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Merial Ltd. v. Cipla, Ltd.: Federal Circuit Strikes a Blow Against Jurisdictional Gamesmanship by Foreign Companies in IP Disputes

 
by John Marsh 2. June 2012 15:50

On Thursday, the U.S. Court of Appeals for the Federal Circuit issued an important ruling that will have significant repercussions for foreign companies that choose to ignore injunctions issued in the U.S. that forbid them from infringing, misappropriating or misusing the intellectual property of U.S. companies.   In Merial Ltd. v. Cipla, Ltd., 2012 U.S. App. LEXIS 10982 (Fed. Cir., May 31, 2012), the Federal Circuit upheld a Georgia district court's finding of contempt against an India-based company that had actual notice of the underlying case but elected not to appear.  Given the increasingly international nature of many trade secret disputes and the importance of injunctions in many trade secret cases, this ruling will force a foreign party to contest jurisdiction sooner rather than later or face the consequences of ignoring a U.S. injunction -- namely, a finding of contempt.

The facts and procedural history are fairly involved, so I will do my best to summarize them briefly.  Merial is the exclusive licensee of patented compositions for protecting dogs and cats from flea and tick infestation and marketed under the brand name Frontline and Frontline Plus.  In 2007, Merial sued Cipla, an India-based company headquartered in Mumbai, for infringing its patent when it sold infringing formulations under the brand "Cipla Protektor" and "Cipla Protektor Plus" in the U.S.  When Cipla did not appear in the case, Merial secured a default judgment in 2008 which included a permanent injunction forbidding Cipla from selling infringing products.  Shortly after the default judgment, Cipla filed an "informal" communication referencing the default and seeking dismissal of the action, which the district court rejected.

In 2011, Merial initiated contempt proceedings against Cipla and a company called Velcera, a competitor formed by former Merial employees.  Cipla and Velcera had entered into agreements to sell "PetArmor Plus," a flea and tick remedy that contained the same compositions as Merial's Frontline Plus.  The Georgia district court found Cipla had been subject to its jurisdiction in 2008 when it issued the injunction, found the PetArmor Plus product was not colorably different from Cipla's previously infringing product, and found Cipla and Velcera had acted in concert to knowingly violate the 2008 permanent injunction.  As a result the court issued an injunction forbidding the sale of any competing products in the U.S. with the assistance or participation of Cipla.

The Federal Circuit's Opinion:  To put it bluntly, the Federal Circuit had no sympathy for Cipla and its partner Velcera.  Judge Alan Lourie, writing for the majority, rejected Cipla's arguments that it had not been served, that the court lacked personal jurisdiction over it, and that it should have been given another opportunity to battle over these and other issues.  Notably, the Federal Circuit found "it is beyond dispute that Cipla had actual notice of the suit and chose to risk a default judgment, based on its subjective assessment of the complaint."  

In particular, the Federal Circuit took Cipla for task for belatedly arguing that it was essentially entitled to a mulligan if it consented to another federal district court under Federal Rule of Civil Procedure 4(k)(2) (Cipla argued that had it been sued in Illinois in 2007, it would have consented to service and jurisdiction there).  Judge Lourie reasoned that "the incentives for gamesmanship" would be "particularly acute because the defaulting party could use a simple, unilateral statement of consent not only to achieve transfer into a forum it considers more convenient (or less convenient for its opponent) but also undo an adverse final judgment for the chance to litigate from a clean slate."

Judge Lourie also rejected Cipla's claim that the district court overextended U.S. law to penalize Cipla for conduct that occurred entirely overseas.  He held that "where a foreign party, with the requisite knowledge and intent, employs extraterritorial means to actively induce acts of direct infringement that occur within the United States, such conduct is not categorically exempt from redress under [35 U.S.C.]  § 271(b)."   He noted that the record supported the district court's finding that Cipla induced infringement of the patent at issue through the PetArmor Plus product with Velcera.

Finally, the Federal Circuit rejected Velcera's arguments that it should not have been found in contempt of the 2008 order because it had not been a party to that case.  Judge Lourie emphasized the fact that Velcera was fully aware of the previous default and understood that acting in concert with Cipla to market an infringing product would violate the injunction.

