breach of fiduciary duty

After being slapped with a post-trial judgment last April totaling $2.2 million for misappropriation of confidential and proprietary information, two Wyoming bank executives were named in an unprecedented “Notice of Intent to Prohibit” filed in December by the Federal Reserve Board.  If these executives thought that more than two million dollars in civil liability was harsh, they were mistaken, as they now face a much harsher consequence:  a ban from the banking business altogether.

In its Notice, the Federal Reserve Board alleges that two executives, Frank Smith and Mark Kiolbasa, conspired to misappropriate the confidential and proprietary business information of their employer, Central Bank & Trust in Wyoming, and to give it to Central’s competitor, Farmers State Bank, in exchange for employment and an ownership interest in Farmers.  The Notice contends that the bankers engaged in unsafe and unsound banking practices in breach of their fiduciary duties to Central Bank and seeks a hearing to determine whether they should be permanently barred from participating in the banking industry “in any manner.”

It is unclear whether this action stands on its own or is part of larger movement by the Federal Reserve to crack down on confidential and trade secret misappropriation.  Regardless, it is an issue we will closely monitor given its sizeable consequences.  The risk of a Federal Reserve action for a permanent ban on participation in the banking business adds greater protection to banks, but creates new risks at the same time.  The same bank who threatens to report one of its executives to Feds could also hire a new executive who brings the same baggage with them.  With the Federal Reserve Board’s recent Notice, we are continuing to notice a trend of the governments’ involvement in the confidential and trade secret misappropriation world.

A Pennsylvania federal court recently denied Defendant Synchrony Group, LLC’s motion to dismiss a trade secret lawsuit filed by Plaintiff Jazz Pharmaceuticals, Inc. (Jazz”) holding that Plaintiff sufficiently stated a trade secret claim. Jazz Pharms., Inc. v. Synchrony Grp., LLC, No. 18-602, 2018 WL 6305602 (E.D. Pa. Dec. 3, 2018). Continue Reading Pennsylvania Federal Court Finds That Plaintiff’s Trade Secret Misappropriation Allegations Hold Up

On April 25, 2012, a federal judge in North Carolina issued a ruling granting in part and denying in part motions to dismiss involving claims for trade secret misappropriation, breach of contract, and conversion in a dispute between two pharmaceutical companies in the case of River’s Edge Pharmaceuticals v. Gorbec Pharmaceutical Services, Inc. This decision confirms, to an extent, the need to plead actual, rather than speculative harm to prevent dismissal for failure to state a claim.

River’s Edge Pharmaceuticals (“River’s Edge”) is a company which distributes pharmaceutical products and aims to provide “reasonably priced alternatives to costly name brand pharmaceuticals.” The company began marketing and developing certain alleged unapproved pharmaceutical products through an FDA approved process known as Drug Efficacy Study Implementation (“DESI”).

In 2007, River’s Edge began working with another pharmaceutical company, Gorbec, to manufacture DESI drugs and test and formulate generic drugs under the Abbreviated New Drug Application (“ANDA”) process. According to the pleadings, the parties agreed to a contract, and agreed the terms would be memorialized in writing, however this was never actually done. River’s Edge began submitting purchase orders to Gorbec, however, and Gorbec performed according to the agreed upon terms.

River’s Edge alleges that beginning in 2010, Gorbec’s executives began making statements about how they owned the “know-how, intellectual property, and regulatory approvals” which River’s Edge had hired and paid them to develop. According to River’s Edge, these statements were made despite the fact that River’s Edge was the actual owner. In addition, Gorbec threatened to stop work on River’s Edge’s products, and made statements of intent to compete with the company. River’s Edge alleges that all of these actions would harm the company and would worsen its chances of getting FDA approval. Gorbec, by contrast, alleged it had agreed to manufacture these drugs based on River’s Edge’s representations and proceeded to do so for three years. However, Gorbec alleges that during that time, River’s Edge received a warning letter from the FDA asking the company to cease sales. River’s Edge allegedly failed to tell Gorbec about it. Gorbec alleges River’s Edge also failed to pay in full for the work they had performed.

River’s Edge filed a complaint against Gorbec and its President, J. Michael Gorman, in the Middle District of North Carolina, requesting declaratory relief, and alleging breach of contract, breach of fiduciary duty, constructive fraud, promissory estoppel, unjust enrichment, conversion, misappropriation of trade secrets, and punitive damages. Gorbec filed a counterclaim, alleging breach of contract, unjust enrichment, negligent misrepresentation, fraud, and unfair and deceptive trade practices.

Both parties recently filed motions to dismiss. Gorbec moved to dismiss all counts of the amended complaint, except for declaratory relief, while River’s Edge moved to dismiss each and every one of Gorbec’s counterclaims.

With regard to breach of contract claim, the court granted Gorbec’s motion in part to the extent the claimed breach was based on Gorbec’s statements of ownership or intent to compete, but denied the motion to the extent the breach alleged pertained to Gorbec’s cessation of ANDA-related work.

Similarly, with respect to the breach of fiduciary duty claim, the court granted the motion to dismiss to the extent the claim was based on Gorbec’s threatened or potential conduct, but denied the motion to the extent the claim was based on Gorbec’s refusal to provide River’s Edge with complete copies of communications with the FDA and info regarding pending ANDAs and said things suggesting ownership of River’s Edge’s intellectual property. The court also dismissed the claims for constructive fraud and unjust enrichment, holding the plaintiff’s allegations failed to state a claim. The court however found that there were sufficient facts to state a claim for both conversion and misappropriation of trade secrets. On the misappropriation of trade secrets cause of action, however, the court held that while there was sufficient facts to state a claim, the burden would be on River’s Edge to show Grobec had the opportunity to acquire, use and disclose such information without consent.

With respect to Gorbec’s counterclaims, the court dismissed the claim for negligent misrepresentation and denied the motion to dismiss for unfair and deceptive trade practices and unjust enrichment, finding sufficient information to state a claim. Additionally, the court found Gorbec had sufficiently alleged a claim for breach of contract regarding the work Gorbec had done for the ANDA process, but dismissed the claim to the extent it was based on River’s Edge’s failure to enter into a marketing agreement. Similarly, the court denied the motion to dismiss the count of fraud to the extent it was based around River’s Edge’s fraudulent concealment of the warning letter, but dismissed the claim to the extent it was based on the idea that River’s Edge formed its own manufacturing company in order to get around its contract.

The Court’s ruling suggests the need to plead with specificity. Here, claims based on speculative damages, and threatened or potential conduct failed to survive dismissal. This confirms the importance of alleging clear harm in one’s pleadings, and shows that to gain a more favorable result for a client, a pleading needs to be framed in such a way that it avoids speculation.

Associated Press (Anna Jo Bratton) is reporting that a state district court judge in Lancaster County, Nebraska tagged two Nebraska Municipal Power Pool executives with millions of dollars in damages arising out of their scheme to use American Public Energy Agency’s "company information, financial data and copyrighted material."  View Article. It appears that Nebraska Municipal Power Pool ("NMPP") previously provided services to American Public Energy Agency.  Then the two NMPP executives decided to create their own agency to compete with American Public Energy Agency.  AP also reports that the two executives attempted to steal away American Public Energy Agency’s customers in an effort to eliminate or severely harm the company. 

I have not been able to locate a copy of the opinion, but I am hoping that it will be up on a website or a search service soon.   If I find it publicly available, I’ll try to post a link to the judge’s decision.