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Paint It White: No Sovereign Immunity in Economic Espionage Case

by | May 8, 2025 |

The US Court of Appeals for the Ninth Circuit affirmed a district court’s denial of foreign sovereign immunity to a Chinese company accused of stealing trade secrets related to the production of proprietary metallurgy technology. United States v. Pangang Grp. Co., Ltd., Case No. 22-10058 (9th Cir. Apr. 29, 2025) (Wardlaw, Collins, Bress, JJ.)

Pangang is a manufacturer of steel, vanadium, and titanium. E.I. du Pont de Nemours (DuPont) had a proprietary chloride-route technology used for producing TiO₂, a valuable white pigment used in paints, plastics, and paper. Pangang allegedly conspired with others to obtain DuPont’s trade secrets related to TiO₂ production through economic espionage in order to use the stolen information to start a titanium production plant in China. The US government filed a criminal lawsuit.

In defense, Pangang invoked the Foreign Sovereign Immunities Act (FSIA) and federal common law, arguing that it was entitled to foreign sovereign immunity from criminal prosecution in the United States because it was ultimately owned and controlled by the government of the People’s Republic of China (PRC). In a prior appeal, the Ninth Circuit had found that Pangang failed to make a prima facie showing that it fell within the FSIA’s domain of covered entities. On remand, the district court again rejected Pangang’s remaining claims of foreign sovereign immunity, including its claims based on federal common law.

While the appeal was pending, the Supreme Court’s 2023 decision in Turkiye Halk Bankasi v. United States clarified that common law, not the FSIA, governs whether foreign states and their instrumentalities are entitled to foreign sovereign immunity from criminal prosecution in US courts. This led to a rebriefing of the present appeal to focus on the now-controlling issues concerning the extent to which Pangang enjoys foreign sovereign immunity under federal common law. Under federal common law, an entity must satisfy two conditions to enjoy foreign sovereign immunity from suit:

  • It must be the kind of entity eligible for immunity.
  • Its conduct must fall within the scope of the immunity conferred.

The Ninth Circuit concluded that Pangang did not make a prima facie showing that it exercised functions comparable to those of an agency of the PRC and therefore was not eligible for foreign sovereign immunity from criminal prosecution. The Court also found that “[t]he mere fact that a foreign state owns and controls a corporation is not sufficient to bring the corporation within the ambit of [sovereign immunity].” Since Pangang’s commercial activities were not governmental functions, there was no evidence that sovereign immunity should be applied. Therefore, the Ninth Circuit affirmed the district court’s denial of the motion to dismiss based on sovereign immunity.



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Tell Us Your Secret: Case Dismissed for Failure to Identify Trade Secrets

by | May 1, 2025 |

The US Court of Appeals for the Tenth Circuit affirmed a district court’s grant of summary judgment in favor of the defendants for the plaintiff’s failure to identify the trade secrets at issue with sufficient particularity. Double Eagle Alloys, Inc. v. Hooper, Case No. 24-5089 (10th Cir Apr. 22, 2025) (Bacharach, Seymour, Phillips, JJ.)

Double Eagle and Ace Alloys are direct competitors and distributors of specialty metals for companies in the oil and gas industry. After working for Double Eagle for decades, including five years as an inside sales manager, Michael Hooper left to join Ace. As he departed, Hooper took with him 2,660 digital files downloaded from his Double Eagle computer to an external storage device. After discovering the download, Double Eagle sued Hooper and Ace for trade secret misappropriation and civil conspiracy. The parties cross moved for summary judgment.

Double Eagle argued that the files Hooper downloaded contained financial, technical, and business information that qualified as trade secrets. Double Eagle categorized the files as pump-shaft-quality (PSQ) specifications, pricing, and customer drawings. Ace argued that the alleged trade secrets were not protectable since Double Eagle shared the information with customers or posted the information online. The district court granted summary judgment to the defendants on all claims, holding that “Double Eagle failed to identify its alleged trade secrets with sufficient particularity and clarity to proceed to trial,” that it failed to present evidence of the information’s secrecy to support the misappropriation claim, and accordingly that there was no underlying tort on which to base the claim for civil conspiracy. Double Eagle appealed.