The Takeaway?  Foreign defendants accused of misappropriating trade secrets or infringing U.S. patents will have to think long and hard about ignoring complaints filed, and court orders issued, in the U.S.  If a foreign party truly feels that service of process is defective or that the court lacks personal jurisdiction over it, that company is now incentivized to respond and take those issues head on, rather than wait for a later opportunity to try to contest them in another proceeding or in a contempt proceeding.  The ruling also serves as a powerful lesson to other companies who may want to do business with a defaulting foreign company, as they may find themselves bound by the same injunction for having acted in concert with that foreign party.

June 5, 2012 Update:  At the time I wrote this post over the weekend, I could not access and post the Federal Circuit's opinion.  For those that would like to review the opinion firsthand, a link to it can now be found in this article in The National Law Journal that appeared earlier today (shameless plug:  I was interviewed for my take, which appears at the end of the article).  For those who do not subscribe to that publication, the opinion can be found in the PDF below.

 

Allergan, Inc. v. Merz Pharmaceuticals: Central District of California Hammers Merz for Failure to Timely Produce Documents and Misappropriation of Trade Secrets and Halts Rollout of Xeomin for Ten Months

 
by John Marsh 12. March 2012 12:20

In a resounding victory, Botox manufacturer Allergan, Inc. has secured a permanent injunction from a  California federal court forbidding competitors Merz Pharmaceuticals and Merz Aesthetic from rolling out the sale of Xeomin for cosmetic purposes for the next ten months. Remarkably, the misappropriation at issue primarily arises from customer lists and contact information -- information that has been increasingly difficult to protect in recent trade secret cases. 

While the injunction issued on Friday, March 9, 2012 by U.S. District Court Judge Andrew Guilford permits limited sale of the product for therapeutic purposes, it is clear that the primary and desired purpose of the drug is for aesthetic and cosmetic purposes. (Copies of the District Court's Findings of Fact and Conclusions of Law and its Injunction Order are attached as PDFs below). Merz had planned its launch of Xeomin for cosmetic purposes on March 15.
 
At the close of the nine day bench trial, Judge Guilford stated that he had concluded there were "dramatic acts of misappropriation" and his opinion emphasizes that his findings of fact were "largely based" on the credibility of the witnesses. As appellate courts tend to be very deferential to a trial court's assessment of truthfulness, this particular holding may insulate the ruling from attack on appeal.

The evidence of misappropriation appears to be largely circumstantial and rests on inferences Judge Guilford drew from the belated production of confidential documents by Merz in July 2011, documents that showed that Merz had copies of Allergan's trade secrets. For this reason, this case resembles the infamous Qualcomm v. Broadcom dispute, in which Qualcomm employees and counsel failed to timely produce important and relevant documents and were sanctioned by the district court for that failure in a series of highly-publicized rulings and decisions.
 
Facts of the case: In the spring and summer of 2010, Merz hired seven sales representatives and business managers from Allergan to assist Merz in its sale of Xeomin. Each of them had been involved in the sale of Botox and each had signed a non-disclosure agreement forbidding them from disclosing Allergan's trade secrets and confidential information. During the course of forensic examinations of the former employees' computers, Allergan discovered that a number of the employees had sent copies of customer lists, including vast spreadsheets with contact information for those customers, to their personal email accounts just before their departure.
 
Allergan then sought a TRO in August 2010 to prevent any use of that information. Merz, however, vigorously argued that it had not received or used Allergan's trade secrets. Merz's counsel stated in briefing and oral argument to the Orange County Superior Court that it “is not in possession, nor has it ever been in possession, of any of the Alleged Confidential Information,” that “[t]here is no evidence that our corporate entities knew, condoned, authorized, used, disclosed, took any of these trade secrets,” and that with respect to Allergan’s confidential and proprietary information, Merz “[has] never seen it. [Doesn’t] know what it is. [Doesn’t] want it, and [hasn’t] done anything.” The Superior Court denied the TRO as a result.
 
