Trade Secret Tidbits: February 2023

March 1, 2023

From the granting of temporary restraining orders to the adoption of pleading standards, February 2023 was a busy month for trade secret misappropriation claims. Although they came in the shortest month of the year, the following trio of trade secret holdings are worth bookmarking for future litigation use.

1. Trade Secret TRO Granted: Helio Logistics, Inc. v. Mehta, No. 22-CV-10047 (NSR), 2023 WL 1517687 (S.D.N.Y. Feb. 3, 2023)

On Feb. 3, the Southern District of New York found the plaintiff, Helio Logistics Inc., demonstrated a likelihood of success on its claims to support its renewed application for a temporary restraining order, expedited discovery and preliminary injunction against the individual defendants and their competing business, Cloud Health Systems LLC d/b/a Sunrise Health. Of note, the court found:

  • Helio demonstrated a likelihood of success on its claim of personal jurisdiction as to Sunrise. Sunrise’s website — which touted “Real members,” “Real stories” and “Real results,” including “Sonia T from New York City” — represented that it had at least one customer in New York.
  • Personal jurisdiction was sufficiently pled with respect to the individual defendants based on their alleged efforts to obtain funding for Sunrise from a New York-based venture capital firm.
  • Helio had demonstrated a likelihood of success as to its trade secret misappropriation claim and that Helio would suffer irreparable harm in the absence of a temporary restraining order. This conclusion was based on Helio’s allegations that the defendants acquired the trade secrets at issue through improper means — false representations that the information would be used to obtain funding for Helio — and used them to start and obtain funding for their competing business.
  • Finally, the types of information at issue (business strategies, client lists, advertising data analytics, pricing structure and vendor relations) were routinely found to be trade secrets in the Southern District of New York.

2. Trade Secret Pleadings on Information and Belief: Ahern Rentals, Inc. v., Inc., 59 F.4th 948 (8th Cir. 2023)

On Feb. 7, the 8th U.S. Circuit Court of Appeals reversed a district court’s dismissal of Ahern Rentals Inc.’s claims against one of the named defendants — EZ Equipment Zone LLC. This ruling also resurrected Ahern’s claims against the other named defendant, Inc. In relevant part:

  • The 8th Circuit officially adopted the prevailing standard among the Circuit Courts with respect to factual allegations pled “on information and belief.” Specifically, the court held that such allegations are not categorically insufficient to state a claim for relief where: (1) the proof supporting the allegation is within the sole possession and control of the defendant; or (2) the belief is based on sufficient factual material that makes the inference of culpability plausible.
  • Under its newly adopted standard, the court found Ahern had pled sufficient facts to state a plausible claim for, among others, misappropriation of trade secrets against EZ. Specifically, with respect to the “closer question” of whether EZ misappropriated the trade secrets at issue, the court found Ahern’s specific factual allegations of a close business relationship between EZ and EquipmentShare — whereby EZ required its users to use EquipmentShare’s programs and its rental owners to purchase equipment through a strategic partnership — sufficiently argued that EZ used systems purportedly developed through the exploitation of Ahern’s trade secrets. Further, Ahern plausibly alleged that EZ knew or had reason to know that such trade secrets were improperly acquired because EquipmentShare’s programs “were at the core of EZ’s operations.” Because hard evidence of EZ’s knowledge was within the sole control of EZ or EquipmentShare, the court held that Ahern’s allegations of EZ’s knowledge being pled “on information and belief” were appropriate at the motion-to-dismiss stage.
  • The court found Ahern had sufficiently pled claims under Missouri law for data tampering, civil conspiracy and unjust enrichment. And, having reversed the district court’s dismissal of EZ, the court likewise vacated the district court’s order dismissing EquipmentShare, reasoning that the analysis that resulted in that ruling may now be different.

3. Trade Secret Ownership and Reverse Engineering: GateGuard, Inc. v. Inc., No. 21-cv-9321, 2023 WL 2051739 (S.D.N.Y. Feb. 16, 2023)

On Feb. 16, another ruling from the Southern District of New York analyzed claims brought by GateGuard Inc. against Inc. and several related entities (Amazon). Generally, the claims arose from GateGuard’s allegations that Amazon was tampering with or commandeering GateGuard’s proprietary security technology that acts as an “AI Doorman” for multifamily residential properties, allowing authorized users to unlock entrances remotely and to monitor activity.

Allegedly, Amazon’s installation of its own “Key” devices — meant to provide Amazon deliverers with 24/7 building access — into GateGuard’s devices has left them inoperable or resulted in Amazon utilizing GateGuard’s technologies without paying a royalty or usage fee. Among its various claims — which included trespass to chattels, conversion, tarnishment, unjust enrichment, tortious interference, and violations of the Computer Fraud and Abuse Act, the Lanham Act, and the Sherman Antitrust Act — GateGuard asserted claims for misappropriation of trade secrets. Ultimately, the court granted in part and denied in part Amazon’s motion to dismiss, with the misappropriation of trade secret claims among the surviving claims.

Notably, the court held:

  • Despite GateGuard’s devices installation being in the public forum, GateGuard’s allegations supported an inference that the internal mechanisms of the devices were kept sufficiently secret. GateGuard asserted that its customers accept certain terms and conditions in its service agreement, acknowledging that the device contains “valuable trade secrets” that “shall remain GateGuard’s property” and that the subscriber shall not itself — or allow a third party to — use, copy, modify … reverse engineer, decompile, disassemble” or “provide access” to the devices.
  • The court did not accept Amazon’s assertion of “reverse engineering” as a defense. First, GateGuard pled that it remained the owner of the installed devices, but reverse engineering is permissible only after a creator has ceded ownership. Further, “the relevant inquiry is whether the means to obtain the alleged trade secret, including reverse engineering, were proper.” If, as GateGuard alleged, Amazon had accessed the devices without the property owners’ knowledge or based on false representations to property employees, such methods would constitute “improper means” of discovering GateGuard’s trade secrets.
  • Finally, GateGuard’s theory that Amazon allegedly installed its Key device into GateGuard devices to “piggy back” off of GateGuard’s technology qualified as “using” or “acquiring” a trade secret to assert a misappropriation claim at the pleading stage.

As trade secret cases flourish in federal courts, companies should continue to evaluate rulings that could impact their dealings with employees, contractors and competitors. Watch for updates and new developments in Trade Secret Tidbits, Volume 2.