United States: L'Oreal Trade Secret Case Shows Dangers Of NDA-Reliance

Last Updated: September 25 2019
Article by Boris Zelkind

On Aug. 12, in Liqwd Inc. and Olaplex LLC v. L'Oreal USA Inc., a jury in Delaware federal court awarded Olaplex over $91 million after finding that L'Oreal willfully misappropriated Olaplex's trade secrets, breached a nondisclosure agreement, and was liable for patent infringement.1 L'Oreal is appealing the verdict and has obtained a stay of the permanent injunction while the court of appeals considers the case.

Although the appeal has not been heard yet, the case highlights the difficulty of defending this classic trade secrets misappropriation scenario to a jury, i.e., when the allegations involve a defendant who enters into an NDA to evaluate technology but releases its own competing product instead. Parties routinely execute nondisclosure agreements or confidentiality agreements when considering an acquisition. But most do not appreciate the devastating consequences that can result from failing to take proper precautions when receiving information under an NDA. The L'Oreal case illustrates this point.

Starting in 2012, Olaplex's founder, Dean Christal, partnered with Drs. Craig Hawker and Eric Pressly to develop haircare products to protect hair during chemical treatments such as hair coloring. They developed a product with certain active agents that, when applied during hair treatments, allegedly strengthened the hair fiber, prevented breaking of hair bonds and left color treated hair looking healthy and vibrant.

Olaplex launched its product line online in June 2014. In November 2014, Olaplex started selling its products through a wholesale distributor that was owned by L'Oreal USA. Olaplex achieved instant market success, and L'Oreal took notice.

By January 2015, L'Oreal reached out to Olaplex about a potential acquisition. After several meetings, Olaplex and L'Oreal executed an NDA effective May 15, 2015. On May 19, 2019, Olaplex provided its unpublished patent application to L'Oreal, which disclosed the active agent and formula allegedly developed by Olaplex.

The parties met again on several occasions, and Olaplex shared additional details about its formulation and the testing that Olaplex performs to assure product efficacy. In September of 2015, L'Oreal representatives informed Olaplex that L'Oreal was no longer interested in pursuing the acquisition. Shortly thereafter, L'Oreal released its competing hair products, and Olaplex filed suit.

Olaplex alleged that L'Oreal stole its trade secrets, including Olaplex's active ingredient and formula, and set out to create blatant knock-off products. Olaplex complained that L'Oreal intentionally copied its product and used its trade secrets in order to "mimic Olaplex's success." It was undisputed that the parties executed an NDA and that L'Oreal gained access to what Olaplex considered to be confidential and proprietary information. L'Oreal, however, disputed that any of Olaplex's information was in fact a trade secret and additionally that L'Oreal did not use any of that information.

L'Oreal asserted that it was working on its own competing product line long before meeting with Olaplex and gaining access to its information pursuant to the terms of the NDA. L'Oreal claims to have been testing the active ingredients found in its accused products in late 2014. L'Oreal conceded that it had tested Olaplex's product prior to entering into the NDA, but reverse engineering is not prohibited by trade secrets law.

L'Oreal asserted that none of the information provided to it by Olaplex under the NDA was new or unknown to it by May 2015. Olaplex, on the other hand, argued that L'Oreal's early testing was unsuccessful and that it was not until Olaplex disclosed its trade secrets under the NDA that L'Oreal was finally able to duplicate the efficacy of Olaplex's products.

Whatever the truth may be — whether or not Olaplex truly had protectable trade secrets or whether L'Oreal actually used the information it received under the NDA — juries want to find for a plaintiff under this fact pattern. The story is tangible and palatable. Someone came up a great idea, then a large company wanted to acquire that idea. The parties enter into a confidentiality agreement, and the inventors share their idea with a would-be purchaser. But the would-be purchaser steals the idea rather than pay for it. Someone got ripped off, and the jury will set things straight.

Defense arguments that attack the trade secrets as being unprotectable because they were publically known sound like excuses — "yes, we took your stuff, but it does not matter because others might also know this information." That does not satisfy our natural sense of right and wrong. Arguing that the defendant was already in possession of the information before accessing it under the NDA can sound disingenuous.

If you already had the information, then why sign an NDA? Why try to get access to this information from the plaintiff? The negative implications mount if the defendant comes out with a new product after seeing the plaintiff's confidential information. It is only logical to assume that the new product makes use of the plaintiff's trade secrets or at a minimum the defendant got a head start by having access to the trade secrets. The defense starts the trial behind the proverbial eight ball.

Moreover if the jury does not buy the defense's explanation, the outcome will be a finding of willfulness. Thus, in these fact patterns, a finding of trade secret misappropriation is almost always accompanied by a finding of willfulness, and the jury will not hesitate to award large sums of money to punish the malicious trade secrets thief.

That is not to say that a defense is hopeless. But, in the jury's mind, it will not much matter that the plaintiff has to meet certain technical requirements to prove its case, i.e., to establish that the alleged trade secrets are protectable under the Defend Trade Secrets Act (or relevant state statute), such as proving that the alleged trade secret has economic value from not being generally known and that the owner had to take reasonable measures to protect its secrets:

the term "trade secret" means all forms and types of financial, business, scientific, technical, economic, or engineering information, ... if —

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.2

Accordingly, it is critical to approach review of allegedly trade secret information in a potential acquisition with extreme caution. If the acquisition is not consummated, feelings could be hurt, and, if the recipient of the confidential information releases a new competing product after seeing the confidential information, you can bet the disclosing party will suspect the worst.

To best position yourself in case of a dispute, think about asking the disclosing party to segregate any trade secrets from the other confidential information and reserve review of the trade secrets until a later stage of the process. If you have previously started working on competing technology, fishing expeditions may not be worth the risk. If you (or your client) are close to releasing a new product, consider postponing the review of confidential information until after the release.

If you are reviewing confidential information under an NDA and decide not to pursue a business relationship, it is critical to contemporaneously document the reasons for the decision and reasons for going in a different direction. If you detect flaws or problems in the technology, document them. There is no simple way to mitigate this risk, but thinking about ways to win the hearts and minds of the jury if a dispute were to arise will go a long way.

Footnotes

[1] Liqwd, Inc., et al v. L'Oreal USA, Inc., et al, Case No. 17-cv-0014 (DED).

[2] 18 U.S.C. § 1839.

Reprinted with permission of Law360.

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