Belated Production of Documents: Nearly a year later, however, Merz produced documents that contradicted its previous assertions at that TRO conference. That belated disclosure and the number and nature of those documents figured prominently in Judge Guilford's analysis. Judge Guilford identified nearly a dozen confidential Allergan documents that Merz had in its possession prior to the TRO conference in August 2010, including internal emails circulating a confidential Allergan PowerPoint addressing its launch of another cosmetic product (Juvederm), detailing Allergan's sales volumes in specific territories, Allergan employee information that was apparently used for recruiting purposes, and information about Allergan's Partner Privilege Program.

Perhaps most notably, Judge Guilford identified an August 2, 2010 email requesting "Competitive info" from the former Allergan employees that "BCC'd everyone on this email so that [they] may remain anonymous and exit [their] current positions without any problems." That last email appears particularly damning because it was two days before the TRO hearing at which Merz's lawyers said Merz didn't have and wasn't using Allergan's trade secrets. In response to that email, one of the former employees responded a week later saying he had a "flashdrive [ ] loaded up with some key account documents, SPP/payer info, some [sic] BOTOX slide sets, etc."

Merz argued that it did not use those documents and therefore did not misappropriate any of Allergan's trade secrets. Judge Guilford, however, rejected those protestations, found that he did not believe the witnesses that Merz presented in its defense, and held that there was "overwhelming" direct and circumstantial evidence of misappropriation. This is where the importance of his ruling on the witnesses' credibility will become so important on appeal.

Finally, in a ruling that is reminiscent of the rulings in Qualcomm, Judge Guilford has directed Merz to continue to look for missing documents in a court-supervised "Examination and Remediation Process." If additional documents or trade secrets are discovered, Judge Guilford may impose sanctions against Merz (he has refrained from imposing attorneys fees and other sanctions thus far).

Why is this case important? First, it appears that Merz's in-house counsel and senior management undertook significant steps before and during the litigation to ensure that the sales staff did not use any of Allergan's documents or trade secrets; however, those steps were undermined by Merz's apparent failure to examine and produce four of the former employees' email files during its initial production. Second, Judge Guilford's injunction barring the March 15 product launch is an extraordinary ruling given the amount of time that has passed and that a monetary remedy could have been imposed in the form of a royalty or other type of award. 

This decision is sure to keep in-house counsel and outside counsel up at night trying to figure out how to make sure their clients gather and timely produce information to them. The belated disclosures that contradicted previous claims to the Superior Court proved to be damning evidence in this case.

Allergan v. Merz Findings of Fact and Conclusions of Law.pdf (178.19 kb)

Allergan v. Merz Injunction Order.pdf (49.53 kb)

 

Robert Bosch LLC v. Pylon Manufacturing: Federal Circuit Bolsters Definition of Irreparable Injury

 
by John Marsh 18. October 2011 20:33

An important decision by the Federal Circuit supporting a robust application of irreparable injury in the patent context should prove useful to trade secret plaintiffs. While that decision, Robert Bosch LLC. v. Pylon Mf'g Corp., 2011-1096 (Fed. Cir., Oct. 13, 2011), acknowledges that the U.S. Supreme Court's decision in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), “jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief," it cautions district courts not "to ignore the fundamental nature of patents as property rights granting the owner the right to exclude.” (Thanks to fellow partner Deborah Coleman for bringing this to my attention and to my colleague Robert Latta for his help with this post; a copy of the opinion is attached below).

Writing for the majority, Judge Kathleen O'Malley noted that while categorical rules for the application of injunctive relief have been abolished and district courts enjoy inherent discretion to fashion equitable relief, that does not mean that district courts “act on a clean slate.” Bosch, at *11. Rather, district courts should apply traditional legal standards in fashioning equitable relief. Id. 

