By Cheryl Beise, J.D.
Jarrow Formulas hired Caudill Seed’s former director of research to misappropriate Caudill’s methods for extracting and developing active broccoli seed compounds.
Sufficient evidence presented at trial supported a jury’s award of $2.4 million in compensatory damages to Caudill Seed and Warehouse Company resulting from supplement maker Jarrow Formula’s willful and malicious misappropriation of trade secrets relating to the development and manufacture of an activated broccoli seed product, the federal district court in Louisville, Kentucky, has held. Four months after Jarrow Formulas hired Caudill Seed’s director of research responsible for developing broccoli seed compounds, Jarrow Formulas launched its own activated broccoli seed product. Caudill Seed sufficiently circumscribed and defined its misappropriated trade secret as the "entire body of knowledge developed over the course of many years" of Caudill Seed’s "seed to shelf" process. Moreover, Caudill Seed’s research and development work was not publicly known or readily ascertainable by experienced scientists. Jarrow Formula’s motion for judgment as a matter of law or a new trial was denied (Caudill Seed and Warehouse Company, Inc. v. Jarrow Formulas, Inc., June 9, 2020, Simpson, C.).
Caudill Seed produces and supplies agricultural products including seeds, sprouts, and the like to commercial producers and distributors. It also sells ingredients for nutritional supplements, food, and cosmetics, and sells some of its own nutritional supplements. From 2002 until his resignation on May 2, 2011, Kean Ashurst was employed by Caudill Seed, holding a number of positions, including Director of Research. At Caudill, Ashurst was responsible for research and development of new products and processes in the area of the extraction, isolation, and development of compounds from broccoli seed including glucoraphanin, the myrosinase enzyme, and the production of sulforaphane. Glucoraphanin is thought to have positive health effects in humans. Prior to Ashurst’s resignation, Caudill Seed was preparing for commercial production of an activated formula broccoli extract product. Jarrow Formulas was formerly a customer of Caudill Seed that purchased bulk quantities of Broccoraphanin. After hiring Ashurst, Jarrow Formulas ceased purchasing Broccoraphanin from Caudill and become a broccoli extract manufacturer.
Caudill Seed sued Jarrow Formulas, alleging violation of the Kentucky Uniform Trade Secrets Act ("KUTSA"). The case was tried to a jury over a three and a half week period. The jury found that Caudill Seed possessed certain trade secrets, that Jarrow Formulas misappropriated some of those trade secrets, that Jarrow Formulas acted willfully and maliciously, and awarded $2,427,605 for Caudill’s actual loss and Jarrow Formulas’ unjust enrichment. Jarrow Formulas moved for judgment as a matter of law or, in the alternative, for a new trial. Jarrow Formulas contended that there was insufficient evidence to support the jury’s finding of trade secret misappropriation, willful and malicious conduct, or damages. The motion focused on the misappropriation of Trade Secret 1, the only trade secret for which the jury awarded damages and found willful misappropriation.
Misappropriation of Trade Secret 1. In order to succeed on a claim under the KUTSA, Caudill Seed had to prove that each of the following elements was more likely true than not true: (1) that Caudill Seed possessed one or more trade secrets as defined by KUTSA; and (2) that Jarrow Formulas misappropriated one or more of Caudill Seed’s trade secrets.
Jarrow Formulas argued that the jury could not reasonably find misappropriation of Trade Secret 1 because (1) Trade Secret 1 was not sufficiently defined; (2) the jury could not find that the entire compilation of Trade Secret 1 was misappropriated by Jarrow Formulas; and (3) Caudill failed to prove a combination of elements in Trade Secret 1 that was unique and not publicly known.
Caudill Seed defined Trade Secret 1 as its "entire body of knowledge developed over the course of many years." Jarrow Formulas contended that Caudill Seed’s claim to trade secret protection for all of its research and development over a 17-year period was untenable. The court, however, found that Caudill Seed adduced evidence from which the jury could reasonably have concluded that the confidential and proprietary materials that Ashurst undisputedly provided to Jarrow Formulas contained Caudill Seed’s extensive and complete instruction on the process for successfully and profitable producing the Caudill Seed products from "seed to shelf," enabling Jarrow Formulas to launch its own manufacturing operation in just a few months. Caudill Seed provided evidence at trial of (1) specific times, temperatures, and pressures used in its process, (2) testing data, (3) discoveries concerning viable and non-viable processes, (4) a compilation of relevant scientific literature, and (5) its vendor, cost, and customer information— the synthesis all of which constituted what Caudill Seed termed its "seed to shelf" process for producing glucoraphanin and activated glucoraphanin, as well as finished products, Vitalica and Vitalica+.
Caudill Seed also offered evidence that its research and development work was not publicly known or readily ascertainable by experienced scientists such that one could achieve what Jarrow Formulas achieved in four months. "Ashurst, remarkably, had an epiphany about a new and ultimately patentable process for increasing the myrosinase within the broccoli seed within weeks of beginning his work for Jarrow Formulas," the court said.