Double Eagle argued that the summary judgment grant was improper because there were genuine issues of material fact on the issue of whether it identified its trade secrets with sufficient particularity and whether the business information was confidential. Double Eagle also argued that the district court erred by not allowing it an opportunity to supplement the evidence in support of its claim. The Tenth Circuit disagreed and affirmed on all counts.

The Tenth Circuit agreed with the district court that Double Eagle failed to introduce evidence that its alleged trade secrets were “known only to a limited number of people, were not readily ascertainable, or were valuable because they were not widely known.” The Court noted that Double Eagle’s PSQ specifications were readily ascertainable through proper means, its pricing was shared with customers without any protection to prevent customers from sharing those prices, and the customer drawings originated from the customers and were not owned by Double Eagle.

The Tenth Circuit similarly agreed with the district court’s dismissal of the misappropriation claim, explaining that the same lack of secrecy that defeated the trade secret claim also defeated the misappropriation claim. Finally, the Court rejected Double Eagle’s argument concerning its ability to supplement the record because the district court invited the parties to submit briefing on the issues, including an opportunity to move for leave to submit more evidence, but Double Eagle chose not to do so. Having [...]

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Ill-Gotten Gains: Unjust Enrichment Remedy Not Barred by Limitation of Liability Provision

by | Apr 17, 2025 |

Examining the issue of trade secret misappropriation when parties have contractually limited their liability from breach, the US Court of Appeals for the Eleventh Circuit reversed the district court’s dismissal of the case, finding that a plaintiff could still recover damages under a theory of unjust enrichment. Pemco Aircraft Engineering Services Inc. v. The Boeing Company, Case No. 22-13776 (11th Cir. Apr. 4, 2025) (Pryor, Branch, Carnes, JJ.)

Pemco and Boeing, who are usually competitors, entered into an agreement to jointly bid for a government contract. The parties’ contract had three separately executed parts that functioned as one agreement. When the contractual relationship fell apart, Pemco sued Boeing for breach of contract and trade secret misappropriation. Based on Boeing’s contractual breach, a jury awarded Pemco more than $2 million of out-of-pocket damages. The district court dismissed the trade secret misappropriation claim, however, as time-barred under Alabama law. After Pemco appealed, the Eleventh Circuit reviewed and determined that the trade secret misappropriation claim arose under Missouri law, not Alabama law, and that under Missouri law, Pemco’s trade secret claims were not time-barred. On remand, Pemco brought amended trade secret misappropriation claims under Missouri law, which the district court dismissed based on the parties’ contract, which limited liability. Pemco appealed.

The issue on appeal was whether the parties’ contractual limitation of liability provision precluded any damages, even for misappropriation. The contractual provision lists the categories of damages that the parties disclaimed, namely, incidental, punitive, and exemplary, or consequential damages. The Eleventh Circuit explained that two sophisticated parties negotiating at arm’s length are permitted by Missouri public policy considerations to contractually limit future recovery for even intentional torts. By including punitive and exemplary damages, which are available only for tort claims and not contractual ones, the parties clearly intended to include torts related to the contract within its scope. Thus, even though trade secret misappropriation is a tort and not a contractual claim, the Court found that the claim was restricted by this provision and Pemco was therefore limited in its potential recovery.

The Eleventh Circuit next looked to whether the jury award had sufficiently compensated Pemco. The district court found that a Missouri trade secrets claim was barred in this context because of a full recovery under the related contract claim. The Court, however, distinguished the two causes of action. So long as the trade secrets claim provides a separate, non-duplicative remedy, it can stand on its own despite other recoveries under the contract. The Missouri Trade Secrets Act explicitly provides for an unjust enrichment remedy not available for contractual breach and the parties chose not to limit recovery for unjust enrichment. Thus, the Court concluded that this remedy was available as a trade secret claim that was not, and could not have been, available to Pemco under the contract.