To that end, the Federal Circuit reversed the District Court of Delaware's denial of a permanent injunction, reasoning that the plaintiff, Robert Bosh LLC, had more than adequately proven irreparable injury. For example, the Federal Circuit held that the presence of multiple competitors in a single market place, without more, does not negate a finding of irreparable harm. Id. at *14. According to the court, a patentee is not obliged to sue all infringers at once and to hold otherwise would abolish injunctive relief in all market places operating with more than two competitors. Id. Additionally, the Federal Circuit rejected the district court's reasoning that a patentee could be denied injunctive relief simply because the patent represents technology which makes up a non-core part of the patentee’s business. Id. at *15. “Injuries that affect a “non-core” aspect of a patentee’s business are equally capable of being irreparable as ones that affect more significant operations.” Id. To hold otherwise, reasoned the court, would encourage large industrial corporations to subdivide their operations into child companies, each focusing on a different product line. Id. 

Finally, the Federal Circuit emphasized that a district court should assess the financial condition of the infringer before the alternative of money damages is found to be adequate. Id. at 23. It held that a district court's failure to ascertain whether monetary damages are truly a meaningful or viable alternative to an injunction may qualify as reversible error. Id. Additionally, in assessing the third eBay factor, the balance of hardships, the court recognized that an injunction cannot be avoided simply because the infringer is a smaller company or because the primary product sold by the infringer is an infringing one. Id. 

The takeaway? Any decision affirming the element of irreparable injury in an IP context is generally a good thing for the trade secrets bar, but the Federal Circuit's vigorous defense of the application of irreparable injury in Bosch is an especially welcome development. eBay should have had minimal impact on trade secret injunction requests since irreparable injury is rarely, if ever, presumed in the trade secret context. However, because eBay was perceived as a "bell weather" decision in the IP context, it may have caused courts to hesitate in issuing otherwise appropriate injunctions. In other words, eBay may have had a "spill over" effect on trade secret claims. Likewise, the Federal Circuit's recognition of the necessity of a defendant's solvency when considering the adequacy of a remedy at law (i.e., money damages) should benefit all potential plaintiffs seeking an injunction.

 Bosch v. Pylon.pdf (1.10 mb)

 

Advanced Equities v. Felix Investments: Protecting Trade Secrets Pending Arbitration

 
by John Marsh 8. July 2011 11:30

I have written previously on the challenges of protecting trade secrets in the context of arbitration. A case filed yesterday in New York Supreme Court by the venture capital firm Advanced Equities, Inc. (AEI) reinforces the necessity of getting injunctive relief from a court while an arbitration is pending and an arbitrator is being selected.
 
As Law360 is reporting, AEI sued its former employee, Jared Carmel, and his new employer, Felix Investments, LLC, alleging that Carmel and Felix are misappropriating its trade secrets, among other things.  Like many disputes in the financial services sector, AEI and Felix have a history, as Felix was formed by a former employee and officer, Frank Mazzola (who AEI has also joined as a defendant) and the firms have already been in litigation over Felix's claims that AEI has defamed it. AEI and Felix have been in the news lately, as they are apparently fierce competitors in a potentially lucrative market of securities: shares of Facebook and Twitter from employees interested in selling them in advance of any initial public offering.
 
While the allegations of the lawsuit are relatively straightforward (i.e., breach of fiduciary duty, theft of trade secrets, intentional interference of contract), what is noteworthy is the fact that AEI has already filed an arbitration proceeding against Carmel before the Financial Industry Regulatory Authority (otherwise known as FINRA). Normally, a court might defer to that pending proceeding and stay any lawsuit filed afterward; however, given the delay that accompanies the appointment of an arbitrator, courts have found that it is appropriate for a party to request an injunction during this process to preserve its trade secrets. See Performance Unlimited, Inc. v. Questar Publishing, Inc., 52 F.3d  1373 (6th Cir. 1994).  
 
The takeaway?  Follow AEI's example and file for a TRO in court even though your trade secrets claim may be subject to an arbitration provision. While this approach is costly and potentially duplicative in some respects, the alternative is that your client's trade secrets may be lost during the inevitable delay that comes with the selection and approval of an arbitrator. The better solution, of course, is to draft your agreements to carve out trade secret and intellectual property disputes from any arbitration provision so that added expense and potential motion practice about the appropriate forum is eliminated. 
 

WikiLeaks and Trade Secrets: The First Amendment Challenge

 
by John Marsh 13. May 2011 16:30

Does the First Amendment provide complete protection to a whistleblower like WikiLeaks that attempts to post trade secrets on the Internet?  That may be the key question in any whistleblower trade secrets case.
 
