California Federal Court Dismisses Trade Secret Claims Based on Conclusory Allegations Regarding Economic Value

At a Glance

• Identification of categories of trade secrets along with a list of exemplar documents that purportedly contained the trade secret information were deemed sufficiently particular at the pleading stage.
• Conclusory allegations regarding economic value were deemed insufficient to allege a trade secret.
• In trade secret litigation, it is important to plead facts supporting economic value and not to rely on mere conclusory allegations that recite the legal standard. Plaintiffs should focus on crafting detailed pleadings that connect the confidential nature of the information to its competitive significance.

Summary 

The plaintiff, United Auto Credit Corp., a nonprime automotive lender, alleged that former employees unlawfully forwarded sensitive business information — including dealer contact lists, pricing strategies, employee compensation plans and training materials — to their personal accounts before joining the defendants and competitor, Veros Credit, LLC. The plaintiff contended that the defendants used this information to solicit its employees and customers, ultimately gaining a competitive advantage. The complaint identified various categories of alleged trade secrets and provided a list of exemplar documents that purportedly contained the trade secret information, such as market penetration strategies, rate sheets and dealer performance data.

Court’s Analysis

The U.S. District Court for the Central District of California first determined that the plaintiff had alleged its trade secrets with sufficient particularity at the pleading stage by “identifying various categories of alleged trade secrets that will be at issue at trial” and by providing “a list of exemplar documents that purportedly contain the trade secret information.” The court found these allegations sufficient to provide reasonable notice to the defendants regarding the “scope of the issues to be decided at trial” and to “ascertain the scope of appropriate discovery.” 

Next, the court explained that to establish a trade secret claim under the Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA), the plaintiff was required to demonstrate that the alleged trade secrets were valuable due to their secrecy. The court examined the plaintiff’s pleadings regarding the economic value of the trade secrets and identified key deficiencies:

1. General Allegations of Economic Value: The plaintiff stated that the trade secrets “have both actual and future economic value arising from the significant market advantage they provide.” However, the court found this assertion to be conclusory and insufficient, as it merely recited a legal element without supporting factual details.
2. Impact of Deficiencies: Because the plaintiff did not adequately plead the economic value derived from secrecy, the court did not proceed to analyze whether the plaintiff sufficiently alleged misappropriation or damages. The court dismissed the DTSA and CUTSA claims without prejudice, allowing the plaintiff the opportunity to amend the complaint to cure these deficiencies.

Key Takeaways for Future Cases

In trade secret litigation, it is important to plead facts supporting economic value and not to rely on mere conclusory allegations that recite the legal standard. Plaintiffs should focus on crafting detailed pleadings that connect the confidential nature of the information to its competitive significance.