Last month, I wrote about Allergan’s “Botox” trade secret dispute with its competitor, Merz Pharma, a dispute that led to an extraordinary injunction forbidding Merz from rolling out its drug Xeomin for cosmetic purposes for 10 months. That post generated a lot traffic; in fact, it was easily the most popular post that I have written over the past year. Given that it struck a chord, I thought it would be useful to outline what lessons can be drawn from that case.
First, a quick recap for those not familiar with the case. Judge Andrew Guilford of the Central District of California came down like a ton of bricks on Merz Pharma, forbidding it from rolling out its drug, Xeomin, for ten months because of the misappropriation of trade secrets by a team of seven former Botox sales representatives and sales managers from Allergan. Merz had defeated Allergan’s motion for a temporary restraining order in August 2010, after assuring the court that Merz did not have any of Allergan’s trade secrets and no intention of using its trade secrets.
Subsequent events, however proved otherwise. After a pre-trial conference, Merz produced thousands of documents and emails which indicated that the sales team had in fact taken proprietary documents with them and they had been circulated within Merz. At the close of the nine day bench trial, Judge Guilford stated that he had concluded there were “dramatic acts of misappropriation” and his opinion emphasized that his findings of fact were “largely based” on the credibility of the witnesses. Judge Guilford also identified nearly a dozen confidential Allergan documents that Merz had in its possession prior to the TRO conference in August 2010, including internal emails circulating a confidential Allergan PowerPoint addressing its launch of another cosmetic product (Juvederm), detailing Allergan’s sales volumes in specific territories, Allergan employee information that was apparently used for recruiting purposes, and information about Allergan’s Partner Privilege Program.
So what are the lessons we can draw from this case?
Lessons for In-House Counsel:
1. Keep an Eye on New Research and Sales Teams. Of course, in retrospect, it all seems so obvious. A new sales team from a competitor is brought aboard and is under tremendous pressure to deliver sales for a potential blockbuster product. The temptation to bring proprietary information to meet those goals and to cut corners may be too tough to ignore in this highly-pressurized situation.
In-house counsel need to be attuned to these situations, and it may be a tough tightrope to walk. Periodic audits and deep dives to make sure that the team is not succumbing to the temptation may be necessary. However, the best approach may be the old-fashioned approach: a face-to-face meeting with the entire team to reinforce the importance of safeguarding the previous employer’s information and business interests. Establishing that personal bond may be the most effective way to communicate the importance of abiding by the safeguards in place to avoid litigation.
2. Don’t get Complacent after an Early Win. It is easy to envision what may have happened here: the client probably felt that the storm had passed and did not want to commit any further spend to the litigation. It’s a tough situation to manage, but in-house counsel have to remember that only the first battle has been won, and not the war.
It appears that Merz may have let its guard down, because there are a number of telltale signs: not following up on all of the forensic examiner’s hits (a sure sign to me that the client wanted to scale back its expenses in the case); failure to search appropriate computers; and failure to timely produce relevant documents.
3. Make Sure Management Has Your Back. In order to effectively manage any situation like this one, counsel needs to know that they have senior management’s support. Before the hiring of the team is complete, in-house counsel should be supportive of the hire but make sure that management knows of the potential for trouble and the need for its backing to avoid a similar result.
Lessons for Outside Counsel:
1. Don’t Oversell at the TRO Conference. This is a really tough one to put into practice, as the emotion and intensity of a TRO conference, particularly one with the stakes of this kind of case, can cause the best of us to get carried away. However, it is clear that the district court felt that the first court got burned at the TRO stage. Reading Judge Guilford’s quotes from the TRO conference is enough to make you cringe. At the time that Merz’s counsel were making forceful statements about not using or wanting Allergan’s trade secrets, Merz’s new sales team was circulating proprietary information and trying to cover their tracks. The lesson? Be measured in your statements at the TRO conference because you never know what lurks around the corner.
2. Let Your Forensic Expert Do His Job. It appears that the forensic expert retained by Merz was not fully utilized by counsel. Indeed, Judge Guilford emphasized the disconnect between the forensic examiner and the trial team. Dylan Wiseman’s post on the Littler Unfair Competition & Trade Secrets Counsel Blog, has a solid analysis:
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.
3. If You Have a Good Case, Don’t Let an Early Setback Deter You. Allergan and its outside counsel should be commended as it would have been easy to throw in the towel after a disheartening loss at the TRO stage. I feel like I am giving a motivational speech to my 12 year old’s football team, but it had to be extraordinarily tough to get up off the mat after that early loss and turn this case around. Allergan and its trial team concluded that they had the goods on the former employees that had departed based on their own forensic examination of their laptops and other devices. They persevered despite a significant setback early on by staying the course, perhaps the most important lesson of all.