Boeing advanced two arguments against the availability of an unjust enrichment remedy. Boing argued that any further award would be duplicative of the previous jury award and that unjust enrichment constitutes a [...]

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Not Secret and Not Used: Misappropriation Claim Dismissed

by | Apr 17, 2025 |

The US Court of Appeals for the Fifth Circuit upheld a district court’s grant of summary judgment in favor of the defendants, finding that the plaintiff failed to identify a trade secret and presented no evidence of its use or disclosure. DeWolff, Boberg & Associates, Inc. v. Justin Pethick and The Randall Powers Co., Case No. 24-10375 (5th Cir. Apr. 3, 2025) (Smith, Clement, Duncan, JJ.)

In 2018, Justin Pethick was a DeWolff, Boberg & Associates (DBA) employee. That year, DBA’s competitor, The Randall Powers Company (Powers), hired Pethick as regional vice president of sales. After Pethick began working at Powers, some prospective DBA clients hired Powers for consulting services. DBA sued Powers for trade secret misappropriation, asserting that Pethick stole its trade secrets and used them to poach clients. The district court granted summary judgment in favor of Powers and Pethick. DBA appealed.

The Fifth Circuit affirmed but on alternative grounds. To prevail on a misappropriation claim under Texas law (where the initial suit was brought), “a plaintiff must show that (1) a trade secret existed, (2) the trade secret was acquired through a breach of a confidential relationship or discovered by improper means, and (3) the defendant used the trade secret without authorization from the plaintiff.”

On appeal, Powers first argued that the information DBA claimed was trade secrets, such as contact information, meeting notes, and “confidential information related to business opportunities,” did not qualify as protectable trade secrets. DBA pointed to “large swathes of database information” without distinguishing what exactly was supposedly a trade secret. The Fifth Circuit found it was unclear as to what materials were trade secrets, noting that it had “no obligation to sift through the record in search of evidence to support a party’s opposition to summary judgment.” The Court held that summary judgment was justified on this basis.

The Fifth Circuit further held that, even assuming the information qualified as trade secrets, summary judgment was still warranted because there was no evidence that Powers and Pethick used the information. Although Pethick had requested a copy of a document that DBA claimed contained trade secrets prior to joining Powers, there was no evidence that he ever possessed it while at Powers. To the contrary, the forensic expert retained by DBA to remove its data from Pethick’s computer did not find the document. The Court concluded that DBA failed to demonstrate any use of an alleged trade secret.



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When Is a Trade Secret Accessible? As Soon as It Can Be Reverse Engineered

by | Apr 10, 2025 |

Although the US Court of Appeals for the Federal Circuit upheld a damages award for trade secret misappropriation and breach of a confidentiality agreement, it found that the district court erred in its determination of when the trade secret became publicly accessible for the purpose of applying a reverse engineering defense. The Federal Circuit also vacated and remanded the prejudgment interest award, finding that interest should not accrue on future sales. ams-OSRAM USA Inc. v. Renesas Elect. America, Inc., Case No. 22-2185 (Fed. Cir. Apr. 4, 2025) (Taranto, Schall, Chen, JJ.)

In 2008 ams sued Renesas for patent infringement, trade secret misappropriation, and breach of contract for using information that ams revealed in confidence. In 2015 a jury found for ams, and the district court entered judgment for trade secret misappropriation damages, but not for breach of contract. The district court determined that the breach award was duplicative of the misappropriation award. On appeal, in 2018 the Federal Circuit affirmed Renesas’ liability for misappropriation on a more limited basis than had been presented to the jury. The Court vacated the misappropriation award and remanded, instructing that disgorgement of profits damages should be decided by the judge, not the jury.

