Earlier this month, a federal judge ruled that a copycat trade secrets theft claim could not be re-litigated in federal court, having already been dismissed in a state court action. That decision came out of a complex dispute between a stem cell company and its prior President and CEO.
After former CEO Alan Smith left Cognate Bioservices Inc. in 2010, he sued Cognate for wage violations in Maryland state court. Cognate then counterclaimed for misappropriation of trade secrets alleging that Smith failed to return his company computer and passwords and misappropriated Cognate’s trade secrets. Meanwhile, Cognate filed a separate lawsuit in Maryland federal court alleging that Smith violated the Computer Fraud and Abuse Act and misappropriated Cognate’s trade secrets, among other things. Both the state court and federal court actions ran in parallel until May 2014 when the state court action went to a jury trial. The jury found against Cognate on its misappropriation counterclaim. Smith accordingly moved to dismiss the federal suit.
Cognate argued that the state and federal actions were not identical because Smith fraudulently concealed discovery in the state court action that prevented litigation of the claims that underlie the federal court action. It is because of this fraudulent concealment, Cognate argued, that it filed the separate federal court action. Chief Judge Blake of the District of Maryland was not convinced. She reasoned that Cognate raised the fraudulent concealment issue as a discovery issue several times in the state court action by motions to extend discovery, sanction Smith, and find spoliation. Although Judge Blake recognized that Smith’s “conduct during discovery may be far from exemplary,” she concluded that due to res judicata, “appealing the state court verdict is the proper avenue for addressing these issues, rather than trying to re-litigate them in federal court.” There was no reason the federal court could “nullify” the state court’s verdict.
Cognate also appears to have outmaneuvered itself. Before it knew the extent of Smith’s alleged misappropriation, Cognate asserted in the state court action that everything on Smith’s laptop was a Cognate trade secret. Cognate thus could not carve out a federal court claim its holistic view of the trade secret claim in the state court action did not already — at least theoretically — cover. This mistake doomed the viability of Cognate’s federal claim after the state court verdict. As Judge Blake found, “even viewing the facts in the light most favorable to [Cognate], it is clear that, in the state court action, Cognate did raise, or could have raised, claims identical to the ones presented here.”
This case is a reminder to practitioners that trade secret litigation rests in a unique place between state and federal courts. Practitioners should think strategically about the long-term issues of filing parallel lawsuits, as the earlier-decided action will likely have a preclusive effect on the other action. Practitioners should also be cautious when over-designating trade secret information. At least in this case, doing so fated Cognate to a federal court dismissal.