Dividing Misappropriation Claim Among Different Trade Secrets Ineffective to Avoid Statute of Limitations

In most states for certain claims, the statute of limitations is tempered by the “discovery rule,” under which the limitations period does not start until the claimant knew or should have known of its claim against the wrongdoer. Although some types of claims may not get the benefit of this rule—such as claims for defamation—the statute of limitations governing claims for misappropriation of trade secrets is generally tempered by the discovery rule. Thus, an injured party that does not know and could not have found out that a competitor misappropriated its trade secrets may generally bring a trade secrets claim outside of the typical limitations period if it timely sues after first discovering the wrong.

A recent California decision illustrates some important limits on the scope of the discovery rule in a situation in which the claimant is charged with knowledge of potential misappropriation of some trade secrets, but may lack knowledge that other of its trade secrets have also been taken. MGA Entertainment, Inc. v. Mattel, Inc., 41 Cal. App. 5th 554 (2019).

The litigation saga over the “Bratz” dolls began in 2004, when toymaker Mattel sued MGA Entertainment in federal court for copyright infringement. According to Mattel, the idea for the Bratz dolls was developed by one of its employees, who improperly brought the concept and designs to MGA. In 2006, Mattel added a claim against MGA for misappropriation of trade secrets. Then in 2010, the court permitted MGA to bring its own claim for misappropriation of trade secrets against Mattel. Mattel challenged MGA’s trade secret claim on statute of limitations grounds, but the district court held that because it was a compulsory counterclaim-in-reply, it was not barred by the statute of limitations. MGA prevailed on its trade secret claim at trial, achieving a jury verdict in excess of $80 million that the district court doubled on account of “willful and malicious misappropriation.” On appeal, however, the Ninth Circuit vacated the trade secret judgement because the claim should not have been allowed as a counterclaim-in-reply. Mattel, Inc. v. MGA Entertainment, Inc., 705 F.3d 1108, 1110-11 (9th Cir 2013).

That decision brings us to the case now under discussion, which MGA refiled in state court after the without-prejudice dismissal ordered by the Ninth Circuit. Mattel again asserted a statute-of-limitations defense, which was now unimpeded by the procedural status accorded the trade-secret claim by the district court in the federal action. Accordingly, that defense was now ready for adjudication by the California state courts on the merits, i.e., when did the clock on the statute of limitations begin to run, and under that starting point was the misappropriation claim timely filed.

Both sides agreed that the statute of limitations was tolled as of the date that MGA filed its trade secret claim in federal court (August 16, 2010). Given California’s three-year statute of limitations for trade secret claims, the question reduced to whether Mattel’s purported misappropriation was “discovered or by the exercise of reasonable diligence should have been discovered” by MGA prior to August 16, 2007. Cal. Civ. Code § 3426.6. Mattel argued that the documents submitted by MGA in the prior federal case demonstrated MGA’s awareness of Mattel’s purported wrongful conduct at least as early as 2004; MGA responded by invoking the discovery rule, contending that it did not know of Mattel’s conduct until much later.

The argument raised by MGA of interest to this post concerned the division of claims among different trade secrets. Specifically, MGA argued that Mattel had misappropriated 114 individual trade secrets, that each gave rise to an individual claim, and that the statute of limitations “runs separately from the discovery of each distinct injury.” Slip op. at 10. Stated differently, the timeliness of the claims needed to be determined on an individual basis for each asserted trade secret, and the potential time bar of a claim for misappropriation of one trade secret did not preclude a claim for a distinct misappropriation of a different trade secret. The Superior Court rejected this argument and granted summary judgment for Mattel.

The California Court of Appeal affirmed, holding that MGA’s assertion in the federal case that Mattel had obtained knowledge of MGA’s trade secrets by having a Mattel employee gain access to MGA’s private showrooms “on false pretenses” was sufficient to show that MGA had at least reason to know of its potential trade secret claim against Mattel by that date. Because MGA made that assertion in the federal case on August 13, 2007, and filed its trade secret claim on August 16, 2010, the claim was filed at least three days too late.

The Court of Appeal distinguished other statute-of-limitations cases relied on by MGA for discovery-rule argument as involving different kinds of injuries. One case, for example, held that discovery of a medical malpractice claim did not start the statute-of-limitations clock for a products liability claim that contributed to the same injury, unless the plaintiff also had reason to suspect that a defective product was also to blame. As the court explained it, “We simply cannot agree with MGA’s compartmentalization of its suspicion of wrongdoing. A [claimant] in these circumstances cannot don blinders to avoid the accrual of the statute of limitations. We reject the notion that, even if MGA learned Mattel infiltrated one toy fair, it had no reason to suspect a similar wrongdoing occurred at any other toy fairs.” Slip op. at 11-12.

Application of the statute of limitations to claims that involve a “continuing wrong” can be challenging, particularly when the issue is complicated by the potential presence of multiple claims (either on different legal theories or based on different facts) and the availability of the discovery rule. While the facts of this case are somewhat unusual—involving as they do the discovery of potential trade secret claims in the course of litigation on other claims—and application of these rules can vary from one jurisdiction to another, it stands as a reminder to always keep an eye on the statute-of-limitations clock when trade secret claims may be asserted, especially when a dispute involves different legal theories, each of which has (i) a different statute of limitations, and (ii) potentially different standards for when a court may find that the potential for that claim should have been discovered.

Compliments of Holland & Knight, LLP, a Member of the EACCNY