Firm’s Claim of Trade Secret Violations Is Upheld

By D.M. Fera January 31, 2023

Takeaway: Companies should not hesitate to protect their trade secrets in court. This is especially true if an employee quits, takes trade secrets with them and provides the information to a competitor that then uses the information to its advantage.

Companies may wish to review their trade secret policy in light of this recent action's analysis of what is a trade secret.

​Caudill Seed & Warehouse Co., a Kentucky-based manufacturer and seller of agricultural products, sued another firm, Jarrow Formulas Inc., for alleged violations of the Kentucky Uniform Trade Secrets Act (KUTSA), and was awarded approximately $7 million in damages.

Jarrow Formulas is a dietary supplement manufacturer that sells BroccoMax, a broccoli-seed extract product. To make BroccoMax, Jarrow purchased glucoraphanin-containing powder from Caudill.

Jarrow eventually decided to "design and sell" its own activated glucoraphanin product, the appeals court said. To do this, it made overtures to Caudill's director of research "to learn Caudill's manufacturing process from him."

The research director eventually ended his employment with Caudill and became a consultant to Jarrow.

The individual's "expertise proved very useful for Jarrow," according to the appeals court, as the company never conducted its own research and development (R&D) on broccoli-seed extract products, but instead looked to the former Caudill employee to provide the necessary input.

"Jarrow profited handsomely from this research. Jarrow brought an activated broccoli product into commercial production just four months after hiring" the consultant, the court said.

Caudill sued Jarrow in the U.S. District Court for the Western District of Kentucky. In August 2014, Caudill amended its original complaint to add a claim under KUTSA.

After a jury trial, the district court denied Jarrow's motion for a new trial and entered a judgment of approximately $2.4 million in damages, $1.0 million in exemplary damages, $3.3 million in attorney fees and $69,872 in costs against Jarrow.

Sixth Circuit

Jarrow appealed the ruling, but the 6th U.S. Circuit Court of Appeals recently upheld it.

The 6th Circuit said the trade secret claim was the "main event" and the only claim truly relevant to Jarrow's appeal.

Jarrow argued that Caudill improperly defined its trade secret in three ways: by showing insufficient particularity, by presenting a constantly shifting definition of "trade secret," and by defining "trade secret" in such a way as to impose on "free labor movement."

The 6th Circuit agreed with the district court and rejected all three of Jarrow's arguments. It affirmed the jury's conclusion that Caudill suitably defined its R&D activities as a protectable combination trade secret with "sufficient definiteness."

The district court jury agreed with Caudill's argument seeking trade secret protection "not for one specific piece of information, but rather for its entire process of research and development," rejecting Jarrow's argument that Caudill improperly advanced a "kitchen-sink theory of trade secrets" by broadly defining all its research activities as components of a trade secret.

Caudill was persuasive in demonstrating it "had assembled a unique combination of processes and information" that furthered its R&D activities "at a level of depth beyond" merely listing technical concepts or containing only information that was in the public domain, the appeals court said.

The 6th Circuit further agreed with the district court that Caudill adequately defined as a trade secret the R&D work that Caudill had performed before the employee in question was hired, the specific work that the employee did while at Caudill and the "body of knowledge" that the employee subsequently took to Jarrow. 

Jarrow also presented a so-called employee-mobility argument, contending that under Kentucky law, an employee has a right "to take with him all the skill he has acquired" when leaving or changing employers.

In rejecting this argument, the appeals court said the research director did more than simply change employers. In fact, "he provided Jarrow with the results of years of research, testing and analysis that informed Caudill's production process. Similar behavior has supported courts imposing trade-secret liability in the past," the court said.

Jarrow's other arguments concerning the calculation and awarding of damages, including the jury's finding of willful and malicious misappropriation by Jarrow, were also rejected by the 6th Circuit.

Caudill Seed & Warehouse Co. Inc. v. Jarrow Formulas Inc., 6th Cir., No. 21-5345 (Nov. 10, 2022).

D.M. Fera is a freelance writer in the Washington, D.C., area.


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