CAFC Clears L’Oréal of Trade Secret Misappropriation, Orders New Trial on Patent Infringement

By Nancy Braman
May 11, 2021

“Olaplex’s lack of specificity in describing the ‘testing and know how’ and ‘dead ends and trials and errors’ information asserted to be trade secrets is telling on the issue of failure of proof of trade-secret status.” – CAFC

federal circuitOn May 6, the U.S. Court of Appeals for the Federal Circuit (CAFC), reversed in part, affirmed in part, vacated in part, dismissed in part, and remanded a judgment in an appeal from the U.S. District Court for the District of Delaware. L’Oréal USA, Inc., L’Oréal USA Products, Inc., L’Oréal USA S/D, Inc., and Redken 5th Avenue NYC, LLC. (collectively, “L’Oréal”) appealed the district court’s ruling in favor of plaintiffs Liqwd, Inc. and Olaplex, LLC, which sued L’Oréal for patent infringement, misappropriation of trade secrets, and breach of a non-disclosure agreement.

Liqwd, Inc. & Olaplex, LLC v. L’Oréal

In 2019, the district court jury heard arguments from plaintiffs supporting their trade secret, breach of contract, and patent infringement claims. The jury also heard counter-arguments from L’Oréal, which asserted that claims 14-16 of U.S. Patent No. 9,668,954 (“the ‘954 patent”) were invalid and thus could not be infringed. The jury returned a verdict in favor of the plaintiffs, finding that L’Oréal “willfull[y] or malicious[ly]” misappropriated the plaintiff’s trade secrets, breached its non-disclosure agreement, and willfully infringed the ‘954 patent. The damages award entered (after adjustments by the court) was $49,920,000, not including attorney’s fees, court costs, or interest. L’Oréal renewed an earlier motion for judgment as a matter of law (JMOL) and moved for a new trial, both of which were subsequently denied by the district court. The plaintiffs moved for prejudgment interest on the damages award and attorney’s fees, to which the court granted prejudgment interest on damages but denied it regarding attorney’s fees. In 2020 L’Oréal filed an appeal, two weeks later the plaintiffs filed a cross-appeal, and in March the district court entered another judgment pertaining to attorney’s fees, costs, and prejudgment interests. After this judgment was entered, L’Oréal then filed a second appeal, and the plaintiffs filed a second cross-appeal.

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Appellate Jurisdiction Allowed if Party Substitution After Judgment on the Merits

At the outset, in responding to a motion from the plaintiffs, the CAFC allowed Olaplex, Inc. to be substituted as the plaintiff under the Federal Rule of Appellate Procedure, because the plaintiffs’ interest had been transferred to Olaplex, Inc. L’Oréal argued that the CAFC should vacate the district court’s judgment and remand for dismissal because the final judgment was only entered after the plaintiffs transferred their interests to Olaplex, Inc., and thus the CAFC did not have jurisdiction over the substitution proceedings. The CAFC rejected this argument, finding that there was no jurisdictional question because even though a final ministerial calculation was entered in a 2020 order, the final judgment on the merits was ordered in 2019 and was thus immediately reviewable at that time. The court, however, declined to opine on if a transfer occurring after a district court’s final decision is always necessary to defeat similar appellate jurisdictional objections. Furthermore, the CAFC noted that jurisdiction attached regardless of any jurisdictional problem with the 2019 order because L’Oréal itself filed an appeal, and thus the plaintiffs had adverse interests in the case. Thus, the CAFC would only be able to remand the case for the substitution of Olaplex, Inc. and re-entry of judgment, leaving the merits issues unchanged.

Misappropriation Allegations Require ‘Reasonable Particularity’

Next, the CAFC reversed the district court’s denial of L’Oréal’s motion for JMOL regarding trade secret misappropriation or breach of contract, finding that “no reasonable jury could have found [either].” Because Olaplex agreed that “if its trade-secret claim does not survive, neither does its breach-of-contract claim[,]” the court looked only at trade secret misappropriation. A trade secret, explained the CAFC, “must not be of public knowledge or of a general knowledge in the trade or business.” Misappropriation occurs when a trade secret is disclosed or used by another without consent of persons such as the trade secret owner. In this case, Olaplex argued that its asserted trade secrets fell into four groups: 1) information in its unpublished patent application; 2) business information; 3) testing and know-how; and 4) dead ends and trials and errors.

