Recently, many of the battles in trade secret litigation in North Carolina have been fought over whether the trade secrets have been alleged with enough specificity to survive a motion to dismiss. (”Trade Secret Misappropriation Claims Under Attack in North Carolina?“). Rarely has the issue come up at the pleading stage as to whether the Plaintiff had pled that it took reasonable measures to protect the secrecy of its information, with defendants saving such arguments for summary judgment or trial. Yet, in late July, the North Carolina Business Court reminds us all that all elements of the trade secrets claim must be pled with facts — even the ”reasonable measures” allegation.
In McKee v. James, 2013 NCBC 38 (July 2013), the North Carolina Business Court dismissed a claim brought under the North Carolina Trade Secrets Protection Act on the basis that the plaintiffs, shareholders of Lanness K. McKee & Co., Inc. (”McKee”), a manufacturer of boats for government and recreational use, had not alleged that McKee had taken “reasonable measures” to protect the secrecy of the information that Plaintiffs claimed as a trade secret. In that case, the Plaintiffs alleged that information regarding the manufacture of McKee boats, including manufacturing processes and techniques, designs, molds and business plans, were trade secrets of McKee which the Defendants misappropriated. The Defendants denied the allegations but also moved to dismiss the claims on two grounds: first, that the Plaintiffs had failed to allege the trade secrets with enough specificity and second, that the Plaintiffs had failed to allege that McKee took reasonable measures to protect the secrecy of the information.
Although finding that the Plaintiffs had identified the information for which it claimed protection with sufficient specificity, the Court agreed with Defendants that the Plaintiff had failed to allege that it had taken “reasonable measures” to protect this information. Absent from the complaint, which had been amended several times, was even a conclusory allegation that McKee had taken “reasonable measures” under the statute to protect the secrecy of the information claimed in the lawsuit to be trade secret. But even if the Plaintiffs had made such conclusory allegation, the Court’s opinion indicates that such an allegation would have still been deficient, as no facts were alleged to demonstrate the “measures” taken. As the Court noted:
“[T]here are no allegations outlining the reasonable measures Plaintiffs relied on to maintain the secrecy of their construction methods.” (emphasis added).
While the Plaintiffs attempted to save their trade secrets claim by noting that they had alleged that McKee protected its financial information with a password (and arguing that a Defendant had signed a non-disclosure agreement with McKee, an allegation which was nowhere alleged in the complaint and correctly ignored by the Court), this allegation was simply not on point, as this measure of protection had no bearing on the information claimed to be trade secret — manufacturing techniques and methodologies, designs, molds and business plans. Again, noting the need to allege such facts, the Court stated:
“At most, Plaintiffs have alleged that the financial records of McKee Craft may have been protected by a password. However, Plaintiffs failed to allege any facts tending to demonstrate that Plaintiffs implemented reasonable efforts to protect the secrecy of the construction methods.” (emphasis added).
Relying in part on Thortex, Inc. v. Std. Dyes, Inc., No. COA05-1274, 2006 N.C.App. LEXIS 1171 a *9-*10 (N.C.App. 2006), the Court found the claim deficient as a matter of law and dismissed the claim, as the Plaintiffs failed to allege a vital element of the trade secrets claim.
The McKee case, in this regard, represents a further development of the law in North Carolina as to the pleading standards for trade secrets. The North Carolina Court of Appeals had certainly commented on the issue in Thortex, supra. The Court of Appeals in that case affirmed the dismissal of the trade secrets claim, stating that the plaintiffs had failed to allege facts tending to show that they had taken reasonable efforts to maintain the secrecy of the alleged trade secret. Id. As the Thortex court stated, “Plaintiffs appear to find themselves in the unfortunate situation of failing to require the manufacturers and their employees to enter into a confidentiality agreement.” The Thortex court’s statement in this regard, however, was arguably dicta. Here, in McKee, the Business Court has expressly held that to properly state a trade secrets claim in North Carolina, the “reasonable measures” taken to protect the secrecy of the information must be pled with facts.
The “reasonable measures” taken to protect the secrecy of the information, long the focus of many trade secret litigations (see, e.g., Sunbelt Rentals, Inc. v. Head & Engquist Equip. LLC, No. 00-CVS-10358, 2002 WL 31002955 (N.C. Super. 2002); Med. Staff Network, Inc. v. Ridgeway, 194 N.C. App. 649, 670 S.E.2d 321 (2009)), is front and center even at the pleading stage in North Carolina.