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New York Court Provides Guidance to Practitioners Challenging Trade Secret Ownership Under the DTSA

Article

New York Law Journal

March 23, 2020

Since the Supreme Court decision in Lexmark International v. Static Control Components, courts across the country have been finding that challenges to the right to sue under federal statutes should be brought as motions under Federal Rule of Civil Procedure 12(b)(6) and not 12(b)(1). See, e.g., Lone Star Silicon Innovations v. Nanya Tech., 925 F.3d 1225, 1229 (Fed. Cir. 2019) (right to sue under the Patent Act); Am. Psychiatric Ass’n v. Anthem Health Plans, 821 F.3d 352, 359 (2d Cir. 2016) (right to sue under the ERISA statute). The U.S. District Court for the Southern District of New York has now clarified that the Lexmark holding applies equally to the Defend Trade Secrets Act (DTSA).

Background

In Lexmark International v. Static Control Components, the Supreme Court held that to sue for false advertising under 15 U.S.C. §1125(a) of the Lanham Act, a party had to “allege an injury to a commercial interest in reputation or sales.” 134 S. Ct 1377, 1390 (2014). In so holding, the court clarified that challenges to so-called “statutory standing” do not implicate a court’s subject matter jurisdiction. Id. at 1387 n.4. The court found the term “statutory standing” misleading because the absence of a valid cause of action under a statute “does not implicate subject-matter jurisdiction, i.e., the court’s statutory or constitutional power to adjudicate the case.” Id. (emphasis in original).

Following Lexmark, the Second Circuit in American Psychiatric Association held that psychiatrists could not bring a civil suit under the Employee Retirement Income Security Act (ERISA) because they were not “participants, beneficiaries, or fiduciaries” under the statute. Am. Psychiatric Ass’n, 821 F.3d at 360. The court further explained that it would no longer refer to the issue of whether a plaintiff can sue under a federal statute as “statutory standing” because it does not implicate the court’s subject matter jurisdiction. See id. at 359. Instead, the court noted, the issue would be addressed as an inquiry into whether plaintiffs had a cause of action under a particular federal statute. See id., citing Lexmark, 134 S. Ct at 1386 & 1387 n.4.

Trade Secret Ownership Under the DTSA

The DTSA provides a private cause of action to an “owner of a trade secret that is misappropriated[.]” 18 U.S.C. §1836(b)(1). In enacting the statute, Congress defined the “owner” of a trade secret as “the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed.” 18 U.S.C. §1839(4) (emphasis added). The use of the definite article “the” in the statutory definition of trade secret owner suggests that there can be only one owner of a particular trade secret. See, e.g., SEC v. KPMG, 412 F. Supp. 2d 349, 387-88 (S.D.N.Y. 2006) (“[a] statutory provision’s use of the definite article ‘the,’ … indicates that Congress intended the term modified to have a singular referent.”)

The approach taken in §1839(4) differs from the patent law approach. Section 281 of the Patent Act provides that “[a] patentee shall have remedy by civil action for infringement” of a patent. 35 U.S.C. §281. However, unlike the definition of trade secret “owner” in the DTSA, the Patent Act defines “a patentee” to include multiple entities—including “not only the patentee to whom the patent was issued but also the successors in title to the patentee.” 35 U.S.C. §100(d). A party may also sue under the Patent Act if it possesses “all substantial rights to the patents.” Lone Star Silicon Innovations, 925 F.3d at 1229. In Lone Star, the Federal Circuit held that after Lexmark, §281 does not create a jurisdictional requirement. See id. at 1235-36 (“whether a party possesses all substantial rights in a patent does not implicate standing or subject-matter jurisdiction”). Critically, the Lone Star court further noted that following Lexmark and interpretive copyright law decisions, motions to dismiss under §281 should likewise be brought under Rule 12(b)(6) rather than Rule 12(b)(1). See id. at 1235 (citations omitted).

A recent New York case, Zirvi v. Flatley, has now applied Lexmark to the DTSA and similarly concluded that a motion to dismiss for failure to allege trade secret ownership should be brought under Rule 12(b)(6) and not Rule 12(b)(1). See Civ. No. 18-7003(JGK), 2020 U.S. Dist. LEXIS 6403, at *15 n.5 (S.D.N.Y. Jan. 14, 2020). In Zirvi, the plaintiffs alleged that the defendants conspired to steal the plaintiffs’ trade secrets related to the encoding and decoding of DNA. Id. at *2. The defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) on the grounds that the plaintiffs lacked standing. Id. The court granted the defendants’ motion to dismiss and dismissed the case with prejudice. Id. at *3.

In Zirvi, the DTSA claims were found to be untimely because they “occurred well before May 11, 2016,” the DTSA’s effective date. See id. at *27. Before dismissing the case, however, the court made an important comment about trade secret ownership, stating that:

[W]hether the plaintiffs ‘owned’ or ‘possessed’ the alleged trade secrets is not a question of constitutional standing, but a question whether the plaintiffs can state a claim under either the DTSA or New York state law.

Id. at *15 n.5. In other words, the Zirvi court reasoned that the proper procedural vehicle by which plaintiffs should challenge trade secret ownership was not through a motion to dismiss under Fed. R. Civ. P. 12(b)(1), but rather a motion to dismiss under Fed. R. Civ. P. 12(b)(6). The court stated that it could not resolve these ownership issues on the motion to dismiss filed in that case because there were “factual disputes about the circumstances under which the intellectual property [at issue] was developed.” Zirvi, 2020 U.S. Dist. LEXIS 6403, at *15 n.5.

Timing Limitations to a Challenge of Trade Secret Ownership Under the DTSA

The decisions noted above should be read in tandem with relevant provisions of the Federal Rules of Civil Procedure, which impose timing limitations on motions brought under Rule 12. For example, under Fed. R. Civ. P. 12(h)(3), “[i]f the court determines at any time that it lacks subject matter jurisdiction, the court must dismiss the action.” Id. Courts have interpreted the phrase “at any time” to give parties the right to challenge subject matter jurisdiction even after trial and entry of judgment and on appeal. See Arbaugh v. Y&H, 546 U.S. 500, 506 (2006) (lack of subject matter jurisdiction may be raised “after trial and the entry of judgment.”); Wills v. Ferrandino, 830 F. Supp. 116, 123 (D. Conn. 1993) (challenges to subject matter jurisdiction may be asserted “prior to, during, or after trial, [and] even at the appellate level.”) (citations omitted). In contrast, the latest a motion to dismiss under Rule 12(b)(6) may be made is “at trial.” See Fed. R. Civ. P. 12(h)(2)(C).

Conclusion

Given the rules and cases noted herein, defendants seeking to challenge a plaintiff’s ownership of a trade secret under the Defend Trade Secrets Act should make the motion at the earliest possible time and no later than at trial under Rule 12(b)(6)—as opposed to lodging the challenge in a Rule 12(b)(1) motion attacking the court’s subject matter jurisdiction. Timing matters. To succeed in dismissing a plaintiff’s DTSA claim based on defects in trade secret ownership, the moving party must ensure that the motion is both procedurally and substantively sound.


Reprinted with permission from the March 23, 2020 issue of the New York Law Journal. © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.