Pennsylvania Federal Court Finds That Plaintiff’s Trade Secret Misappropriation Allegations Hold Up

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A Pennsylvania federal court recently denied Defendant Synchrony Group, LLC’s motion to dismiss a trade secret lawsuit filed by Plaintiff Jazz Pharmaceuticals, Inc. (Jazz”) holding that Plaintiff sufficiently stated a trade secret claim. Jazz Pharms., Inc. v. Synchrony Grp., LLC, No. 18-602, 2018 WL 6305602 (E.D. Pa. Dec. 3, 2018).

Jazz alleged that Synchrony had breached a contract, the duty of loyalty and fiduciary duty, in addition to violating the federal Defend Trade Secrets Act (“DTSA”) and the Pennsylvania Uniform Trade Secrets Act (“PUTSA”). Id., at *1. In response to the complaint, Synchrony raised a number of defenses on a motion to dismiss, most to no avail. First, it argued that, because it had complied with the conditions of an agreed-upon preliminary injunction and returned all information owned by Jazz, the case was moot. Id., at *3. Next, the defendants maintained that the complaint failed to allege a breach to sustain a breach-of-contract claim. Id., at *4. Third, the statutory counts should fail, according to Synchrony, because the allegations were vague and speculative and raised, at most, the potential for a future violation, which should fail to pass statutory muster. Id., at *5–6.

The Honorable Cynthia M. Rufe rejected each of these arguments. She did, however, dismiss the claims that Synchrony had violated a fiduciary duty and duty of loyalty allegedly owed to Jazz, relying upon the gist-of-the-action doctrine.  Id., at *7.

Background

A California manufacturer of sleep medications, Jazz, had hired Synchrony, a Pennsylvanian marketing company, to expand the reach of its medication Xyrem, an FDA-approved medicine designed to treat narcolepsy. Id., at *1. The parties executed a Master Services Agreement (“MSA”) on March 1, 2012, that, upon an amendment, would terminate on March 1, 2018. Id. The MSA included provisions mandating the protection of Jazz’s confidential information and the return or destruction of such information once the relationship ended. Id. During this engagement, Synchrony reviewed and obtained non-public drug sales data, information related to physician-prescribing habits and patient habits and preferences, analyses comparing Jazz’s products to others’, as well as marketing strategies, tactics to promote Jazz’s products, risk analyses, and mitigation strategy research and information. Id.

More than three months before the MSA was to expire, Synchrony informed Jazz of its intentions to work with a competitor to promote its new narcolepsy drug. Id. After a week had passed, Synchrony then notified Jazz in writing of its intention to terminate their relationship. Id. According to Jazz, despite Synchrony’s denial, Synchrony never returned all of Jazz’s confidential information. Id., at *2. As a consequence, Jazz filed suit against Synchrony, who responded with a motion to dismiss. Id.

Legal Analysis

Mootness

Prior to the filing of the motion to dismiss, the parties had stipulated to a preliminary injunction. Id., at *3. By virtue of this, Synchrony argued that there no longer existed a live controversy requiring the continuation of the lawsuit, which had become moot. Id. In other words, a change in circumstances had ended any ability by the Court to grant any further relief and afforded the plaintiff no stake in the outcome of the lawsuit.  Id. (citing Knox v. Serv. Employees, 567 U.S. 298, 307 (2012) (internal quotation marks and citations omitted); Camesi v. Univ. of Pittsburg Med. Ctr., 729 F.3d 239, 247 (3d Cir. 2013) (quotation and citation omitted); N.J. Tpk. Auth. Jersey Cent. Power & Light, 772 F.2d 25, 31 (3d Cir. 1985)).

The Court found this defense unpersuasive for a number of reasons. First, because Jazz had requested a permanent injunction, including the ending of Synchrony’s relationship with Jazz’s competitor, the Court could grant additional relief. Therefore, the controversy was still live. Id. Second, questions remained whether Synchrony had fully complied with the stipulated preliminary injunction, to wit: whether it had returned all of Jazz’s confidential information and affirmed that it would not disclose the information. Id. Indeed, Synchrony’s denial that it had disclosed any information “is only a self-serving denial, insufficient to resolve the issues of fact.”  Id. n.26 (citing NVR Inc. v. Davern, No. 15-5059, 2015 WL 9450831, at *3 (D.N.J. Dec. 23, 2015)). Third, Jazz had also sought monetary relief, including punitive damages. “Thus, even if injunctive relief were considered moot in this case, Jazz’s other claims are not.” Id. n.28 (citations omitted).