On remand, ams argued that it was entitled to “re-elect its remedy” and narrowed to the misappropriation and contract claims, which required the case to be retried. The new jury also found in favor of ams. The district judge then determined the monetary award for trade secret misappropriation, consisting of disgorgement of profits for one product and exemplary damages of double that sum. On ams’s breach of contract claim, the jury awarded a reasonable royalty on sales of products, other than the one subject to disgorgement damages. ams was also awarded prejudgment interest on both its misappropriation and contract claims, and attorneys’ fees on its breach of contract claim. Both parties appealed.

Trade Secret Accessibility and Reverse Engineering

The district court ruled that ams’s trade secrets became accessible in January 2006 when Renesas successfully reverse engineered the trade secret embodied in ams’s product. The district court determined that the relevant inquiry for accessibility is what the misappropriator actually did rather than what the misappropriator or other parties could have done. Renesas argued that the trade secret first became accessible when it could have reverse engineered the trade secret in February 2005.

The Federal Circuit agreed with Renesas, explaining that the district court’s ruling was inconsistent with Texas law. Under Texas law, information that is generally known or readily available by independent investigation does not qualify as a trade secret. Citing Fifth Circuit precedent, the Federal Circuit emphasized that the public is free to discover and exploit trade secrets through reverse engineering of products in the public domain. The Court found that Renesas could have accessed ams’s trade secrets through proper and straightforward means by February 2005. While acknowledging that the trade secret may not have been immediately apparent through casual inspection, the Court pointed out that reverse engineering is a common [...]

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What’s Shaking? Not an Interlocutory Appellate Decision on Damages

by | Jan 30, 2025 |

The US Court of Appeals for the Fifth Circuit dismissed and remanded a district court certified interlocutory appeal concerning the standard for calculating a reasonable royalty under the Defend Trade Secrets Act (DTSA). The Court explained that the rate instruction issued by the district court was erroneous because the parties had not yet gone to trial and the plaintiff had not yet proven liability. Therefore, the issue of damages might never arise. Silverthorne Seismic, L.L.C. v. Sterling Seismic Servs., Ltd., Case No. 24-20006 (5th Cir. Jan. 3, 2025) (Smith, Clement, Higginson, JJ.) (Higginson, J., dissenting).

Silverthorne licensed seismic data to Casillas Petroleum Resource Partners II, LLC, an oil and gas exploration company. Under this arrangement, Silverthorne provided data to Sterling, a seismic data processer, which processed the data and sent it to Casillas. Because Sterling’s data processing required more data than what Casillas had paid for, Sterling was only permitted to forward the data that Casillas had licensed. However, Sterling sent Casillas unlicensed data, which Casillas allegedly showed to potential investors.

Silverthorne sued Sterling for trade secret misappropriation under the DTSA and sought reasonable royalties for Sterling’s improper disclosure. Shortly before trial, the district court issued an order adopting the Fifth Circuit’s definition of “reasonable royalty” in University Computing (1974), which, in this case, would have required Silverthorne to prove what the parties “would have agreed to for . . . use [of] the alleged trade secret.” University Computing predates the DTSA, which provides for reasonable royalties for “disclosure or use of a trade secret.” Silverthorne appealed the order, noting that it would not be able to prove what Sterling would have agreed to pay to use the data, since Sterling was a data processor and not an end user. The district court certified the following question for appeal:

[W]hether a plaintiff is entitled to prove reasonable royalty damages under the DTSA using willing buyer(s) detached from the parties to the litigation when willing buyers (here, oil and gas exploration companies) exist for plaintiff’s alleged trade secret (here, seismic data), but the defendant and comparable entities (here, seismic processors) do not buy or license that trade secret.

An administrative panel of the Fifth Circuit granted leave to appeal.

