In the ongoing battle between competitors in the aesthetics field, the court in Allergan, Inc. v. Merz Pharmaceuticals, LLC, et al. recently completed a nine-day bench trial resulting in an injunction [pdf] against the defendants to prevent the actual or threatened misappropriation of Plaintiff Allergan, Inc.’s (Allergan) trade secrets.
Allergan produces several different prescription medicines, including Botox Cosmetics and Juvederm, which are injectable treatments used to correct facial wrinkles and folds. Merz Aesthetics also had for years been in the facial aesthetics market, and had a product that competed with Allergan’s Juvederm product.
In July of 2010, Merz Aesthetics announced that it received FDA approval for a new product to compete with Allergan’s Botox Cosmetic product. A related company, Merz Pharma, announced that it too would begin selling a product to compete with Cosmetic Botox by the end of the year.
In the summer of 2010, four of Allergan’s employees, who sold Botox Cosmetic, left and were hired by Merz Aesthetics. Shortly thereafter, three more regional sales representatives left Allergan and were hired by Merz Pharma as territory business managers. All of Allergan’s former employees had signed confidentiality agreements, executed Allergan’s employee handbook, and agreed to the terms of Allergan’s Code of Business Ethics. Allergan’s employment agreement identified as confidential numerous categories of information including, “information relating to investigational or market products . . . business studies . . . marketing and sales programs and data . . . design and engineering specs [and] product development plans.”
When the departing employees arrived at the two Merz entities, they too signed written agreements committing they would not “improperly use, disclose, or induce [the Merz entities] to use any proprietary information or trade secrets of any former employer,” and they also agreed not to bring to Merz or transfer to its computer systems any confidential data from any prior employer. The same obligations were found in Merz Pharma’s and Merz Aesthetics’ employment offers to the former Allergan employees.
After sending a cease and desist letter, Allergan filed a lawsuit in the Orange County Superior Court and sought a temporary restraining order. At the TRO hearing, counsel for the Merz defendants expressly disavowed having or wanting Allergan’s trade secret information. At the hearing counsel for the Merz defendants proclaimed Merz “[has] never seen it, [Doesn’t] know what it is. [Doesn’t] want it, and [hasn’t] done anything.” The court denied the TRO, and Allergan proceeded with further investigation and discovery, and the action was apparently removed to the federal court.
Allergan’s discovery and investigation revealed that, contrary to the statements made at the TRO hearing, Merz Pharma and Merz Aesthetics had in fact been in possession of Allergan’s confidential information months before the TRO hearing. Indeed, the court’s factual findings [pdf] chronicle the extensive use and transmission of Allergan’s data via email within both Merz Pharma and Merz Aesthetics.
To its credit, Merz Pharma sought to educate its employees about compliance with their confidentiality obligations. Merz also engaged in a program to identify those involved in the hiring of the former Allergan employees to determine whether they had received any of Allergan’s information. Merz Pharma’s in-house counsel also gave a presentation to the entire sales force reminding them not to solicit or use any competitors’ confidential business information.
The Merz defendants also hired a private computer forensics firm. However, the Merz defendants’ own computer forensic review was arguably superficial. The search terms were developed by the Merz defendants without consultation or input from their computer forensic expert. Further, the search terms oddly did not include the term “Allergan.” The Merz defendants also did not search the computers belonging to the four former Allergan employees who had joined Merz Aesthetics. The Merz defendants also did not include any portable storage media from the 50 custodians they had identified as potentially having Allergan’s information. Likewise, the results of the Merz defendants’ computer forensics, which produced “thousands” of hits, were not analyzed by its own consultant, but rather were turned over to the Merz defendants and their outside counsel. The court concluded that “the Merz Defendants’ searches for Allergan’s trade secrets and confidential information were inadequate.”
