A recent decision from the Eastern District of California illustrates the sometimes fine line between the need for plaintiffs to allege a claim for trade secret misappropriation in sufficient detail, while avoiding disclosing the trade secret in so much detail as to destroy it.
In Dairy, LLC v. Milk Moovement, Inc., Dairy, LLC (“Dairy”) sued Milk Moovement, Inc. and Milk Moovement, LLC (collectively, “Defendants”), alleging trade secret misappropriation under both the Defend Trade Secrets Act and the California Uniform Trade Secrets Act and intentional interference with contractual relations. No. 2:21-cv-02233, 2022 WL 1103822, at *1 (E.D. Cal. Apr. 13, 2022). Defendants moved to dismiss all claims pursuant to Federal Rule of Civil Procedure 12(b)(6). Id.
Dairy and Defendants all provide software to companies in the dairy industry. Id. Part of Dairy’s software, called the “producer payroll application,” helps users comply with federal regulations regarding the minimum milk prices paid to dairy producers. Id. The software also generates reports that help users “determine whether to participate in the federal ‘pool’ which sets a minimum price for different classes of milk.” Id.
In 2014, California Dairies Inc. (“CDI”) began using Dairy’s producer payroll application. Id. In September 2021, CDI entered into a software and services agreement with Defendants, and subsequently notified Dairy that it was terminating its software subscriptions. Id. Dairy’s trade secret claims are based on allegations that Defendants and CDI “had a call in which they discussed ‘confidential and trade secret information regarding [Dairy’s] producer payroll application and reporting capabilities’” and, further, that CDI employees shared with Defendants fifteen reports generated by Dairy’s software. Id. Dairy alleged that its user agreement with CDI restricted CDI from sharing this information. Id.
A plaintiff alleging trade secret misappropriation must “describe the subject matter of the trade secret with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons … skilled in the trade.” Id. at *2 (quoting Imax Corp. v. Cinema Techs., Inc., 152 F.3d 1161, 1164-65 (9th Cir. 1998)). Defendants argued that Dairy’s allegations were insufficient to state a claim pursuant to Rule 12(b)(6), in part because Dairy failed to identify its trade secrets with sufficient particularity. Id.
In denying Defendants’ motion to dismiss, the court explained that Dairy repeatedly described its trade secret throughout its First Amended Complaint. Specifically, Dairy alleged that its “software includes and implements a methodology for handling [Federal Milk Marketing Order] pooling that is unique in the industry and is Dairy’s trade secret.” Id. Dairy further identified the trade secret as “[t]he elements of Dairy’s producer payroll application that enable Dairy’s clients to easily and efficiently make decisions about what milk to pool, designate milk for pooling, and generate accurate reports and invoices to comply with [federal regulations].” Id. Rather than “broadly stat[ing] that plaintiff’s software is its trade secret,” the court found that Dairy identified and described a “single, distinct system and the components therein,” specifically, the producer payroll application’s pooling methodology. Id. (citing InteliClear, LLC v. ETC Glob. Holdings, No. 2:18-v-10342, 2019 WL 3000648, at *2 (C.D. Cal. Apr. 5, 2019)).
Further, the court determined that Dairy’s trade secret did not “lack boundaries,” even though Dairy alleged that “the trade secret information is ‘including, but not limited to’ the pooling methodology and the pooling methodology is ‘amongst Dairy’s trade secrets.’” Id. Dairy specifically identified the pooling methodology as a trade secret, and appropriately used language that left open the possibility of identifying additional trade secrets later, which was permissible at the pleading stage. Id. (citing InteliClear, LLC v. ETC Glob. Holdings, 978 F.3d 653, 659 (9th Cir. 2020)). Accordingly, the court concluded that Dairy identified its trade secret with sufficient particularly to state a claim for trade secret misappropriation. Id. at *3.
This case shows that plaintiffs can satisfy minimum pleading requirements to sufficiently allege trade secret misappropriation by describing, in relatively general terms, a distinct system and its purpose. Doing so allows plaintiffs to overcome a motion to dismiss and “moo-ve” past the pleading stage without revealing the details of the trade secret.