Majority Opinion

The Fifth Circuit dismissed the appeal as not involving a controlling question of law. The Court explained that interlocutory appeals are only permitted where an order involves a controlling question of law, the resolution of which would materially and immediately affect the outcome of litigation in the district court. The Fifth Circuit emphasized that a question is not controlling just because the answer would complicate a litigant’s ability to make its case or because the answer could save the parties from a post-judgment appeal. Applying these principles, the Court reasoned that damages issues generally do not control a case until the plaintiff establishes liability, unless the damages issue would be dispositive. Because Silverthorne had not yet established liability and was not barred from proving damages under the district court’s definition [...]

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Jury Trial on Legal Issue Denied, But No Harm Done

by | Aug 29, 2024 |

The US Court of Appeals for the Seventh Circuit affirmed a district court’s denial of a jury trial, concluding it was harmless error because the defendant would have been entitled to a directed verdict regardless. Overwell Harvest Ltd. v. Trading Techs. Int’l, Inc., Case No. 23-2150 (7th Cir. Aug. 12, 2024) (Kirsch, Pryor, Kolar, JJ.)

Overwell Harvest was established to invest in Neurensic, a company specializing in market surveillance technology. Despite Overwell’s investment of millions of dollars, Neurensic faced significant financial distress, leading its management to pursue a sale. Neurensic’s CEO and COO accepted an offer from Trading Technologies, which subsequently hired former Neurensic employees with the CEO and COO’s approval. Prior to the sale, Overwell submitted a competing bid, to which Trading Technologies responded by raising its offer. Neurensic chose to accept Trading Technologies’ offer.

Overwell sued Trading Technologies for aiding and abetting breaches of fiduciary duties by Neurensic’s leadership. The district court dismissed Overwell’s jury demand and ruled that the claim was equitable despite the damages sought. In a bench trial, the district court ruled in favor of Trading Technologies, determining that Overwell waived its claims that Trading Technologies had aided and abetted breaches of fiduciary duty by Neurensic’s leadership. The district court’s decision was based on Overwell’s failure to advance arguments concerning improper notice to shareholders regarding the vote on Trading Technologies’ offer. Overwell appealed.

The Seventh Circuit decided that Overwell had a Seventh Amendment right to a jury trial because the case involved legal relief in addition to equitable relief. While the Court agreed that Overwell’s claim for aiding and abetting breaches of fiduciary duty under Delaware law was historically equitable, the request for compensatory and punitive damages constituted legal relief. The Court emphasized that even if a claim is equitable, the pursuit of legal relief (such as money damages) entitles a party to a jury trial. The Seventh Circuit determined that the district court erred by denying Overwell this right because determining legal relief is traditionally the role of a jury.

The Seventh Circuit concluded that this error was harmless, however, because under Delaware law Trading Technologies would have been entitled to a directed verdict. The Court explained that a directed verdict is appropriate when no reasonable jury could find for the losing party based on the evidence, viewing the record in the light most favorable to the losing party.

The Seventh Circuit rejected Overwell’s breach of fiduciary duty claims, finding that the alleged breaches lacked merit under the Delaware standard for aiding and abetting fiduciary breaches. First, the Court held that Overwell failed to show that Trading Technologies knowingly participated in a fiduciary breach, as the continued servicing of Neurensic’s customers by former employees benefitted Neurensic, not Trading Technologies.

Second, the Seventh Circuit determined that Overwell’s claim of blocking competitive bids could not succeed as Neurensic still held its most valuable asset – its source code – and could have repossessed its servers. Trading Technologies’ negotiation tactics were permissible under Delaware law, which allows [...]

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Insuring Innovation: Software Code May Be Protected as an Arrangement

by | Aug 22, 2024 | ,

The US Court of Appeals for the Eleventh Circuit once again remanded a trade secret and copyright dispute involving software for generating life insurance quotes, finding that the district court erred by failing to consider the copyrightability of the source code’s arrangement. As to the trade secret claim, however, the Eleventh Circuit found that the district court did not err in finding that the defendants misappropriated the trade secrets at issue and could be held jointly and severally liable, despite varying levels of culpability. Compulife Software, Inc. v. Newman, Case No. 21-14074 (11th Cir. Aug. 1, 2024) (Jordan, Brasher, Abudu, JJ.)

