IP Law Daily, TRADE SECRETS—S.D. Cal.: Federal court dismisses trade secret lawsuit brought by tissue processing lab, (Oct 24, 2022)

By Ursula Furi-Perry, J.D., MBA

While sufficiently alleging the requirements of ownership of a trade secret, a tissue processing lab failed to allege enough facts to constitute actual or threatened misappropriation.

A tissue processing lab brought suit against various parties associated with a competitor entity, alleging “corporate espionage” by a former employee, which resulted in the misappropriation of trade secrets by the competitor. The federal court in California held that personal jurisdiction over one defendant was improper, as the lab failed to provide specific allegations showing that the individual’s acts as to each count were expressly aimed at California. The court also dismissed the claims for failure to state a claim upon which relief could be granted; although the lab sufficiently alleged the requirements of ownership of a trade secret, it failed to allege enough facts to constitute actual or threatened misappropriation (Kimera Labs Inc. v. Jayashankar, October 20, 2022, Anello, M.).

Background. A tissue processing lab and Florida corporation developed and produced XoGlo, the first clinically available exosome product in the world. It required its employees to maintain confidentiality regarding its customer list and the process used to develop XoGlo, and included such requirements in their employment agreements. In its lawsuit, the lab alleged that a scientist working for it between 2018 and 2019 “brazenly and secretly engaged in corporate espionage” in order to establish Exocel, a Delaware company with its principal place of business in California and direct competitor in the exosome isolation industry, by using the lab’s trade secrets and other confidential information to make Exovex, a competing product.

The lab brought suit against various parties associated with the competitor entity in the U.S. District Court for the Southern District of California, alleging misappropriation of trade secrets, civil conspiracy to commit tortious interference with business relations, tortious interference with business relations, unjust enrichment, and unfair competition. The defendants filed a motion to dismiss for failure to state a claim, and one defendant filed a motion to dismiss for lack of personal jurisdiction.

Analysis--12(b)(2) motion. In its decision dated October 20, 2022, the federal district court addressed the procedural issue of a 12(b) motion for lack of personal jurisdiction. The court, relying on California’s long-arm statute, reviewed whether exercising jurisdiction would comport with due process, which requires minimum contacts between the defendant and the forum state. Applying the Ninth Circuit’s three-part “effects” test, the court discussed whether the defendant purposefully directed his activities at the forum by committing an intentional act, expressly aimed at the forum state, and causing harm that the defendant knew was likely to be suffered in the forum state.

This motion was filed by one of the individual defendants, a former resident of Illinois and current resident of Ohio, who argued that the California federal court lacked specific jurisdiction because the lab failed to allege any connection between him and California. The lab countered that the defendant conspired with others to engage in an intentional act to misappropriate the lab’s trade secrets. However, the court noted, the lab failed to separate out each defendant’s actions in the alleged conduct, nor did it provide specific allegations showing that the individual’s acts as to each count were expressly aimed at California. Because the lab failed to prove specific jurisdiction over the individual defendant, the court granted his motion to dismiss, with leave to amend.

12(b)(6) motion. Next, the court discussed the motion to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, reviewing whether there was a prima facie claim upon which relief could be granted and first discussing the lab’s federal claims, upon which federal question jurisdiction was predicated.

Trade secret misappropriation claims. The lab alleged misappropriation of its proprietary process and customer list; the defendants argued that the claims should be dismissed because the lab did not allege ownership of its trade secrets with particularity. However, in applying the Rule 12(b)(6) standard, the court chose to apply Rule 8’s general pleading standards, which require plausibility as opposed to particularity.

The court found that the lab sufficiently alleged the requirements of ownership of a trade secret as defined by the DTSA, and that it “has taken reasonable measures” to keep such information secret. Moreover, the lab’s description of its process was sufficient to place the defendants on notice of the trade secret in dispute, and the lab plausibly pleaded that it derives independent value from its trade secret. And because courts have repeatedly held that customer lists can be considered protectable trade secrets, the federal court held that the lab plausibly alleged the trade secret element of its DTSA claim under Rule 8 to survive a motion to dismiss.

On the issue of misappropriation, however, the court ruled for the defendants. Because the lab alleged that the defendants misappropriated its trade secrets from a third party, the scientist – with whom the lab had previously settled – the court reviewed its claim for indirect trade secret misappropriation, which exists where the information is derived from or through a person who owed a duty to the lab to maintain the secrecy of the trade secret or limit its use. The lab’s allegations were vague and conclusory, the court held, and merely demonstrated that the defendants may have possessed the lab’s alleged trade secrets; they did not offer any factual substantiation of the defendants’ “knowledge” regarding the alleged trade secret information. The lab failed to allege enough facts to constitute actual or threatened misappropriation.

Other state claims. Because the remaining state claims brought by the lab were all essentially based on the same factual scenario alleged in its trade secrets claims—that the defendants received stolen “confidential information” from the scientist – those claims were displaced by California law and dismissed by the court.

Conclusion. The federal district court granted the motions to dismiss, with leave to amend the Complaint by November 10, 2022.

The Case is No. 3:21-cv-02137-MMA-DDL.

Attorneys: Jon F. Cieslak (Bona Law PC) for Kimera Labs Inc. Alexis J. Schuler (Wood Smith Henning & Berman LLP) for Raj Jayashankar and Exocel Bio Inc.

Companies: Kimera Labs Inc.; Exocel Bio Inc.

Cases: TradeSecrets CaliforniaNews