What is the Statute of Limitations for Trade Secret Misappropriation?
August 2, 2019
When Does the Breach of an NDA Trigger the Statute of Limitations for Trade Secret Misappropriation?
Businesses often require employers, vendors, and potential business partners to execute non-disclosure agreements (NDAs), as a means to safeguard trade secrets and other proprietary information. In many cases, NDAs require the party who received confidential information to return it on a specified date, such as the termination of the employment relationship. If the party fails to do so, it can constitute trade secret misappropriation.
To protect a discloser’s rights, it is also important to recognize that the breach of an NDA’s duty to return confidential information will also trigger the statute of limitations for trade secret misappropriation claims. Under the Defend Trade Secrets Act (DTSA), plaintiffs must file suit no later than three years after the date the misappropriation is discovered or reasonably should have been discovered.
A recent California federal court decision highlights what happens if businesses don’t act expediently to protect their rights. In Alta Devices, Inc. v. LG Electronics, Inc., Judge Lucy Koh of the Northern District of California held that Alta Devices, Inc. (Alta) could not pursue its trade secret misappropriation claims because it filed suit in 2018, which was more than three years after it was on inquiry notice of potential misappropriation of trade secrets when LG Electronics, Inc. (LGE) breached its duty to return confidential information in 2012.
Alleged Trade Secret Misappropriation
In 2011, LGE learned of Alta’s thin GaAs solar film technology and expressed an interest in Alta. In early June of 2011, Alta and LGE entered into discussions regarding possible investment or other business opportunities related to Alta’s technology. On June 13, 2011, Alta and LGE entered into a mutual non-disclosure agreement (2011 NDA) that prohibited both parties from disclosing or using “Confidential Information” disclosed by the other party in connection with discussions regarding the potential business opportunities.
The 2011 NDA defined Alta’s confidential information and stated that “the Confidential Information is proprietary to the disclosing party [(Alta)], has been developed and obtained through great efforts and expense by the disclosing party, and that disclosing party regards all of its Confidential Information as trade secrets.” The text of Section 5 of the 2011 NDA also stated:
The term for the parties’ disclosure of Confidential Information under this Agreement (“Disclosure Period”) shall be one (1) year (extendable by addendum) from the Effective Date. The parties’ duty to hold in confidence Confidential Information that was disclosed during the Term shall survive for an additional three (3) years after the expiration of this Agreement.
The 2011 NDA further provided that the receiving party must immediately return and redeliver all Confidential Information to the disclosing party “upon the earlier of (i) the completion or termination of the dealings between the parties; (ii) the termination of the Agreement; or (iii) at such time as the disclosing party may so request.”
As a result of the 2011 NDA, LGE gained information “showing the financial and technical feasibility of the mass-production of Alta Devices’ solar film technology, testing information, and plans for improvement, as well as other Confidential Information.” According to Alta’s complaint, it learned of LGE’s misappropriation of Alta’s trade secrets in mid-2016 and requested that LGE return Alta’s confidential information pursuant to the 2011 NDA. Alta first filed suit on January 18, 2018. Among other claims, Alta alleged trade secret misappropriation under the DTSA and the California Uniform Trade Secrets Act (CUTSA).
LGE sought to dismiss the trade secret claims as time-barred. It argued that, under the 2011 NDA, LGE had a duty to return Alta’s confidential information at the end of the 2011 NDA’s “Disclosure Period,” which was June 13, 2012. Because Alta alleges that LGE failed to return Alta’s confidential information both on and after that June 13, 2012 date, LGE argued that Alta was put on inquiry notice as of June 13, 2012, that LGE had misappropriated Alta’s trade secrets. Because Alta did not file its complaint in the instant case until January 18, 2018, LGE argued that Alta’s CUTSA and DTSA claims are time-barred.
Court Dismisses Trade Secret Claims
Judge Koh agreed with LGE’s arguments. “[T]he Court concludes that Alta was on inquiry notice of potential misappropriation as of June 13, 2012,” Judge Koh wrote. “Therefore, Alta’s complaint, which was filed January 18, 2018, more than three years after the June 13, 2012 date, is barred by the statute of limitations as a matter of law. This is sufficient to find that Alta’s CUTSA and DTSA claims fail.”
In reaching her decision, Judge Koh relied heavily on Wang v. Palo Alto Networks, Inc., No. C 121-05579 WHA, 2014 WL 1410346 (N.D. Cal. Apr. 11, 2014). In that case, the court similarly held that the failure to return documents containing alleged trade secrets in breach of a non-disclosure agreement gave the plaintiff inquiry notice.
According to Judge Koh, just as in Wang, LGE had a duty to return Alta’s confidential information at the end of the 2011 NDA’s “Disclosure Period,” which was June 13, 2012, which it failed to do. Alta also knew that LGE was seeking to engage in work in the same field as Alta and made no allegation that LGE ever asked for relief from its duty to return Alta’s trade secrets.
Judge Koh further found that because the violation of the 2011 NDA was sufficient to put Alta on inquiry notice. “It is of no matter that Alta alleges that it was put on actual notice by mid-2016,” she wrote. “The earlier June 13, 2012 inquiry notice triggered the start of the three-year statute of limitations period.”
Key Message for Businesses
As the court’s decision in Alta Devices, Inc. v. LG Electronics, Inc. highlights, waiting too long to bring a trade secret misappropriation case can prove fatal to your case. If your contract partner breaches the NDA by failing to return confidential documents, keep in mind that the clock is now ticking on the three-year statute of limitations for misappropriation of trade secrets under the DTSA. Accordingly, it is imperative to take prompt action to determine whether any trade secrets that were disclosed have been improperly used. Trade secret owners may also file suit under both federal and state law to obtain injunctive relief to prevent any “actual or threatened” misappropriation.
If you have any questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, David Einhorn, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.