IP Law Daily, TRADE SECRETS—5th Cir.: Dismissal of trade secret misappropriation claims in insurance purchase application dispute upheld, (Feb 4, 2025)

By Linda O’Brien, J.D., LL.M.

The dismissal of trade secret appropriation claims in a prior suit constituted a final judgment on the merits for res judicata purposes.

Res judicata applied to the dismissal of claims of the misappropriation of trade secrets in a prior suit by a developer of a workers compensation insurance purchase application against a competitor, barring the same claims brought against the same parties in a second suit, the U.S. Court of Appeals for the Fifth Circuit has ruled. The developer also failed to state a claim for misappropriation of a trade secret against two affiliated defendants under both the MUTSA and DTSA as the complaint failed to plausibly allege that the two defendants knew or had reason to know that a trade secret was acquired by improper means. Thus, the dismissal of the claims on the basis of res judicata and for failure to state a claim was affirmed (Pie Development, L.L.C. v. Pie Carrier Holdings, Inc., No. 24-60155 (5th Cir. Feb. 3, 2025)).

AmFed Insurance sought to develop an application that would simplify the process of applying for workers compensation insurance and engaged consulting company Valen Analytics to help with the effort. The two companies entered into a non-disclosure agreement in March 2016. One month later, AmFed formed a wholly owned subsidiary, Pie Development, to carry out its business plans. In June 2019, the insurance company terminated the consultant and subsequently two principals of the consulting company, John Swigart and Dax Craig, created their own company called Pie Insurance and marketed competing product.

Pie Development sued Swigart, Craig and Pie Insurance, alleging misappropriation of trade secrets under the Mississippi Uniform Trade Secrets Act (MUTSA) and Defend Trade Secrets Act (DTSA), unlawful interference with business relations, unjust enrichment, and civil conspiracy. The district court granted the defendants’ motion to dismiss and Pie Development appealed. In March 2023, the appellate court affirmed the dismissal.

While the appeal was pending, Pie Development filed a separate action in district court against Pie Carrier Holdings, Incorporated, Gallatin Point Capital, LLC, Sirius Point Ltd., and Pie Casualty Insurance Company, alleging the same claims as the first complaint. Pie Insurance, Swigart, Craig, Pie Carrier, and Pie Casualty moved to dismiss on the grounds that the claims were barred by res judicata. Gallatin and Sirius separately moved to dismiss for failure to state a claim. The district court granted both motions to dismiss and Pie Development timely appealed.

Res judicata. The court found that the first suit was concluded with a final judgment on the merits and therefore res judicata barred the second suit. Res judicata bars an action when the parties are identical or in privity, the judgment in the prior action was rendered by a court of competent jurisdiction, the prior action was concluded by a final judgment on the merits, and the same claims were involved in both actions. The only element in dispute was whether there was a final judgment on the merits. The district court judgment dismissing the claims in the prior action without prejudice was indisputably final and Pie Development admitted that when it appealed the judgment, thereby expressly invoking the jurisdiction of the appellate court.

Dismissals without prejudice are not typically considered decisions on the merits. Pie Development declined the opportunity to amend its complaint after its claims were dismissed without prejudice in the first action and chose instead to appeal. Therefore, the dismissal without prejudice converted to a dismissal with prejudice and constitutes a final judgment on the merits for purposes of res judicata. Although Pie Development never received a ruling from a tribunal on the merits of its claims, it “slept on its rights” to receive one by choosing not to amend its complaint at the district court level, the court noted.

Failure to state a claim. Pie Development failed to state a claim for misappropriation of a trade secret against Gallatin and Sirius under both the MUTSA and DTSA, the court determined. To state a claim under either the MUTSA or DTSA, a plaintiff must plead the acquisition of a trade secret by a person who knows or has reason to know that trade secret was acquired by improper means, the disclosure of the trade secret was without express or implied consent. Under the definition, Pie Development’s complaint did not adequately plead misappropriation. Specifically, the complaint contained no facts to plausibly state a claim that Gallatin or Sirius knew or had reason to know that the alleged trade secret was in fact a trade secret, or that anyone had improperly acquired it. There are only conclusory allegations that Gallatin and Sirius held ownership interests in Pie Carrier, worked with Pie Insurance and Pie Carrier, and “knew the Pie Trade Secret had been misappropriated by Pie Insurance, Pie Services, Dax Craig, and/or John Swigart.”

Further, Pie Development pointed to nothing other than the first litigation that would have given Gallatin and Sirius reason to know that they were using a misappropriated trade secret. The prior litigation of the Pie trade secret ended and Gallatin and Sirius were entitled to rely on that decision no protectible trade secret existed. Finally, since the trade secrets claims against Gallatin and Sirius failed, the claims for unlawful interference, unjust enrichment, and civil conspiracy also failed, the court concluded.

The Case is No. 24-60155.

Judge: Per Curiam.

Attorneys: Brian C. Kimball (Butler Snow, L.L.P.) for Pie Development, L.L.C. Adam Gershenson (Cooley, L.L.P.) for Pie Carrier Holdings, Inc.

Companies: Pie Development, L.L.C.; Pie Carrier Holdings, Inc.

Cases: TradeSecrets LouisianaNews MississippiNews TexasNews