In an August 17 decision in LS3 Inc. v. Cherokee Nation Strategic Programs, LLC, a Colorado appeals court reinstated some, but not all, of a former employer's breach of a noncompete agreement's claims that had been dismissed by the trial court at the pleadings stage.
What Former Employer LS3 Claimed
In this case, IT company LS3 alleged that Cherokee Nation, a competing IT company had poached several of its ex-employees, using those employees, who brought with them trade secret, confidential information to unfairly bid for, and ultimately win, a contract with the USDA.
What the Trial Court Did
In response to LS3's complaint, Cherokee Nation and the ex-LS3 employees moved to dismiss the compaint on several grounds, including the following:
1) At the time these former employees migrated over to competitor Cherokee Nation, LS3 had already been declined for the USDA contract, thereby defeating any possible claim that LS3 had any legitimate business interest worthy of judicial protection, becase the defendants, by definition, could not have proximately caused LS3 any damages; and,
2) LS3 did not identify any specific trade secrets that were purportedly misappropriated, let alone used, by any of the defendants.
As you can probably guess from the title and lead-in of this post, the trial court sided with the defendants on these issues, and dismissed the case.
What the 10th Circuit Appellate Court Held
In reversing part of the District Court's decision dismissing the complaint, the Appellate Court ultimately held that the trial court had rushed to judgment in turning away those portions of LS3's claims predicated on the former employees' breach of their noncompete agreements prohibiting them from diverting live leads to a competitor, stating:
"Taking the allegations in the amended complaint as true and construing them in the light most favorable to LS3, see Waller, 932 F.3d at 1282, we conclude the amended complaint plausibly alleged that LS3 was still competing for the bridge contract when Ms. Evans emailed the Individual Defendants. We therefore reverse the district court’s dismissal of the portion of the breach of contract claim alleging a breach of the duty of loyalty in the Individual Defendants’ IP-NDAs and EAs."
On the other hand, the Appellate Court upheld that portion of the trial court's dismissal of the claims alleging trade secret theft in violation of the Defend Trade Secrets Act ("DTSA"), stating, in pertinent part, as follows:
"[B]ecause the amended complaint failed to allege what information the Individual Employees shared, the conclusory factual allegations “are merely consistent with,” and not indicative of, the Cherokee and Individual Defendants’ liability, and therefore “stop short of the line between possibility and plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678 (quotations omitted).
A Practical Takeaway
One practical takeaway from this decision is that it serves as a potent reminder for claimants seeking recovery for trade secret misappropriation: it's not enough to claim, in broad, vague terms that your trade secrets were wrongly taken and used unfairly to compete against you. You must allege specifics, or you run a high risk of having those claims tossed right out of the gate.