Following up on my recent post on the Julius Baer v. WikiLeaks case, and my presentation at the AIPLA's Spring Meeting later today, one of the issues -- if not the issue -- that presented the greatest concern to the district court in that case was that its order might qualify as a "prior restraint" in violation of the First Amendment.  
 
Federal courts are very attuned to constitutional issues, and, I would respectfully submit, especially amenable to a claim that their order might present a prior restraint in violation of the First Amendment. See Procter & Gamble Co. v. Bankers Trust Co., 78 F.3d 219, 225 (6th Cir. 1996); Ford Motor Co. v. Lane, 67 F. Supp. 2d 745 (E.D. Mich. 1999).  State courts, on the other hand, may be more sensitive to the policies underlying trade secret law, as decisions by the California Supreme Court and the Ohio Supreme Court have shown.  In those cases, those courts have rejected broad prior restraint arguments and recognized that policies underlying the protection of trade secrets must be balanced as well.  American Motors Corp. v. Huffstutler, 61 Ohio St. 3d 343, 575 N.E.2d 116 (Ohio 1991);  DVD Copy Control Assoc., Inc. v. Bunner, 31 Cal. 4 864, 4 Cal. Rptr. 3d 69 (2003).
 
In the Julius Baer case (see my earlier post), the intervention of the media and the arguments that they presented in that case influenced the court's decision to dissolve the injunction.  While they properly noted that some First Amendment protections that would be implicated (i.e., the impact that a shutdown of WikiLeaks website would have on news-gathering efforts), their arguments of course overlooked the important governmental and private interests in protecting confidential information (in that case, the privacy rights of the bank's clients).
 
It is important to remember that the First Amendment issues -- and there were plenty -- were briefed extensively over an incredibly short period of time and on issues that were the "bread and butter" of the intervening media and public interest parties.  This ultimately provided them with what proved to be an overwhelming procedural advantage.  
 
In Julius Baer, the California First Amendment Coalition (“CFAC”), a non-profit public interest organization composed of large daily newspapers in California, and the ACLU both sought to intervene on February 26, 2008.  On that day, both submitted extensive briefs not only extolling the importance of WikiLeaks to its members’ news-gathering efforts, but vigorously arguing that the First Amendment protects the right to gather and receive information and that the injunction in question had prevented the public’s access to the information previously contained on that website.  The CFAC then filed yet another brief, challenging the jurisdictional basis of the case and arguing that diversity of jurisdiction was lacking because Julius Baer and WikiLeaks were both foreign citizens.  Three days after the appearance of the CFAC and the ACLU (February 29, 2008), the district court issued its order dissolving the injunction, based on those arguments.
 
The reality is that many trade secret and commercial litigators may not be conversant in the wide-ranging law concerning the First Amendment.  Given the speed of an injunctive proceeding, and the fact that counsel for the plaintiff is expected to be prepared to respond to whatever obstacle is thrown in his/her path, the intervention by the media in this kind of case can be devastating. 
 
Arguing that the requested injunction is "content neutral" is probably the best argument that can be made in these circumstances because it triggers lesser scrutiny from the court.  It is worth noting that this argument appears to not have been made in Julius Baer, either because of the lightning speed of the briefing on this issue or because the substantive basis for the injunction was rooted in constitutional and statutory privacy interests (as opposed to trade secrets).  The DVD Copy Control case, cited above, provides a superb template for understanding and ultimately making this argument; in that opinion, the California Supreme Court very methodically reasoned that a narrow trade secret injunction would qualify as a content neutral injunction.  The California Supreme Court further held that such an injunction was supported by a number of equally important policy considerations -- preserving incentives to innovate, protecting investment in research and development, and the promotion of commercial and business ethics, among others.
 
In short, if you are faced with a sophisticated whistleblower with access to the Internet, First Amendment issues will be front and center in any litigation that tries to restrain him.  Allaying a court's concerns that you are protecting an important private property right, and not seeking to muzzle an important issue of public safety or concern, will be critical.

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

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