The District Court for the Southern District of California held that despite not alleging direct evidence of misappropriation, a complaint’s allegations about a company’s lack of experience in the particular industry coupled with its purported behavior during business negotiations were sufficient to state a claim that an allegedly competing product misappropriated trade secrets under the Defend Trade Secrets Act (DTSA) and to defeat a motion to dismiss. According to the Complaint, Applied Biological Laboratories (ABL), a biotechnology company that researches, develops, manufacturers, and distributes healthcare products, developed an antiviral nasal technology using immunoglobulin G, a common antibody in body fluids. ABL’s antiviral nasal spray is allegedly effective against rhinoviruses and novel respiratory pathogens, such as COVID-19. With an application to the mouth and nose, the antiviral spray allegedly aids in naturally flushing pathogens and foreign particles in the digestive tract.

In December 2020, ABL filed a complaint against Diomics Corporation and its CEO making the following claims: In 2017, ABL engaged a private equity fund manager—and its operating partner who later became Diomics CEO—to explore business opportunities.  ABL alleged that it (1) had the operating partner sign two NDAs prohibiting him from using ABL’s proprietary information for any purpose other than to evaluate its business; (2) installed a document control system and limited access to users with company-issued usernames and passwords; and (3) created a password-protected data room that housed more than 90 confidential and proprietary documents. ABL further claimed that the operating partner had no prior experience with antiviral nasal spray technology but was particularly curious about ABL’s product. After the exploratory business relationship ended unsuccessfully in 2018,

ABL further alleged that, thereafter, the operating partner became the CEO of Diomics (another biotechnology company, which also had no prior experience in the antiviral spray field) and that Diomics subsequently developed an antiviral nasal spray with the same technology. ABL also alleged that the CEO misappropriated more than 90 confidential and proprietary files. The files alleged to have been misappropriated included ABL’s business plans and documents disclosing ABL’s scientific testing results, experimental designs, patent applications, formulations, manufacturing processes, and marketing strategies. The complaint asserted claims for trade secret misappropriation under DTSA and unfair competition under California state law.

Diomics moved for dismissal, but on September 7, 2021, the Court denied the motion as it related to the trade secret misappropriation claims. In denying the motion, the court found that ABL had sufficiently pled the trade secrets misappropriation claims for the following reasons:  (1) Diomics’ CEO had no prior experience with antiviral nasal spray technology before working with ABL; (2) the CEO displayed a heightened level of interest in ABL’s product during their business relationship;  and (3) Diomics had no prior experience with antiviral nasal spray technology before hiring the CEO, yet it was able to produce and commercialize a product quickly.

The court looked at the totality of the circumstances and held that the allegations were sufficient to state a claim under the DTSA.  While the complaint survived the motion to dismiss based on the allegations made, it remains to be seen whether the allegations will be proven as true.  We will continue to report on this case as it develops.

The case stands as a reminder that many trade secret cases may survive the motion to dismiss stage, despite a lack of direct, unambiguous allegations of misappropriation. It is also a reminder that given the complexities of business collaborations and the potential exposure of confidential or proprietary information to business partners, trade secret holders need to understand their trade secrets and must tailor its protections to fit them.

The case is Applied Biological Laboratories, Inc. v. Diomics Corporation, et al, 20CV2500 AJB LL/ (S.D. Cal.).