other entities owned by Samuel Goldner’s (the majority shareholder) company, Goldner Capital Management.

Sherbrooke’s other two shareholders are Gabriel Mayer and Joseph Queen, each a minority shareholder.

Goldner stepped away from the day-to-day operations of Sherbrooke, so Mayer and Queen assumed and performed all operations as the primary officers.

In March 2022, Goldner hired Beau Walker as Sherbrooke’s Chief Technology Officer. His responsibilities included designing, creating and maintaining proprietary software for the exclusive use of Sherbrooke and its related entities.

Mayer, Queen and Walker all signed an employment contract that included a confidentiality agreement and an inventions provision, which stated that any developments or systems applicable to Sherbrooke’s business would become its sole and exclusive property.

According to a complaint filed by Sherbrooke and Goldner, at some point in 2022, Mayer and Queen began preparations to create a corporate entity to compete with Sherbrooke. Walker joined the scheme and the three began using confidential property of Sherbrooke – including the proprietary software – to assist with the new competing entity.

Sherbrooke and Goldner filed suit, alleging Mayer, Queen and Walker misappropriated trade secrets in violation of the DTSA in addition to various state law claims related to corporate malfeasance.

The district court granted the defendants’ motion for judgment on the pleadings, and the plaintiffs appealed.

In Samuel Sherbrooke Corporate, Ltd. v. Mayer, Judge Stephanie D. Thacker – joined by Judges G. Steven Agee and Julius N. Richardson – reversed.

To state a viable DTSA claim, a plaintiff must plausibly allege that it owns a trade secret, the trade secret was misappropriated, and the trade secret implicates interstate or foreign commerce.

On appeal, the plaintiffs argued that the district court erred when it determined they failed on the first step because they sufficiently plead the secrecy element where the defendants were required to sign the employment contract, which included the confidentiality agreement and invention provision.

The court agreed.

According to the complaint, the proprietary software has always been the confidential property of Sherbrooke, the employment contract specified that employees shall not disclose confidential information and the invention provision provided that the software was the property of Sherbrooke.

“Taking these allegations as true, we have no trouble concluding that the Complaint sufficiently alleges that the Proprietary Software, which was ‘confidential property,’ was treated as confidential information under the employment contract,” the court wrote, rejecting the defendants’ contention that the facts did not make clear if the proprietary software uses open source code which is already public available and therefore not confidential.

“But this argument requires too much,” the court said. “[The plaintiffs] did not need to prove anything. They only needed to plausibly allege that the Proprietary Software was covered by the confidentiality provision, which was a reasonable measure intended to keep it secret. [The plaintiffs] did so here.”

The defendants told the court that the mere existence of a confidentiality provision alone was not sufficient as a matter of law to demonstrate reasonable efforts to maintain secrecy, but at this stage of the proceedings, the court disagreed, citing a 9th Circuit opinion for support.

“Trade secrets take many forms and what may constitute ‘reasonable measures’ must be considered in light of the nature of the trade secret and the context in which it exists,” the court wrote. “At the pleading stage, then it is sufficient that [the plaintiffs] allege they protected the Proprietary Software by requiring employees to sign the confidentiality agreement and Invention Provision contained in the employment contract.”

The court also concluded that the plaintiffs plausibly alleged that the defendants misappropriated their trade secret.

While the defendants tried to argue that the complaint made only one conclusory allegation that they were “actively using” the proprietary software, the court listed several examples from the complaint relevant to the misappropriation claim.

“Much more than a bare allegation of ‘use,’ the Complaint explains that Walker created the Proprietary Software and Queen and Mayer were shareholders, directors, and officers of Sherbrooke, such that they knew about the Proprietary Software,” the court said. “The Complaint alleges that all three [defendants] created a competing business and used the Proprietary Software to assist that competing business, rather than Sherbrooke. In the context of this alleged Proprietary Software, we find these allegations sufficient to state a claim for misappropriation. After all, what does one do with a stolen competitive pricing software except ‘use’ it, as alleged in this case, ‘to assist with operating this new competing insurance entity’?”

The court reversed dismissal of the DTSA claim and remanded.

Dylan M. Bensinger of McGuireWoods in Charlotte, who represented Sherbrooke and Goldner, did not respond to a request for comment on the decision.

Neither did Atlanta attorney David L. Pardue of Pierson Ferdinand, who represented Mayer, Queen and Mayer.