The Importance of Pleading Actual Harm in Trade Secret Misappropriation Cases

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In an April 25, 2012 ruling [pdf] a Middle District of North Carolina court clearly illustrated the importance of pleading actual harm in an unfair competition case.  By dismissing parts of a dispute between River’s Edge Pharmaceuticals, a discount pharmaceutical product distributor, and Gorbec Pharmaceutical Services, Inc., a pharmaceutical manufacturer, the court ruled that speculation about potential harm  is not enough to sustain a litigant’s burden.

In 2003, River’s Edge first developed products through an FDA-sanctioned program.  River’s Edge sought help from Gorbec in 2007 to manufacture and test generic drugs under an Abbreviated New Drug Application (ANDA) process.  The parties contemplated preparing a written contract to memorialize their agreement, but never completed one.  River’s Edge submitted purchase orders to Gorbec to manufacture drugs to River’s Edge’s specifications. 

In 2010, the relationship soured.  River’s Edge claimed Gorbec executives boasted of having the “know-how, intellectual property, and regulatory approvals,” threatened to stop work, and made plans to compete.  Gorbec claimed River’s Edge failed to pay Gorbec in full, and hid a warning letter from the FDA asking River’s Edge to cease sales.  Both sued.  River’s Edge’s complaint alleged breaches of contract and fiduciary duty, fraud, promissory estoppel, unjust enrichment, conversion, and misappropriation of trade secrets; and sought declaratory relief.  Gorbec’s counterclaim was almost a mirror image, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and deceptive trade practices.

Both parties moved to dismiss for failure to state a claim under the Federal Rules of Civil Procedure, as interpreted by the U.S. Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); the only count not included in the Rule 12(b)(6) motions was River’s Edge’s declaratory judgment request.  The court granted many parts of the dueling motions.  What survived? 

River’s Edge’s Claims Trimmed

River’s Edge was left with a fiduciary breach claim based on Gorbec’s alleged refusal to provide River’s Edge with all FDA communications on pending ANDA work, conversion and trade secret misappropriation claims, and a contract claim for the alleged cessation of ANDA work.  However, the court dismissed the contract claims based on Gorbec’s alleged statements of ownership or intent to compete, fiduciary claims for any “threatened or potential conduct,” claims for constructive fraud and unjust enrichment, and made it clear that as to the misappropriation claims, River’s Edge had to be able to prove Grobec had the opportunity to acquire, use and disclose trade secrets without consent.

Gorbec’s Counterclaims Narrowed

The court dismissed Gorbec’s counterclaim for negligent misrepresentation entirely, dismissed part of the fraud counterclaim to the extent it was based on the idea that River’s Edge formed its own manufacturing company in order to get around its contract, and dismissed part of the contract counterclaim to the extent it was based on River’s Edge’s failure to enter into the anticipated written agreement.  The court denied the motion to dismiss for unfair and deceptive trade practices and unjust enrichment, finding sufficient information to state a claim; and denied the motion as to the part of the contract claim based on the actual ANDA work Gorbec had done, and denied dismissal of the fraud counterclaim to the extent it was based on fraudulent concealment of the FDA warning letter. 

Lessons Learned

As the court’s ruling demonstrates, in the arena of unfair competition, it is paramount to avoid speculative language about potential harm.  Instead, courts in trade secret misappropriation cases will look for plaintiffs to identify the specific injury the alleged theft has cost them. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.