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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)

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Comments (1) -

Zulfiqar Khan
Zulfiqar Khan India
4/10/2012 10:53:40 AM #

Excellent...

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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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