Court Upholds Unfair Competition Claim Based on Theft of Trade Secrets

On April 5, 2019, Justice Masley of the New York County Commercial Division issued a decision in Weil v. Stenzler, 2019 NY Slip Op. 30966(U), upholding an unfair competition claim based on a theft of trade secrets, explaining:

Under New York law, the primary concern in unfair competition is the protection of a business from another's misappropriation of the business organization or its expenditure of labor, skill, and money. The principle of misappropriation of another's commercial advantage is a cornerstone of the tort. A cause of action based on unfair competition may be predicated upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets.

To state an unfair competition claim for misappropriation of trade secrets, plaintiffs must allege that (1) they possessed a trade secret and (2) the defendants used that trade secret in breach of an agreement, confidential relationship or. duty, or as a result of discovery by improper means.

A trade secret is any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Under New York law, a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage. The secrecy of certain information is, in some circumstances, an issue of fact that cannot be resolved on a motion to dismiss.

Accepting the allegations in the complaint as true, plaintiffs adequately allege that Stenzler misappropriated their trade secrets/proprietary business information through their meetings, entered a confidentiality agreement of some form, and violated that agreement by using the trade secrets proprietary information to form Rumble, with other business partners, using virtually all of the material aspects of the information gleaned from plaintiffs. At this early stage, on a motion to dismiss under only CPLR 3211 (a) (7), it is not for the court to decide whether the information is novel or comprises trade secrets/proprietary information.

As to Rumble, discovery is needed to determine the manner in which it obtained and used the allegedly misappropriated information: While defendants further contend that plaintiffs have failed to allege any legally cognizable damages that resulted from the purported misappropriation, the court declines to grant the motion on that basis at this pre-answer stage. Although plaintiffs' damages "must be measured by the loss of their own commercial advantage, which may not correspond to what the defendant has wrongfully gained, the Court of Appeals has noted that damages can be difficult to prove in relation with an unfair competition claim, and the measure of damages is especially complicated where the injury affects intangible values. Though the complaint does not contain allegations precisely setting forth a calculation of plaintiffs' losses, plaintiffs' state that they have sustained losses, and, at this pre-answer stage, those damages need only be alleged, not proven. Limited, expedited discovery can be conducted at small cost to the parties to determine the amount, if any, of actual losses plaintiffs sustained as a result of the alleged misappropriation. Accordingly, the motion is denied with respect to the first cause of action.

(Internal quotations and citations omitted).

The law protects intellectual property in a number of ways, but that protection is not unlimited. We frequently litigate intellectual property claims, including trademark, copyright and trade secret claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about whether you have, or face, a claim for theft or infringement of intellectual property.