Compulife’s software generates life insurance quotes using a proprietary database of insurance rates. The software produces a quote by using blocks of code, arranged in a particular manner, that correspond to different data points such as state, birth month, birthday, birth year, sex and smoking status. Compulife licenses its software to customers and offers an online version to the public.

David Rutstein is a former insurance agent who is permanently barred from the profession. Rutstein misled Compulife into giving him its software by pretending that he worked with someone who had a license to use it. Rutstein then created and registered several websites in his son’s name using Compulife’s software in connection with the sites. One of the websites was later owned by Aaron Levy. Rutstein and Levy directed an employee, Moses Newman, to launch a scraping attack on Compulife’s website to get millions of quotes, which they used for their own websites. Compulife’s sales declined as a result.

Compulife sued Rutstein, Rutstein’s son, Levy and Newman for copyright infringement and misappropriation of trade secrets, among other claims. After a bench trial, the parties appealed, and the Eleventh Circuit directed the district court to make more specific findings. After a second bench trial, the district court determined that the defendants did not infringe Compulife’s software by copying it and using it for their own website, but they did misappropriate Compulife’s trade secrets. The defendants were held jointly and severally liable despite differing degrees of culpability. All parties appealed.

Compulife argued that the district court erred in concluding that the defendants did not infringe its copyright. The Eleventh Circuit agreed in part, finding that the district court incorrectly applied the abstraction-filtration-comparison test used in software copyright infringement analyses. Compulife claimed that the arrangement of its various source code elements (e.g., state, birth month, birthday, birth year and sex) was a creative and therefore protectable form of expression. The Court agreed that the arrangement was potentially protectable, similar to its holding in another case that the arrangement of yacht listings in a boat guide could be protectable. BUC Int’l v. Int’l Yacht Council (11th Cir. 2007). The Court remanded the copyright infringement analysis to the district court, finding that it erred in the abstraction step because it “never identified the entire arrangement of these variables in the code as a constituent component of the code.” The Eleventh Circuit disagreed, however, with [...]

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Don’t Share Trade Secrets With Your Fiancé: A Cautionary Tale

by | Aug 15, 2024 |

The US Court of Appeals for the First Circuit largely affirmed a multimillion-dollar award against a temp agency for misappropriation of trade secrets and unjust enrichment due to its employee’s act of obtaining proprietary information from his fiancée, who worked at a competitor placement firm. BioPoint, Inc. v. Dickhaut, et al., Case No. 23-1575 (1st Cir. July 30, 2024) (Rikelman, Lynch, Howard, JJ.) (Rikelman, dissenting in part).

BioPoint is a Massachusetts-based life sciences consulting firm that places highly skilled candidates in temporary positions at pharmaceutical, biopharmaceutical and medical device companies. Leah Attis was one of the company’s top salespeople. Catapult is a Texas-based placement company. It opened a Boston office in 2017 and hired Attis’s fiancé, Andrew Dickhaut, as managing director. When business did not go well at Catapult’s Boston office, Attis began to help Dickhaut place candidates by giving him proprietary information about candidates and rates from BioPoint’s database, even though Catapult did not initially operate in the life sciences sector. As a result, Catapult eventually entered into a managed services provider agreement with biotechnology company Vedanta, whereby Catapult would manage all of Vedanta’s labor contracts and would have the first opportunity to fill openings there. Attis continued to give Dickhaut information on candidates from BioPoint’s system to help with Vedanta openings.

