Tech Industry Trade Secrets Case to Proceed

The Southern District of New York issued an opinion denying HumbleTech’s motion to dismiss a case brought against it by plaintiff Smart Team Global. STG is a software consulting firm, accusing Lin Li, a former employee, and HumbleTech of “unfair competition,” “breach of the common law duty of loyalty,” “tortious interference with prospective economic advantage,” “violation of the Virginia Uniform Trade Secrets Act,” “common law misappropriation of confidential information and trade secrets,” “misappropriation of trade secrets” under the Defend Trade Secrets Act, “unjust enrichment,” and “forfeiture of salary and benefits.” Defendant has moved to dismiss all counts except count 4, “violation of the Virginia Uniform Trade Secrets Act.”

STG claimed that defendant Li worked as a consultant for the company, and through his position, “he acquired intimate and detailed knowledge about STG’s business, including but not limited to current and proposed products and services, business plans, software and other technology, client lists and information, and marketing and sales strategies.” After approximately six years of being a consultant, Li resigned in February 2018, but the complaint said “[u]nbeknownst to STG, he had formed a competing entity in China in January 2018 and HumbleTech in New York on February 1, 2018…While he was still employed by STG, Li began laying the groundwork to pursue two former STG clients and started to perform information governance support services through HumbleTech for both former STG clients upon his resignation from STG.” They claimed that since Li left STG he “has been misleading STG’s potential business partners and clients, and STG’s former and current employees, into believing that HumbleTech is a successor to STG.” This has also allegedly diverted clients away from STG.

HumbleTech argued that STG’s six common law claims alleged in the amended complaint are preempted by the Virginia Uniform Trade Secrets Act, and therefore, must be dismissed. The court disagreed, saying the cases HumbleTech uses to support its argument “make clear that the VUTSA’s preemption provision ‘is intended to preclude only those common law claims…premised entirely on a claim for misappropriation of a trade secret.’” The court held the common law claims “are not premised entirely on the alleged misappropriation of trade secrets.” For example, claim 1 alleging unfair competition is based on the allegation that Li claimed to be the only member of HumbleTech, and for leading STG’s potential business partners and clients to believe that HumbleTech is the successor of STG, which is false, as well as misappropriating STG’s name. The other claims follow suit and are not entirely based upon the misappropriation of trade secrets. As a result, these claims fail to meet the preemption requirement.

Only count 5, “the common law misappropriation of confidential information and trade secrets” claim is based entirely on the misappropriation of trade secrets. The court states that this claim “is pleaded only in the alternative should the court determine that the law of a state other than Virginia applies to STG’s claims.” Consequently, since none of the claims that the VUTSA may apply are based entirely on the misappropriation of trade secrets, HumbleTech’s motion to dismiss these claims for preemption is denied.

The court also noted that “STG’s Defend Trade Secrets Act claim is adequately alleged.” While HumbleTech argues that this claim should be dismissed for failure to state a claim, the court believe otherwise. The DTSA allows for a cause of action to the “owner of a trade secret that is misappropriated.” To have a trade secret misappropriation claim, a plaintiff must “plausibly allege that (1) it possessed a trade secret, and (2) the defendant misappropriated the trade secret.” The court finds that plaintiff plausibly alleges both aspects: that STG possessed a trade secret and that HumbleTech misappropriated said trade secret. In particular, STG claims that HumbleTech “misappropriated STG’s proprietary source code for its software,” which is “stored in a password-protected ‘Bitbucket’ that only employees with a need to access the Bitbucket are provided with the Bitbucket password…and that STG derives substantial value from maintaining the confidentiality of its source code because competitors are not able to easily replicate it.” However, Li and HumbleTech “wrongfully acquired and used the source code” to use for their own business purposes. Consequently, the court states that STG adequately alleged a DTSA claim against HumbleTech, so defendant’s claim is denied.

Smart Team Global is represented by K&L Gates. HumbleTech is represented by Butzel Long. The presiding Judge was Judge Alison J. Nathan.