First, the CAFC found that despite testimony from multiple experts, Olaplex did not provide evidence to support its contention that using maleic acid during hair bleaching, as asserted in its unpublished patent application, was not generally known or readily ascertainable through proper means. Conversely, L’Oréal cited numerous prior art patent references disclosing the asserted trade secret before the start of the alleged misappropriation, specifically U.S. Patent No. 7,044,986 (“Ogawa”), WO 2014/207097A1 (“Wahler”), and J.A. 14285–86 (“Mintel”). Second, the CAFC found no evidence that L’Oréal misappropriated trade secret information through improper use of business information and financials when it used this information in its “Build v. Buy” analysis. Instead, referencing the language of the non-disclosure agreement, the CAFC found that L’Oréal was given explicit authorization to use this information “to evaluate, negotiate and, if applicable, consummate a possible Transaction . . .” Lastly, the CAFC found that Olaplex, Inc. failed to identify with specificity how L’Oréal improperly used Olaplex’s trade secret information regarding testing, know-how, dead ends, or trial and errors. Even though Olaplex’s expert acknowledged that “‘the methods that Olaplex developed for evaluating their products’” constituted a trade secret, the expert “did not identify what these methods were so as to provide any concrete basis for finding that they were not ‘readily ascertainable’ by proper means . . .” The court went further, noting: “Olaplex’s lack of specificity in describing the ‘testing and know how’ and ‘dead ends and trials and errors’ information asserted to be trade secrets is telling on the issue of failure of proof of trade-secret status.”

The court also looked to Delaware law in finding that plaintiffs in trade secrets cases “. . . must disclose the allegedly misappropriated trade secrets with reasonable particularity.” See SmithKline Beecham Pharms. Co. v. Merck, 766 A.2d 442, 447 (Del. 2000). The CAFC found that, without particularity, fair adjudication of a defendant’s use of specific information is impossible.

Estoppel under 35 U.S.C. § 325(e)(2)

L’Oréal also raised two issues on appeal pertaining to patent invalidity: 1) whether no reasonable jury could find that claims 14-16 of the ‘954 patent were not invalid over the written-description requirement; and 2) whether the district court’s jury instructions on obviousness were erroneous. L’Oréal also asked to be reassigned to a different district court judge. The CAFC affirmed both the district court’s denial of JMOL on the invalidity of claims 14-16 of the ‘954 patent and denial of a motion for a new trial on invalidity for obviousness. The CAFC cited estoppel under 35 U.S.C. § 325(e)(2) as barring L’Oréal from seeking to overturn the verdict because it could have raised these arguments during post-grant review of the ‘954 patent conducted at the USPTO’s Patent Trial and Appeal Board. 35 U.S.C. § 325(e)(2) specifically provides that:

The petitioner in a post-grant review of a claim in a patent under this chapter that results in a final written decision under section 328(a), or the real party in interest or privy of the petitioner, may not assert either in a civil action arising in whole or in part under section 1338 of title 28 or in a proceeding before the International Trade Commission under section 337 of the Tariff Act of 1930 that the claim is invalid on any ground that the petitioner raised or reasonably could have raised during that post-grant review.

Ultimately, the CAFC granted the plaintiff’s motion to substitute, reversed the denial of L’Oréal’s JMOL motion as to trade-secret misappropriation and breach of contract, affirmed the denial of L’Oréal’s post-trial motions on patent invalidity, vacated and remanded for a trial on patent infringement and damages, dismissed Olaplex’s cross-appeal, and denied L’Oréal’s request for reassignment.

 

The Author

Nancy Braman

Nancy Braman is a U.S. Registered Patent Agent. She is also a 3L at UNH Franklin Pierce School of Law, where she serves as Senior Editor of IDEA: The Law Review of the Franklin Pierce Center for IP. She has been contributing to IPWatchdog since 2019.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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