Conspiracies to misappropriate trade secrets - pitfalls and possibilities

Conspiracies provide for juicy allegations. Complaints alleging claims for misappropriation of trade secrets under the California Uniform Trade Secrets Act (CUTSA) and federal Defend Trade Secrets Act of 2016 (DTSA) are typically riddled with allegations about "corporate raids," "pirating," "massive downloads," "double agents," and other hyperbole. But there are pitfalls when alleging conspiracies to misappropriate trade secrets. Courts within the Ninth Circuit have been pushing back on the proliferation of trade secrets cases by dismissing civil conspiracy claims, including on the grounds they are not plausibly alleged under Iqbal / Twombly, that they are preempted by state-law versions of the Uniform Trade Secrets Act (UTSA), and that the DTSA does not authorize claims for civil conspiracy.

Under California law, "Civil conspiracy is not an independent cause of action, but rather a theory of vicarious liability under which certain defendants may be held liable for torts committed by others." [VBS Distribution, Inc. v. Nutrivita Laboratories, Inc., No. 16-1553, 2020 WL 6259999, at *5 (C.D. Cal. Sept. 28, 2020); see also Acculmage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 947 (N.D. Cal. 2003).] Civil conspiracy is simply a "legal doctrine that imposes liability on persons who although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration." [Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503, 510-511 (1994).] "The elements of an action for civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common design." [Id. at 511. ]

At the pleading stage, the plaintiff must allege facts, and not merely recite the elements of a conspiracy, in order to allege a plausible conspiracy theory. [Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).] Conclusory allegations of an "agreement" to engage in misappropriation will not suffice. In Acculmage Diagnostics Corporation v. Terarecon, Inc., 260 F. Supp. 2d 941 (N.D. Cal. 2003), the district court rejected the plaintiff's conclusory allegations that the defendants had conspired to steal its trade secrets. The plaintiff had merely alleged that the CEO defendant sought to hire the plaintiff's employee, that the employee had a laptop full of the plaintiff's trade secrets, and that the defendant corporation subsequently offered for sale a competing product. Id. at 950-51.

Courts have found that the DTSA does not appear to create a private right of action for conspiracy to engage in misappropriation of trade secrets. In Steves and Sons, Inc. v. JELD-WEN, INC., 271 F. Supp. 3d 835, 840-43 (E.D. Va. 2017), the counterclaimant, JELD-WEN, alleged there was a conspiracy to violate the DTSA, 18 U.S.C. § 1832(a) (5). The U.S. District Court for the Eastern District of Virginia noted that when Congress enacted the DTSA, Congress created a private right of action under Section 1836(b), but no decision has held there is a private right of action under Section 1832(a). The court also noted that after the enactment of the DTSA, plaintiffs who asserted claims for trade secret misappropriation under the DTSA have relied on state law to present conspiracy claims, which suggests the DTSA is not generally seen as creating a private right of action pertaining to all of the conduct prohibited by Section 1832(a). Given that Section 1836(b)(1) only provides for a private right of action "under this subsection," the court concluded that Section 1836(b) cannot be read to imply that a private right of action lies for redress of the criminal conspiracy provision in Section 1832. Courts within the Ninth Circuit have followed JELD-WEN. See, e.g., Genentech, Inc. v. JHL Biotech, Inc., No. 18- 6582, 2019 WL 1045911, at *12 (N.D. Cal. Mar. 5, 2019) (agreeing that 18 U.S.C. § 1832(a)(5), which criminalizes conspiracies to violate the DTSA, does not provide a private right of action) (citing JELD-WEN, 271 F. Supp. 3d at 840-44); see also NW Monitoring LLC v. Hollander, 534 F. Supp. 3d 1329, 1338-39 (W.D. Wash. 2021) (dismissing conspiracy claims because "the weight of authority tips against the viability of conspiracy claims based on misappropriation of trade secrets under the DTSA").

With respect to California law, CUTSA generally preempts claims that are "based on the same nucleus of facts as the misappropriation claim." K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939, 958 (2009). Although there have been a few outlier opinions, [See Farmers Ins. Exch. V. Steele Ins. Agency, Inc., No. 2:13-CV-00784-MCE, 2014 WL 466274, at *3-4 (E.D. Cal. Feb. 5, 2014) (stating preemption under CUTSA does not apply because the plaintiff alleged additional facts, such as an agreement to steal trade secrets and the formation of a conspiracy, that factually differentiate this claim from a misappropriation claim).], most courts have preempted conspiracy allegations under CUTSA's preemption doctrine. See, e.g., VBS Distribution, 2020 WL 6259999, at *5 (plaintiffs' civil conspiracy claim preempted by CUTSA because it was based on trade secret misappropriation); Nelson Brothers Professional Real Estate LLC v. Jaussi, No. 17-0158, 2017 WL 8220703, at *8 (C.D. Cal. Mar. 23, 2017) (finding plaintiff's civil conspiracy claim preempted by CUTSA); ATS Products, Inc. v. Champion Fiberglass, Inc., No. 13- 2403, 2015 WL 224815, at *2 (N.D. Cal. Jan. 15, 2015) (plaintiff's conspiracy claims preempted by CUTSA).

Given the obstacles to asserting misappropriation of trade secrets conspiracies, as an alternative, consideration should be given to alleging claims for "indirect" misappropriation of trade secrets. Cal. Civ. Code § 3426.1(b); 18 U.S.C. § 1839(5). And, after discovery is taken, any additional defendants can be added by seeking leave to file an amended complaint. It's always better to pursue trade secrets claims based on factual evidence rather than unsubstantiated, wild conspiracy allegations.