Court Throws Out Trade Secrets Lawsuit Filed Against IBM China

The U.S. District Court for the Southern District of New York last week dismissed a trade secrets lawsuit against International Business Machines Corp (IBM) and IBM China by Beijing Neu Cloud Oriental System Technology Co. The Chinese firm alleged that IBM stole trade secrets from its joint venture in order to sell IBM products to the Chinese market.

IBM China and Beijing Teamsun Technology Co. originally formed Beijing Neu Cloud in 2014 as a joint venture to distribute IBM technology in China. But in a 2021 complaint, Beijing Neu Cloud alleged that IBM induced “Neu Cloud and its majority owner through later-breached contracts to expend resources and provide IBM with access to sensitive, confidential customer information, which IBM then secretly used to create competing ventures in China.”

In the complaint, Beijing Neu Cloud said that the joint venture agreement made their company “completely reliant” on IBM. The company alleged that an agreement between IBM China and INSPUR to create a separate joint venture distribution firm amounted to the misappropriation of trade secrets. The claims in this complaint were thrown out for lack of personal jurisdiction and failure to state a claim for relief, and Beijing Neu Cloud filed a First Amended Complaint intending to cure the problems Judge Alvin Hellerstein had identified.

However, Judge Hellerstein threw out the First Amended Complaint as well for multiple reasons, including a failure on the part of Beijing Neu Cloud to identify any protectable trade secrets stolen by IBM.

The judge ruled that the alleged confidential customer information was “available through public and independent sources; it is implausible that [IBM] would not be able to identify potential users of IBM technology without [Beijing Neu Cloud] having identified some of them.”

Identifying Trade Secrets

Beijing Neu Cloud alleged that IBM used customer information from their joint venture to sell IBM technology in China with a competing Chinese company in a separate joint venture.

Beijing Neu Cloud’s complaint alleged that IBM “established a rival joint venture, refused to sell the server products to Neu Cloud except through the new joint venture, and induced its own employees with knowledge of Neu Cloud’s confidential customer lists to join this new joint venture and share that confidential information with the new joint venture.”

But Hellerstein remained unconvinced that Beijing Neu Cloud had identified protectable trade secrets. And even if they had, simply stating that IBM employees took the information to another joint venture would have been insufficient, as it was publicly available or could be committed to memory.

The judge wrote, “the Confidentiality Agreement expressly exempted use of information retained in the memories of employees.”

Jurisdiction, Statute of Limitations, DTSA

In addition to failing to identify protectable trade secrets, the court also granted the motion to dismiss for lack of personal jurisdiction as to IBM China. Hellerstein wrote, “mere allegations of control and domination… does not afford an adequate basis for exercising personal jurisdiction over a nondomiciliary subsidiary.”

The court also ruled against Beijing Neu Cloud based on the statute of limitations, explaining that the claims are time-barred under either the BPA or the Original Equipment Manufacturer (OEM) Agreement. The Chinese firm argued that the two-year statute of limitations in the OEM did not apply because the misappropriation did not arise out of that agreement, but a special and independent “Special Bids” process. But the court found that Beijing Neu Cloud’s arguments failed in all possible scenarios and that the claims were either time-barred or failed to state a claim under the DTSA if they arose under Chinese law.

The court next dismissed Beijing Neu Cloud’s claims under Section 1837 of the Defend Trade Secrets Act (DTSA), which requires that the misappropriation of trade secrets has to be carried out by a U.S. citizen, entity or organization. Since the allegations were against a Chinese subsidiary of IBM, none of the alleged IBM employees are American citizens, and no act in furtherance of misappropriation was taken in the United States, this section did not apply, said the court.

IBM has deals in multiple joint ventures with Chinese firms that act as distributors and resellers of their products.