Upon discovering that it lost a candidate placement to Catapult because of Attis’s interventions, BioPoint fired her in December 2019. BioPoint then sued Catapult and Dickhaut for federal and state law claims, alleging misappropriation of trade secrets, tortious interference, and unfair and deceptive trade practices. The case proceeded to trial, and the district court divided the claims between a jury trial for the legal claims and a bench trial for equitable relief. The jury found that Catapult had misappropriated trade secrets and tortiously interfered with BioPoint’s relationship with the candidate that Attis helped Dickhaut place. The jury awarded BioPoint more than $300,000 in damages. At the bench trial on the equitable claims, the district court found that all profits that Catapult derived from its relationship with Vedanta arose on account of misappropriation of trade secrets and were recoverable as unjust enrichment. The district court awarded treble damages jointly against Dickhaut and Catapult, totaling more than $5 million. Catapult appealed.

While the First Circuit largely affirmed the district court and the jury’s findings, the First Circuit found two errors. First, the Court found that the district court erred in awarding BioPoint both the lost profits from the placement of the candidate and the unjust enrichment that accrued to Catapult as the result of the placement. The Court explained that the law does not permit the lost profits to be counted twice and reduced the award by more than $150,000, which was the amount that the district court had awarded for the loss of the candidate.

Second, the First Circuit found that the district court erred in finding Dickhaut jointly and severally liable for the entirety of his employer’s unjust enrichment, calling it “a bridge too far.” Since the [...]

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One Bite at the Apple Where State and Federal Jurisdiction Is Concurrent

by | Aug 15, 2024 |

The US Court of Appeals for the Second Circuit upheld a federal district court’s dismissal of a case on res judicata grounds after a state court issued a decision on different claims but had concurrent jurisdiction over the claims alleged in the federal case. Beijing Neu Cloud Oriental Sys. Tech. Co. v. Int’l Bus. Machs. Corp., Case No. 22-3132 (2d Cir. July 25, 2024) (Livingston, Menashi, Kahn, JJ.)

Beijing Neu Cloud Oriental System Technology filed suit in federal district court against several International Business Machines companies (collectively, IBM defendants) asserting a single claim for trade secret misappropriation under the Defend Trade Secrets Act (DTSA). Shortly thereafter, Neu Cloud also sued the IBM defendants in New York state court, alleging state law causes of action for unfair competition, unjust enrichment, breach of fiduciary duty, breach of contract and tortious interference.

The state court dismissed the claims. After the state court issued its decision, the IBM defendants moved to dismiss the federal action, arguing that:

  • Neu Cloud’s claim was time-barred.
  • Neu Cloud failed to state a plausible DTSA claim.
  • The judgment of the New York Supreme Court precluded the instant DTSA claim under res judicata.

The district court granted the motion to dismiss, agreeing with the IBM defendants on the DTSA claims but not on the effect of res judicata. Neu Cloud appealed the dismissal of its complaint. The Second Circuit only considered the arguments related to the IBM defendants’ res judicata defense.

Applying New York law to determine the preclusive effect of the state court’s judgment, the Second Circuit explained that under New York preclusion law “a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter.” This rule applies if the subsequent claim was “actually litigated” in the prior action or if it merely “could have been raised in the prior litigation.”

The Second Circuit found that the district court’s decision was on the merits and the trade secret claims could have been raised in the state court action. The Court held that the New York state court would have been competent to adjudicate the DTSA claim since jurisdiction for DTSA actions is not exclusive to federal courts. The Court noted that the plain text of the DTSA is strong evidence that Congress intended for jurisdiction over DTSA claims to be federal and state concurrent. Moreover, the Second Circuit found that the legislative history revealed no evidence that Congress affirmatively intended to confer exclusive jurisdiction over DTSA claims on the federal courts. The Court noted that many other circuit courts had come to the same conclusion.

Since the parties were clearly the same, the state court case involved the same subject matter, and the claims alleged the same injury and arose out of the same or related facts, the Second Circuit stated that the relevant question was whether Neu Cloud should have sought recovery in state court for its claim of trade secret [...]

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