The court also explained that the "uniqueness" of Trade Secret 1 was not found in a particular secret feature adopted by the defendant. Rather, its unique and protectable value was that it afforded a proprietary and successful process and know-how synthesized from years of research and development which assisted or accelerated a misappropriator’s development of its own similar product and process. The court concluded that sufficient evidence was adduced at trial for the jury to reasonably conclude that Trade Secret 1 existed, was possessed and protected by Caudill Seed, and that Jarrow Formulas misappropriated Trade Secret 1 in violation of the KUTSA.
Jarrow Formulas’ misappropriation. The court noted that Caudill Seed’s KUTSA claim against Jarrow Formulas could not be predicated solely on the acts or omissions of Ashurst, as he was not a defendant in this case. Instead, Caudill Seed had to demonstrate that it was more likely true than not true that another officer, employee, or agent of Jarrow Formulas did some independent act constituting "misappropriation." Caudill seed met this standard.
Testimony at trial established that Jarrow Formulas had no prior research on broccoli products. Yet four months after hiring Ashurst away from Caudill Seed, Jarrow Formulas was commercially capable of manufacturing an activated broccoli seed product. "The evidence was thus sufficient to support a conclusion that the achievement likely resulted from Jarrow Formulas’ misappropriation of Caudill Seed’s ‘seed to shelf’ process, the ‘roadmap’ provided by Ashurst to Jarrow Formulas at Jarrow Formulas’ request," the court found.
Jarrow Formulas argued that because it utilized a process that it was able to patent, Caudill Seed could not succeed on its claim for misappropriation. The court observed that KUTSA does not require the novelty or uniqueness of patentable products or processes. Rather, KUTSA requires that trade secrets "derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use." Caudill Seed presented evidence to support the proposition that Jarrow Formulas’ acquisition of Caudill Seed’s trade secrets enabled it to bypass years of research and development in reaching what it would ultimately patent.
Willful and malicious conduct. Under the KUTSA, "[i]f willful and malicious misappropriation exists," the court may award exemplary damages and a reasonable attorney fee. The court noted that there is no Kentucky case that defines willful and malicious conduct in the context of trade secret misappropriation. However, the KUTSA directs courts to harmonize our interpretation of the provisions of the act, to the extent possible, with that of other states. The courted look to decisions from other jurisdictions for guidance on the meaning of "willful and malicious misappropriation."
The jury instructions stated that "Willful and malicious" conduct "is calculated, deliberate, and reprehensible." The court explained that this language was derived from a Fourth Circuit case interpreting the punitive damages award under the Virginia Uniform Trade Secrets Act. See Sperry Rand Corp. v. A-T-O, Inc. 447 F.2d 1387 4th Cir. 1971).
The court found that there was sufficient trial evidence from which a jury could reasonably find that Jarrow Formulas actively, deliberately, aggressively, and deceptively pursued Caudill Seed’s trade secrets in order to "beat [Caudill Seed] to the punch" in getting an activated formula broccoli seed product to market. "Secretive and underhanded tactics employed to capitalize on Caudill Seed’s knowledge, designed to benefit Jarrow Formulas and necessarily to damage Caudill Seed as the flip side of that coin, could reasonably be found to constitute ill will," the court said.
Damages. The jury awarded damages of $2,023,000 in actual loss for misappropriation of Caudill Seed’s Trade Secret 1. The jury also awarded $404,605 in damages, reflecting the profits from Jarrow Formulas’ sales of glucorphanin and activated glucorphanin-containing products attained as a result of the misappropriation.
Jarrow Formulas argued that it was inappropriate for the jury to award development costs as damages. The court disagreed. The court observed that the jury did not award Caudill Seed all of the development costs. The court found that, under the circumstances of the case and the evidence adduced, it was reasonable for the jury to find the value of the benefit to Jarrow Formulas in misappropriating Trade Secret 1 to be, in part, measured as a portion of Caudill Seed’s development costs.
In addition to an award of damages derived from Caudill Seed’s costs of development evidence, the jury awarded Caudill Seed $404,603, based upon expert calculations concerning Jarrow Formulas’ net profit on four of its products containing either glucoraphanin or activated glucoraphanin. The jury was instructed that "Caudill Seed may recover damages for trade secret misappropriation only for the period in which information is entitled to protection as a trade secret plus an additional period, if any, in which Jarrow Formulas retained an advantage over good faith competitors because of the misappropriation." Caudill Seed offered evidence from which a reasonable jury could conclude that Jarrow Formulas’ misappropriation of Trade Secret 1 enabled it to develop its process and products in four months’ time. Moreover, there was sufficient evidence to support a conclusion that Jarrow Formulas would not have sold the products that it did without the misappropriation.
The case is No. 3:13-cv-00082-CRS-CHL.
Attorneys: J. Mark Grundy (Dentons Bingham Greenbaum LLP) for Caudill Seed and Warehouse Co., Inc. d/b/a Caudill Seed Co. Jamie K. Neal (Burke Neal PLLC) and Joel T. Beres (Stites & Harbison, PLLC) for Jarrow Formulas, Inc.
Companies: Caudill Seed and Warehouse Co., Inc. d/b/a Caudill Seed Co.; Jarrow Formulas, Inc.
MainStory: TopStory TradeSecrets GCNNews KentuckyNews
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