Breach of Contract

Under California law, which applied to the MSA, Jazz’s burden was to sufficiently allege (1) the existence of a contract, (2) plaintiff’s performance or excusable non-compliance, (3) breach, and (4) damages caused by the breach. Id., at *4 (citation omitted). Only the latter two elements were at issue: Synchrony maintained that Jazz failed to aver that a breach had occurred that caused any damages. Id. The Court found this unavailing. Jazz alleged that Synchrony disclosed its trade secrets without authorization, failed to return its confidential information, and simultaneously worked with a competitor in violation of MSA’s inherent duty of loyalty—all plausible breaches, if later proven.  Id. Thus, Jazz met its burden to overcome Synchrony’s motion to dismiss its breach-of-contract claim. Id.

DTSA and PUTSA

Similarly, Synchrony failed to dismiss Jazz’s allegation that the defendants had misappropriated its trade secrets, in violation of the DTSA and PUTSA. Id., at *6. A “trade secret” is “information that: (1) the owner has taken reasonable means to keep secret; (2) derives independent economic value, actual or potential, from being kept secret; (3) is not readily ascertainable by proper means; and (4) others who cannot readily access it would obtain economic value from its disclosure or use.” Id., at *5 (citing, inter alia, 18 U.S.C. § 1839(5); 12 Pa. Cons. Stat. Ann. §  5302). Taken as true for purposes of considering Synchrony’s motion, Jazz’s alleged confidential information met this definition: Jazz apparently used safeguards to protect this information, which was of significant value if placed in the hands of a competitor, especially since the information was the culmination of years of refinement and costs. Id. n.42.[1]

Because Jazz plausibly alleged a trade secret, it was entitled to injunctive relief if it could later show an actual or threatened misappropriation, which occurs when an entity (1) acquires the information knowing or with reason to know it was obtained by improper means or (2) uses or discloses the trade secret without any express or implied consent.  Id. (citing, inter alia, 18 U.S.C. §  1836(b)(3)(A); 12 Pa. Cons. Stat. Ann. §  5503(a)).

The Complaint sufficiently alleged misappropriation in two ways.  First, based on information and belief (a qualifier appropriate in the Third Circuit if the relevant information is “peculiarly within the defendant’s knowledge or control”), id., at *6 n.50 (citations omitted), Jazz pleaded that the defendants had disclosed its trade secrets to acquire the competitor’s business and thereby passed along this information without any authorization.  Id. Second, under the inevitable-disclosure doctrine, the Third Circuit holds that where there is substantial overlap between Jazz and its competitor—based on the same role, industry, and geographic region—a Court may find that there will likely be disclosure of the confidential information to Synchrony’s detriment. Id. (citing Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 111–12 (3d Cir. 2010)). Synchrony had offered no assurances that it would sequester its personnel who had worked with Jazz from working with the competitor, which plausibly moved the allegations beyond speculation, thereby warranting a denial of the defendants’ motion to dismiss these statutory counts. Id., at *7.

Breach of Duty of Loyalty and Fiduciary Duty

While its motion failed to dismiss these previous counts, Synchrony did succeed in knocking out Jazz’s tort claims that it had breached the duty of loyalty and fiduciary duty owed to Jazz as a result of a special relationship between the two. Id. Citing the gist-of-the-action doctrine, the Court found that, where the allegations underlying these tort counts are the same ones supporting the contractual claim, these counts could not survive. Id. (citing DePuy Synthes Sales, Inc. v. Globus Med., Inc., 259 F. Supp. 3d 225, 234 (E.D. Pa. 2017)). That is, a party cannot cloak as a tort claim what is, in fact, a contract claim. Id. (quoting DePuy Synthes Sales, 259 F. Supp. 3d at 236). Here, because Jazz could not identify a source of these duties beyond the MSA itself, the Court granted Synchrony’s motion to dismiss the tort counts.


 

[1] Notably, Judge Rufe denied Jazz’s argument that its employee names, which were apparently disclosed by Synchrony to the competitor, were trade secrets.  Id., at *6.  Even assuming it did not waive this argument by raising it for the first time in its opposition, Jazz neglected to identify how it kept these names a secret through reasonable measures, nor did it substantiate how the names qualified as a trade secret under either statute. Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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