In a recent decision, the District Court for the Southern District of California held that despite not having direct evidence of misappropriation, a company’s lack of experience in the particular industry coupled with its behavior during business negotiations were sufficient to state a claim that a competing product misappropriated trade secrets under the Defend Trade Secrets Act (DTSA) and to defeat a motion to dismiss. 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 effective against rhinoviruses and novel respiratory pathogens, such as COVID-19. With an application to the mouth and nose, the antiviral spray aids in naturally flushing pathogens and foreign particles in the digestive tract.

In 2017, ABL engaged a private equity fund manager—and its operating partner Anthony Zolezzi—to explore business opportunities. Zolezzi had no prior experience with antiviral nasal spray technology but was particularly curious in ABL’s product. To protect its confidential and proprietary information, ABL (1) had Zolezzi 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. The relationship ended unsuccessfully in 2018. Thereafter, Zolezzi became the CEO of another biotechnology company, Diomics Corporation, which also had no prior experience in the antiviral spray field. Diomics developed an antiviral nasal spray with the same technology.

ABL sued Diomics and Zolezzi for trade secret misappropriation under DTSA and unfair competition under California state law. ABL alleged that Zolezzi misappropriated more than 90 confidential and proprietary files. The files included ABL’s detailed business plans and documents disclosing ABL’s scientific testing results, experimental designs, patent applications, formulations, manufacturing processes, and marketing strategies.

Diomics moved for dismissal, but on September 7, 2021, the Court denied the motion as it related to the trade secret misappropriation claims. The court held that ABL had sufficiently pled that Zolezzi and Diomics misappropriated ABL’s trade secrets to launch a similar product – Zolezzi had no prior experience with antiviral nasal spray technology before working with ABL; Zolezzi displayed a heightened level of interest in ABL’s product during their business relationship;  and Diomics had no prior experience with antiviral nasal spray technology before hiring Zolezzi, yet the company was able to produce and commercialize a product that took ABL substantial time to manufacture. The court looked at the totality of the circumstances and held that the allegations were sufficient to state a claim under the DTSA.

The case stands as a reminder that many trade secret cases are viable despite the absence of direct, unambiguous evidence 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.).