In 2016, Congress passed the Defend Trade Secrets Act (DTSA), which creates a federal private civil cause of action for trade secret misappropriation. “Misappropriation” is defined to include acquisition, disclosure or “use” of confidential information by one who knows or has reason to know that the information was derived improperly.
While acquisition and disclosure are straightforward actions that can give rise to liability, “use” is a more amorphous concept. A recent Third Circuit decision, Oakwood Laboratories LLC v. Thanoo (2021), held that the term is to be construed broadly to include any commercially beneficial use. The information need not necessarily be used for manufacturing a product; the Oakwood Labs. case involved use to advance basic pharmaceutical research. Reversing the district court, the Third Circuit held that this “use” could constitute a misappropriation of the plaintiff’s trade secret.
This expands the rights of trade secret owners, if they secure their rights. Conversely, parties involved in using what might be confidential information of others need to be more careful, as the potential for liability has been broadened.
The Oakwood Labs. Case
According to its Complaint, Oakwood Labs. is a technology-based specialty pharmaceutical company focused on hard-to-develop generic and quasi-generic, sustained-release, and small molecule injectable drugs. It is involved in the “the research and development of sustained release injectable drugs involving microsphere systems.” Through extensive research, Oakwood developed processes for manufacturing, testing, research, quality assurance, and regulatory compliance. It takes extensive efforts to maintain these as confidential within its company.
In 1997, Oakwood hired Dr. Bagavathikanun Thanoo as a Senior Scientist responsible for product development, and required him to sign a non-disclosure agreement. Thanoo worked on developing a generic version of a brand name drug used to treat endometriosis.
Around 2013, Oakwood entered into discussions with another pharmaceutical company named Aurobindo Pharma USA Inc. Subject to a non-disclosure agreement, it disclosed some of its trade secret information,. After talks broke down, Aurobindo continued discussions with Dr. Thanoo. It hired him, and “within months” came up with a competing product that closely tracked Oakwood’s technology. Oakwood alleged that its proprietary information was used to jump start Aurobindo’s program, allowing it to achieve in months what otherwise would have taken years to develop.
The Decision
The district court dismissed three of Oakwood’s complaints. The first two were dismissed for lack of sufficient detail (which the Third Circuit criticized). The third amended complaint was dismissed for a different reason: Oakwood's failure to allege misappropriation. According to the district court, Oakwood needed to “show that the Microsphere Project was replicated, that is, that the microsphere technology Aurobindo has been working on has been developed using Oakwood’s trade secrets.”
This was legal error, held the Court of Appeals. The term “use” does not require that a trade secret be replicated in any way. Because the term “use” is not defined in the DTSA, then ordinary dictionary definitions apply, and "use" is generally defined to mean “to employ for the accomplishment of a purpose” or to “benefit from.”
In the context of trade secret misappropriation, the term “use” is given broad meaning. An oft-cited Fifth Circuit decision applying Texas law, Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 450-51 (5th Cir. 2007), which in turn relied on the Third Restatement of Unfair Competition, § 40, states that use includes:
any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant[.] ... Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret ... all constitute ‘use.’”
The Third Circuit embraced this broad definition in construing the DTSA. “In accordance with its ordinary meaning and within the context of the DTSA, the ‘use’ of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as “assist[ing] or accelerat[ing] research or development.”
Decisions such as Oakwood Labs. expand the scope of protection afforded to trade secrets, and are that much more reason for trade secret owners to take step to secure their rights.
While acquisition and disclosure are straightforward actions that can give rise to liability, “use” is a more amorphous concept. A recent Third Circuit decision, Oakwood Laboratories LLC v. Thanoo (2021), held that the term is to be construed broadly to include any commercially beneficial use. The information need not necessarily be used for manufacturing a product; the Oakwood Labs. case involved use to advance basic pharmaceutical research. Reversing the district court, the Third Circuit held that this “use” could constitute a misappropriation of the plaintiff’s trade secret.
This expands the rights of trade secret owners, if they secure their rights. Conversely, parties involved in using what might be confidential information of others need to be more careful, as the potential for liability has been broadened.
The Oakwood Labs. Case
According to its Complaint, Oakwood Labs. is a technology-based specialty pharmaceutical company focused on hard-to-develop generic and quasi-generic, sustained-release, and small molecule injectable drugs. It is involved in the “the research and development of sustained release injectable drugs involving microsphere systems.” Through extensive research, Oakwood developed processes for manufacturing, testing, research, quality assurance, and regulatory compliance. It takes extensive efforts to maintain these as confidential within its company.
In 1997, Oakwood hired Dr. Bagavathikanun Thanoo as a Senior Scientist responsible for product development, and required him to sign a non-disclosure agreement. Thanoo worked on developing a generic version of a brand name drug used to treat endometriosis.
Around 2013, Oakwood entered into discussions with another pharmaceutical company named Aurobindo Pharma USA Inc. Subject to a non-disclosure agreement, it disclosed some of its trade secret information,. After talks broke down, Aurobindo continued discussions with Dr. Thanoo. It hired him, and “within months” came up with a competing product that closely tracked Oakwood’s technology. Oakwood alleged that its proprietary information was used to jump start Aurobindo’s program, allowing it to achieve in months what otherwise would have taken years to develop.
The Decision
The district court dismissed three of Oakwood’s complaints. The first two were dismissed for lack of sufficient detail (which the Third Circuit criticized). The third amended complaint was dismissed for a different reason: Oakwood's failure to allege misappropriation. According to the district court, Oakwood needed to “show that the Microsphere Project was replicated, that is, that the microsphere technology Aurobindo has been working on has been developed using Oakwood’s trade secrets.”
This was legal error, held the Court of Appeals. The term “use” does not require that a trade secret be replicated in any way. Because the term “use” is not defined in the DTSA, then ordinary dictionary definitions apply, and "use" is generally defined to mean “to employ for the accomplishment of a purpose” or to “benefit from.”
In the context of trade secret misappropriation, the term “use” is given broad meaning. An oft-cited Fifth Circuit decision applying Texas law, Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 450-51 (5th Cir. 2007), which in turn relied on the Third Restatement of Unfair Competition, § 40, states that use includes:
any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant[.] ... Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret ... all constitute ‘use.’”
The Third Circuit embraced this broad definition in construing the DTSA. “In accordance with its ordinary meaning and within the context of the DTSA, the ‘use’ of a trade secret encompasses all the ways one can take advantage of trade secret information to obtain an economic benefit, competitive advantage, or other commercial value, or to accomplish a similar exploitative purpose, such as “assist[ing] or accelerat[ing] research or development.”
Decisions such as Oakwood Labs. expand the scope of protection afforded to trade secrets, and are that much more reason for trade secret owners to take step to secure their rights.