Fourth Circuit Rules against Sysco in Trade Secret Appeal

The Fourth Circuit has affirmed a ruling from a North Carolina district court dismissing trade secret claims, copyright claims, and other claims brought by the Taiwanese company Sysco against its American distributor.

The case is Sysco Machinery Corp. v. DCS USA Corp.

As the court explained,

Sysco is a Taiwanese company that manufactures rotary die cutting machines. DCS is a North Carolina company that distributes them. From 2017 to 2021, the companies worked together to sell machines to American customers. DCS was responsible for securing the customers and identifying each one’s unique technical requirements, and Sysco was responsible for producing customized machines that met those requirements. The two companies shared the profits that resulted.

However, said the court,

Sysco’s fortunes began to sour in April 2021, when a group of Taiwanese employees left the company and launched a competitor named Cymtek Solutions, Inc. (Cymtek). According to Sysco, the employees engaged in “copying, stealing, and misappropriating confidential files and machine layouts” when they departed.

After Cymtek was launched, DCS arranged at least three transactions in which it sold Cymtek-made machines to customers who had previously bought, or at least expressed interest in, Sysco-made machines. Sysco alleged that these “diverted” contracts were worth “millions of dollars.”

Sysco sued Cymtek in a Taiwanese court in March 2022. According to the Fourth Circuit, there was “significant dispute” between the parties over the nature of the Taiwanese court’s ruling, which was published only in Mandarin. According to Sysco, the Taiwanese court ruled in its favor and issued a preliminary injunction against Cymtek. Although DCS wasn’t a party to the Taiwanese case, Sysco sent DCS letters informing it of the Taiwanese action and advising that it “avoid placing orders” from Cymtek.

Sysco also registered at least 23 technical drawings related to its rotary die cutting machines with the US Copyright Office. As with all unredacted material registered with the Copyright Office, the drawings were available to the public.

In August 2022, Sysco sued DCS, Cymtek, Cymmetrik, and Sysco’s former employees in the United States in the Eastern District of North Carolina.

But after the court denied Sysco’s request for a temporary restraining order and took DCS’s request for sanctions under advisement, Sysco asked the court to dismiss the suit.

Three days later, Sysco also sued Cymtek and Cymmetrik in the District of Massachusetts, failing to inform the court about the dismissed case in North Carolina.

Sysco then went back to the Eastern District of North Carolina, where it sued DCS once again in March 2023, claiming misappropriation of trade secrets under the federal Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836, et seq., and North Carolina’s Trade Secrets Protection Act (TSPA), and copyright infringement, among other claims.

The district court dismissed all of Sysco’s claims for failure to state a claim.

The trade secret misappropriation claim failed, the court held, because it was stated in “broad, sweeping terms” that, “absent factual enhancement,” lacked the specificity needed to be cognizable.

The copyright infringement claim failed because Sysco’s copyright in technical drawings could not “preclude others from manufacturing and marketing the article” depicted in the drawings, said the district court.

On appeal, the Fourth Circuit noted that a claim for trade secret misappropriation under the DTSA or North Carolina’s TSPA demands plausible allegations both that the plaintiff “possessed a valid trade secret” and that the trade secret was misappropriated.

Here, said the court, “Sysco plausibly alleged neither component.”

The court noted that

Sysco’s complaint defined its trade secrets twice, first as “Sysco’s compilation of machinery, software, and confidential information,”…, and then as “Sysco’s proprietary and confidential information, including the Copyrighted Works, and technical, financial, operations, strategic planning, product, pricing vendor, and customer information,” … When pressed at oral argument to define its trade secrets, Sysco pointed to yet a third part of its complaint that described “the technical documents, test videos, statistical data, client contracts, and other confidential information used by Sysco to develop and manufacture” rotary die cutting machines.

Considered together, said the court,

these three definitions suggest that nearly Sysco’s entire business is a trade secret. That is the type of claim so “sweeping and conclusory” that it is impossible for DCS to know what it has been accused of misappropriating or for the court to assess whether Sysco has met the reasonable secrecy and independent economic value requirements.

Also, said the court, “The claim is also unlikely to be true in practice, which means that it falls short of ‘plausible on its face.’”

Sysco’s trade secret definition was also problematic in that it included information that was incapable of being a trade secret.

A trade secret is “extinguished” when it is disclosed “to others who are under no obligation to protect the confidentiality of the information.” Here, material registered with the US Copyright Office is under no obligation of confidentiality.

The court noted that misappropriation under trade secret law involves “acquisition,” “disclosure,” or “use” of a trade secret by “improper means” or without consent.

The court pointed out that

A party that acquires another party’s information via “lawful means” and that takes on no legal duties with respect to the information cannot be liable for misappropriating it, however objectionable its conduct may seem to the party to whom the information first belonged.

In this case, said the court,

Sysco did not plausibly allege misappropriation because it did not make clear how DCS acquired, disclosed, or used its trade secrets. Sysco argued that after the establishment of Cymtek, DCS began to fulfill customer orders with Cymtek machines rather than Sysco machines … But it did not explain the manner in which fulfilling customer orders involved disclosing or using Sysco’s trade secrets. As the district court noted, “Sysco [did] not even allege that DCS [was] in possession of any of Sysco’s ‘trade secrets.’”

Also, said the court,

Any information DCS possessed about Sysco appears to have been acquired lawfully as part of the parties’ ordinary manufacturer-distributor relationship. Sysco did not allege that, prior to the activity at issue, it ever informed DCS that such information contained trade secrets. It is therefore difficult to see what it is about DCS’s conduct that involved a breach of duty.

The court thus affirmed the judgment of the district court.