Allergan’s initial computer forensic discovery revealed that while working at Allergan several of its former sales employees who joined Merz sent “numerous documents and electronic files” to their personal email addresses. Those files included “the entire nationwide list of nearly 24,000 physician customers, contact information, and details concerning sales volumes and future targets . . .” and other lists, new product information, and sales presentations. Allergan’s further computer forensic review established similar facts and showed that certain employees had transferred files to portable electronic storage media. Indeed, one of the departing employees backed-up over 700 Allergan files to a 2 terabyte hard drive. That same former Allergan employee returned a 320 gigabyte drive to Allergan during her exit interview and made no mention of the 2 terabyte drive. The computer forensics also established that other former Allergan employees had copied and transferred to external devices numerous files and spreadsheets about “top doctors” and “target physicians.”
Nearly a year after the TRO hearing, and just hours before the parties’ pretrial conference, counsel for Merz Pharma and Merz Aesthetics hand-delivered a box containing a hard drive, a CD containing electronic documents, and various hard copy records. Among the materials “returned” to Allergan were email messages containing Allergan’s files as attachments, information about Allergan’s customer loyalty program, a confidential PowerPoint presentation, and other confidential information belonging to Allergan. The Merz defendants then also sent two subsequent packages claiming they had “returned” Allergan’s confidential information.
Contrary to the Merz defendants’ assertions, the court made the express findings that “[t]here is overwhelming circumstantial and direct evidence that Defendants . . . improperly acquired, disclosed, or used [Allergan’s trade secrets] and that Allergan faces a substantial threat of impending injury as a result of this misappropriation.” The court also concluded that “numerous witnesses affiliated with the Defendants were not credible.”
The court also took note that “[n]either Merz Aesthetics nor Merz Pharma has terminated or reassigned” any of the former Allergan employees even after they were “found to be in possession of Allergan information.”
The court also made several important legal conclusions. First, the court found that the information which had been taken by the former Allergan employees was a “trade secret” under California’s Uniform Trade Secrets Act (CUTSA). In doing so, the court found that Allergan had taken reasonable measures under the circumstances to maintain the secrecy of the information, which “need not be overly extravagant, and absolute secrecy is not required . . . .”
Next, the court concluded that the Merz defendants had engaged in a “misappropriation” under the CUTSA. The theft of the data and copying it to external media was also a breach of the former Allergan employees’ confidentiality obligations, and amounted to an “acquisition by improper means.”
Third, the court concluded that the Merz entities were “liable for the acts of misappropriation committed by their employees and former employees” because the CUTSA imposes liability where an employer knew or should have known of an employee’s wrongdoing. In making that finding, the court discounted the Merz defendants’ argument that the former Allergan employees had “secretly taken” the information unbeknownst to the Merz defendants because “an act of this nature was generally foreseeable as part of [his] duties to solicit customers for Defendant.”
In issuing an injunction, the court also made several important factual findings. For the element of irreparable injury, the court determined it was appropriate to “presume that Plaintiff will suffer irreparable harm if its proprietary information is misappropriated.” The court further concluded that “the risk of losing established customers to defendants’ new business due to the defendants’ improper use of plaintiff’s proprietary information would obviously create lasting, irreparable harm.”
The court also concluded that Allergan’s monetary damages were insufficient resulting from the misappropriation “where the threat of injury is imminent and the measure of that injury defies calculation, damages will not provide a remedy at law.” Most importantly, in response to the Merz Defendants’ stated position that “they have returned, and no longer possess, any of Allergan’s trade secrets, the court concluded “[i]t is the duty of the courts to beware of efforts to defeat injunctive relief by protestations of repentance and reform, especially when abandonment seems timed to anticipate suit, and there is a probability of resumption.”
The practical lessons learned from Allergan are significant. First, when hiring sales personnel from a direct competitor, employers should be expected to make thorough, meaningful, and diligent efforts to ensure that their new hires have not taken any of their employer’s electronic or hard copy records. Second, in this electronic era, conducting a superficial computer forensic review is completely inadequate, particularly in the face of evidence of actual wrongdoing. Third, any efforts to “return” electronic and hard copy records may likely have little impact on the issuance of injunctive relief. The fact that new hires may have “secretly” or without the approval of the employer taken files may be of little consequence, particularly where it was foreseeable by their job duties to solicit customers. Lastly, when confronting obvious wrongdoing, the failure to discipline or re-assign employees who have engaged in a misappropriation can certainly be problematic.