IP Law Daily, TRADE SECRETS—E.D.N.C.: US distributor succeeds dismissing Taiwanese manufacturer’s misappropriation and copyright claims, (Nov 17, 2023)

By Saurabh Kashyap

The court ruled that the plaintiff had failed to plead a plausible claim for allegations of trade secret misappropriation, copyright infringement, and unfair trade practices.

A federal district court in North Carolina dismissed a complaint alleging copyright infringement and misappropriation of trade secrets filed by a Taiwanese industrial equipment manufacturer against its US distributor. The court found that the plaintiff failed to state a plausible claim on factual foundations granting the defendant's motion to dismiss without considering its alternative motion for a stay (SYSCO Machinery Corp. v. DCS USA Corp., November 15, 2023, Boyle, T.).

Background. Sysco Machinery Corp (“Sysco”), a Taiwanese industrial cutting equipment manufacturer founded in 1977, filed a lawsuit accusing Dorey Converting Systems (“DCS”), its U.S. distributor since 2018, of misappropriating trade secrets and infringing copyrights.

The suit, which included claims for unfair and deceptive trade practices and tortious interference under federal and North Carolina law, arose from allegations that former Sysco employees formed a competing company, Cymtek, and redirected business from Sysco to Cymtek using confidential information. Despite obtaining injunctive relief against the former employees and Cymtek in Taiwan, Sysco's legal efforts in the United States met with setbacks.

In North Carolina, their motion for a temporary restraining order was denied, and while a similar order was granted in Massachusetts, their motion for a preliminary injunction was denied. DCS filed the instant motion to dismiss Sysco's claims or, alternatively, to stay the case pending the outcome of the Massachusetts litigation.

Misappropriation of trade secrets. The court examined Sysco's complaint for alleged trade secret misappropriation, finding it lacking in specificity and factual support. Sysco's references to "certain files" and "confidential information" were ruled insufficiently detailed to constitute a trade secret. Moreover, the court found no compelling evidence that DCS was involved in misappropriation. The court also noted a lack of conspiracy or secondary liability for Defend Trade Secrets Act (DTSA) claims.

Furthermore, Sysco's inability to demonstrate that the purported trade secrets were handled with reasonable care to maintain confidentiality undermined their claim. As a result, DCS successfully obtained dismissal of Sysco's misappropriation of trade secret claims, with the court reinforcing the principle that precise, factually substantiated assertions must accompany allegations of trade secret misappropriation.

Federal copyright infringement. Sysco had accused DCS of copyright infringement by distributing products that allegedly contained Sysco's copyrighted technical specifications. The court stated that establishing copyright infringement requires the plaintiff to demonstrate valid ownership and unauthorized copying of the work. Sysco, which registered its copyrights on July 12, 2022, could not claim infringement before this date.

The law grants copyright holders exclusive rights to reproduce and display their work but not to use the work itself, the court observed. As a result, Sysco's claim that DCS violated its copyrights by using the technical drawings in their products was found to be without merit because copyright does not prohibit the manufacturing of the article itself. Furthermore, Sysco's allegations against DCS regarding conspiracy and reproduction of the drawings lacked specific legal support and detail, resulting in the dismissal of the copyright infringement claims.

Deceptive and unfair trade practices. Sysco’s allegations against DCS included the illegal acquisition and misuse of Sysco's confidential information for the benefit of Cymtek, assisting Sysco's employees in breach of duty, and poaching Sysco's staff and clientele to compete directly with Sysco. A plaintiff must demonstrate an unfair or deceptive business act that affects commerce and causes harm to substantiate claims under the state statute, the court observed.

The court also noted that acts are considered unfair if they are unethical or substantially harmful and deceptive if they could potentially mislead. However, Sysco's failure to counter DCS's arguments about alleged abetting of employees' breaches of duty and recruitment of Sysco's workforce weakened their claims. The court interpreted Sysco's silence on DCS’ arguments as a tacit admission of their validity, dismissing the allegations of unfair and deceptive trade practices. This dismissal was made without considering DCS's claim that the Act did not apply because the alleged infractions occurred outside North Carolina's jurisdiction.

Tortious interference. The court outlined the necessary elements for a tortious interference claim: the existence of a potential contract, the tortfeasor's malicious inducement to prevent the contract, and consequential damages. Here, Sysco had accused DCS of illegally disrupting potential contracts with several clients, including Enovix, Axxiva, and FREYR. However, because DCS was about to become a party to the disrupted contracts, the court determined that it could not be considered an outsider or third party whose actions would constitute tortious interference.

Furthermore, for Sysco to successfully argue that DCS's actions were unjustified, it had to demonstrate that DCS's conduct was solely motivated by malice, with no connection to any legitimate business interest—which Sysco failed to show. As a result, Sysco's claims were dismissed for failing the conceivable-to-plausible threshold.

The case is No. 5:23-CV-134-BO-RJ.

Attorneys: Christopher E. Hanba (Dickinson Wright PLLC) for SYSCO Machinery Corp. Jeffrey B. Kuykendal (McAngus Goudelock & Courie, PLLC) for DCS USA Corp. d/b/a Dorey Converting Systems.

Companies: SYSCO Machinery Corp.; DCS USA Corp. d/b/a Dorey Converting Systems

Cases: Copyright TradeSecrets NorthCarolinaNews