Timing is Critical when Asserting Trade Secrets and Business Conspiracy Claims in Virginia Courts

partnerships issues
In a recent case, Judge James C. Cacheris of the Alexandria Division of the U.S. District Court for the Eastern District of Virginia issued an opinion that clarified the preemption provision of the Virginia Uniform Trade Secrets Act.  This opinion is useful guidance to commercial litigators in Virginia. In MicroStrategy Servs. Corp. v. OpenRisk, LLC, No. 1:14-cv-1244, 2015 WL 1221263 (E.D.Va. Mar. 17, 2015), the parties were embroiled in contentious litigation that sprang from a failed vendor agreement.  MicroStrategy provided cloud-based data storage to OpenRisk, which in turn was using the storage to develop a software platform to estimate damages to real property caused by natural disasters.  OpenRisk contracted to pay MicroStrategy for the storage space, and then provided its proprietary software to MicroStrategy to utilize the space.  The relationship between the parties soon soured, however, , OpenRisk was hit with significant employee turnover, some of which involved allegations that MicroStrategy poached OpenRisk employees.  This loss of key employees led OpenRisk to cease business operations. MicroStrategy then sued OpenRisk in the Eastern District for failure to pay contracted monthly fees relating to the data storage.  OpenRisk asserted counterclaims for misappropriation of trade secrets, business conspiracy, and aiding and abetting a breach of fiduciary duty.  MicroStrategy moved to dismiss OpenRisk’s counterclaims under Fed. R. Civ. P. 12(b)(6). As low-hanging fruit, Judge Cacheris first focused the counterclaim for “aiding and abetting a breach of fiduciary duty.”  OpenRisk asserted that MicroStrategy “aided and abetted” a key former employee of OpenRisk to violate his fiduciary duty to the company.  Judge Cacheris made short work of this claim and held that Virginia law does not recognize an independent cause of action for aiding and abetting a tort.  The judge distinguished a Supreme Court of Virginia case, Halifax Corp. v. Wachovia Bank, 604 S.E.2d 403 (Va. 2004) by noting that the Virginia high court merely assumed, for purposes of analysis, the existence of such a claim, and this was a far cry from holding that such a claim, in fact, existed. Judge Cacheris next turned to OpenRisk’s claims for business conspiracy under Va. Code § 18.2-499-500 and dealt with the procedural confusion that arises when such claims are pled alongside trade secret claims.  Under the Virginia Uniform Trade Secrets Act, if information qualifies as a “trade secret,” then the uniform act “displaces conflicting tort, restitutionary, and other law of this Commonwealth providing civil remedies for misappropriate of a trade secret.”  Va. Code § 59.1-341(A). The procedural confusion arises from the question of when in the litigation any other preempted claims must be dismissed.  In litigation, a party asserting a trade secrets claim bears the burden of proving that its stolen information qualifies as a trade secret.  Often in such litigation, the parties spar over whether reasonable efforts were taken to safeguard the secrecy of the information.  If the party asserting the trade secrets claim fails to prove this, then it has failed to prove that it had a trade secret to protect.  At that point, the Uniform Act (and the preemption provision) should not apply to the information.  But if this determination is made after the party’s alternative causes of action were dismissed as preempted under the Uniform Act, the party can be left without a remedy.  Thus, the procedural timing matters greatly in trade secrets litigation. Judge Cacheris held that he could not rule as a matter of law on an early motion to dismiss that the conspiracy claims were preempted by the Uniform Act.  He surveyed the case law on the issue and noted that the Virginia Supreme Court has not yet provided a definite answer on the timing issue.  Thus, Judge Cacheris’s opinion would leave the determination of preemption until later in the litigation, though the opinion notes contrary authority from other states holding the determination should be made at the outset of litigation. Finally, Judge Cacheris examined OpenRisk’s trade secrets claim, which was based upon the company’s proprietary software that was provided to MicroStrategy for use in the data storage.  MicroStrategy attacked the claim on the ground that OpenRisk supposedly did not take sufficient efforts to safeguard the secrecy of the software, and Judge Cacheris agreed with this argument.  The judge focused on OpenRisk’s pleading (or lack thereof), specifically that OpenRisk did not allege that the person at MicroStrategy who was provided the software was under any duty of confidentiality.  In other words, the consultant was never made to sign a Non-Disclosure Agreement that legally prevented him from sharing the software.  Because no duty of confidentiality was alleged in the counterclaim, Judge Cacheris sustained the 12(b)(6) motion on this count. MicroStrategy v. OpenRisk provides commercial litigators useful guidance regarding the procedural complexity of alternative trade secrets and business conspiracy claims – two claims that often arise in business disputes.  The opinion is useful for illustrating the EDVA judges currently view these claims, but it also demonstrates what we do not yet know.  Practioners must wait for further answers from Richmond on the remaining issues.