By Pamela C. Maloney, J.D.
The owners of a dance studio failed to identify with sufficient particularity the trade secrets allegedly misappropriated by competitor and two former employees so as to put them on notice as to the precise information that they had misappropriated and also failed to outline in the complaint the steps the dance studio had taken to maintain the secrecy of that information, the North Carolina Supreme Court ruled in affirming the lower court’s dismissal of a claim for misappropriation of trade secrets under North Carolina law. The state high court also affirmed the dismissal of the dance studio’s other claims against its competitor and former employees, including unfair and deceptive trade practices, tortious interference with contract, unjust enrichment, and civil conspiracy. Writing in dissent, Justice Cheri Beasley opined that the studio pleaded sufficient facts under North Carolina’s liberal pleading standards to put the defendants on notice of the transactions and occurrences at issue (Krawiec v. Manly, April 6, 2018, Jackson, B.).
The owners of Happy Dance Inc./CMT Dance, a Fred Astaire franchised dance studio, entered into contracts with two foreign-born dancers in which the owners of the dance studio agreed to procure work visas for the dancers in exchange for each dancer’s express promise to work exclusively for Happy Dance as dance instructors and performers during the term of their respective contracts. The two dancers also agreed not to work for any other company that offered dance instruction or competed against Happy Dance for one year after the expiration or termination of their employment with the studio. However, during the term of their employment contracts, both dancers began to work for Metropolitan Ballroom, LLC, and, according to Happy Dance, the dancers shared with Metropolitan confidential information relating to Happy Dance’s ideas and concepts for dance productions, marketing strategies and tactics, and customer lists with contact information. Happy Dance also alleged that the dancers had lured away its customers, resulting in a significant loss of revenue. Happy Dance filed a lawsuit against Metropolitan and the dancers, asserting claims for misappropriation of trade secrets, unfair and deceptive practices, tortious interference with contract, unjust enrichment, and civil conspiracy.
Misappropriation of trade secrets. In order to succeed on its claim for misappropriation of trade secrets under the North Carolina Trade Secrets Protection Act, Happy Dance was required to identify the trade secrets with sufficient particularity so as to put Metropolitan and the dancers on notice as to the precise information that had been appropriated. However, in claiming that the dancers and Metropolitan had misappropriated trade secrets, Happy Dance simply described their trade secrets as original ideas and concepts for dance ideas; concepts for dance productions; marketing strategies and tactics; and student, client and customer lists with contact information. According to the court, Happy Dance failed to provide any details about their dance productions or to describe a specific idea, concept, strategy, or tactic with respect to marketing plans. Therefore, their claim for misappropriation was too general for the court to determine whether there was a formula, pattern, program, device, compilation of information, method, technique, or process at issue that derived actual or potential commercial value from not being known or readily ascertainable through independent development or reverse engineering.
In addition, although the North Carolina courts have recognized that customer names and addresses could qualify as a trade secret, Happy Dance’s complaint failed to allege that the lists contained any information that would not have been readily available to Metropolitan or the dancers using publicly available information. Thus, on the face of the complaint, Happy Dance failed to plead that its dance concepts, marketing strategies or customer lists constituted trade secrets.
According to the state high court, Happy Dance also was required to show that it had attempted to maintain the secrecy of information that had been misappropriated. However, the complaint merely alleged that Happy Dance had shared the information regarding dance ideas and productions, marketing strategies and customer lists with the dancers in confidence. There were no allegations of any methods, plans, or other acts that Happy Dance took to maintain the secrecy of its trade secrets. Under North Carolina law, an expectation of confidentiality was not sufficient to establish that the information was the subject of reasonable efforts to maintain secrecy.
Concluding that Happy Dance had failed to alleged the existence of a trade secret and that the dance studio had failed to alleged that it took steps to maintain the secrecy of the allegedly misappropriated information, the state supreme court affirmed the lower court’s dismissal of the dance studio’s claim for misappropriation of trade secrets.
Remaining claims. The state supreme court also upheld the lower court’s dismissal of Happy Dance’s remaining claims on similar grounds—that the complaint failed to state valid claims. With respect to Happy Dance’s claim for tortious interference with a contact, the dance studio failed to allege that Metropolitan knew of the exclusivity provision contained in the dancers’ employment agreements other than through the latter’s knowledge of the work visas obtained by Happy Dance. However, there were no allegations that the work visas themselves constituted or contained any reference to the exclusivity of the employment arrangement.
Happy Dance’s claim for unfair and deceptive trade practices was based on the misappropriation of trade secrets by Metropolitan and the dancers for their own benefit and on Metropolitan’s wrongful hiring of the dancers. In light of court’s dismissal of Happy Dance’s misappropriation of trade secrets and tortious interference with contract, the claim for unfair and deceptive trade practices likewise failed. Similarly, because all underlying tort claims against Metropolitan had been dismissed, and because Happy Dance failed to provide sufficient detail on how Metropolitan and the dancers had unlawfully solicited Happy Dancers’ customers, the civil conspiracy claim could not survive, the court concluded.
Finally, the state supreme court affirmed the lower court’s dismissal of Happy Dance’s claim for unjust enrichment but on the alternative ground that Happy Dance conferred no benefit on Metropolitan by having obtained work visas for the dancers because Metropolitan was required to file a new visa petition once there was a change in employment.
Dissent. Writing in dissent, Justice Cheri Beasley noted that the sufficiency of a claim for misappropriation of trade secrets was a matter of first impression for the court and concluded that the majority’s reasoning and reliance on cases applying a preliminary junction or summary judgment standard for the state’s general pleading standard worked to conflate North Carolina’s liberal pleading standards and validated a heightened pleading standard for a claim in which public disclosure of confidential information was a very real concern for plaintiffs. Justice Beasley pointed out that North Carolina courts have long recognized that both marketing strategies and customer lists could constitute trade secrets, explaining that it was unreasonable to conclude that Happy Dance could not rely on those cases in pleading its claim. In addition, although there was no support in North Carolina law for the premise that original ideas and concepts for dance productions constituted trade secrets, Beasley pointed out that there was no authority stating that they were decidedly not trade secrets either, and that similar information had been valued and protected when former employees accepted similar employment from competitors. In light of these cases and North Carolina’s liberal pleading standard, Justice Beasley concluded that Happy Dance’s allegations provided specific details regarding both client and business information to put Metropolitan and the dancers on notice of the transactions and occurrences at issue.
Justice Beasley also took exception to the fact that the majority announced a new pleading standard by requiring evidence at the pleading stage to show that Happy Dance had taken steps to keep its trade secrets confidential. Under existing North Carolina precedent, evidence of affirmative efforts to maintain the secrecy of a trade secret was required in cases decided at the preliminary injunction or summary judgment stage, not at the pleading stage, Justice Beasley explained.
The case is No. 252A16.
Attorneys: Erin B. Blackwell (Hatcher Legal, PLLC) for Michael Krawiec, Jennifer Krawiec and Happy Dance, Inc./CMT Dance, Inc. d/b/a Fred Astaire Franchised Dance Studios. Renner St. John (Brock & Scott, PLLC) for Jim Manly, Monette Manly and Metropolitan Ballroom, LLC.
Companies: Happy Dance, Inc./CMT Dance, Inc. d/b/a Fred Astaire Franchised Dance Studios; Metropolitan Ballroom, LLC
MainStory: TopStory TradeSecrets NorthCarolinaNews
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