As pharmaceutical, medical device and high-tech innovations involve increasingly sophisticated technologies–such as complex cell- and gene-based therapies, artificial organs, AI-powered products and services, and advanced semiconductors–fewer companies can "go it alone" in researching and developing cutting-edge products. Instead, companies and research institutions frequently collaborate even in the early stages of R&D. Examples include:
" Outsourcing manufacturing of complex experimental products or prototypes.
" In-licensing promising early-stage technologies from academic research centers and small-cap startups.
" Joint research collaborations, which may involve accessing advanced research tools like innovative discovery platforms or AI-based discovery/modeling systems, or benefiting from specialized design and manufacturing capabilities.
While such collaborations can yield great rewards, there are also risks when researchers and companies share highly-sensitive proprietary information. Protecting trade secrets is crucial to preserve the value of early-stage innovations, especially where patent protection has not yet been obtained or might not be available (e.g., innovations that are patent-ineligible under current interpretations of 35 U.S.C.§ 101, or are difficult to patent broadly under § 112). Collaborations can be an opportunity to protect and strengthen such trade secrets; but they can also be a juncture where trade secrets are misappropriated or lose their protection entirely.
In this article, trade secrets protection and misappropriation issues that can arise in three common early-stage collaboration scenarios, illustrated by three real-world cases, are discussed: (1) outsourcing manufacturing for early-stage R&D materials or prototypes; (2) pre-collaboration discussions to explore early-stage in-licensing; and (3) entering into an early-stage joint research agreement. For each of these scenarios, good-practice takeaways to protect valuable trade secrets and guard against potential misappropriation allegations are provided.
Snapshot: Trade Secrets Protection in the US
In the United States, trade secrets are protected under state law, and since 2016, in parallel under the federal Defend Trade Secrets Act (DTSA) if they relate to products or services in interstate or foreign commerce. In either case, "trade secrets" are typically defined as information that (1) the owner has taken reasonable measures to keep secret, and (2) derives its economic value from not being generally known or readily ascertainable by others who would value it–i.e., from being kept "secret." If these requirements are met, "trade secrets" can include a wide variety of information generated during the R&D process–such as data, research plans, designs, drawings, prototypes, formulas, methods, procedures, techniques, devices, patterns, compilations, code, etc.
"Misappropriation" generally refers to the improper acquisition, disclosure, or use of a trade secret, including acquiring trade secrets by theft or misrepresentation, or breaching a contractual duty to keep the information secret. Under the DTSA and US state laws, trade secret owners can sue to seek remedies from someone who misappropriates their trade secrets, including for damages, injunctive relief, and–in certain cases under the DTSA–civil seizure of property.
Scenario 1: Outsourcing Manufacturing of Prototypes or R&D Materials
This scenario occurs when a research institution or company requires assistance to manufacture a proprietary device or material during early-stage R&D–e.g., a complex prototype medical device, or a specialized microprocessor. In this scenario, it may be necessary for the party to disclose its critical trade secrets to a contract manufacturer–raising the risk of potential misappropriation.
Case Example: CardiAQ Valve Techs. v. Neovasc Inc.
Plaintiff CardiAQ and defendant Neovasc were both medical device companies in the cardiovascular space. CardiAQ hired Neovasc to manufacture prototypes of CardiAQ's artificial heart valve device suitable for animal studies–because Neovasc had special manufacturing capabilities to make devices using heart tissue. Before their first substantive discussion, the parties entered a Non-Disclosure Agreement (NDA), providing that "the recipient of Confidential Information could not .... use the Confidential Information for its own benefit ....." The parties thereafter entered into several purchase orders, and Neovasc provided CardiAQ with the assembled prototypes.
During this relationship, a Neovasc engineer who was assigned to the CardiAQ collaboration project, and thereby learned the details of CardiAQ's confidential device, started to design a competing Neovasc device. Neovasc did not separate the personnel assigned to CardiAQ from those working on Neovasc's own internal programs (several employees worked on both programs), and did not inform CardiAQ that Neovasc was working internally on a competing device program. CardiAQ first learned of Neovasc's competing program upon seeing its published patent application–and eventually sued Neovasc for alleged misappropriation of trade secrets (under Massachusetts law) and breach of the NDA.
Following trial, a jury awarded CardiAQ $70 million on its trade secret misappropriation and contract claims; and the court enhanced the damages by $21 million. The court upheld the jury's verdict on the three CardiAQ trade secrets found to be misappropriated–(1) the confidential design of CardiAQ's proprietary device; (2) a proprietary tool created by CardiAQ to help construct its proprietary device–which Neovasc had also used on its own internal projects; and (3) the confidential development history of CardiAQ's device, including its progression of design modifications. In each case, the court found CardiAQ had met its burden in demonstrating that the information was secret, it took reasonable steps to preserve the secrecy, and Neovasc had used the trade secret through improper means (i.e., in breach of the NDA).
Good Practice Takeaways:
For parties seeking contract manufacturing: This case illustrates the value of entering into a clear Non-Disclosure Agreement before exchanging any confidential information. The plaintiff was protected when it took reasonable steps to keep its proprietary product design, research tools and development history secret, and secured the defendant's agreement not to use such information for the defendant's own internal purposes.
For parties engaging in contract manufacturing: This case illustrates several opportunities to protect against inadvertent misappropriation. For example, the defendant could have walled off its employees on the contract manufacturing project from employees working on the defendant's competing internal program. The defendant also could have proactively disclosed the existence of its internal program to the plaintiff, so the parties could have reached an agreement about any appropriate confidentiality restrictions going forward.
Scenario 2: Exploring Potential In-Licensing Opportunities
This scenario arises when a research institution or company initially interacts with another company interested in potentially in-licensing early-stage technology to advance R&D (e.g., by scaling up manufacturing, or conducting expensive and resource-intensive testing).
Case Example: Bianco v. Globus Med., Inc.
The plaintiff Dr. Bianco, a neurosurgeon, was invited to meet with the defendant Globus, a medical device company making spinal surgery implants. Upon meeting, Dr. Bianco explained he had some new ideas for spine implants. Before Dr. Bianco disclosed drawings illustrating his idea–which he had been storing in a safe–Globus had Dr. Bianco sign a non-disclosure agreement, a document that the parties later lost. Globus employees also instructed Dr. Bianco to notarize his drawings "so we make sure we don't have problems afterwards." Dr. Bianco thereafter handed Globus his drawings for an adjustable-size interbody spacer implant. Globus told Dr. Bianco that its product development engineers would consider the idea, and Dr. Bianco would be compensated if Globus decided to use it.
Several years later, Globus returned the drawings and told Dr. Bianco that it was not interested in the technology. But, unknown to Dr. Bianco, Globus had previously circulated Dr. Bianco's drawings shortly after receiving them to senior executives overseeing Globus's product development and fabrication–and within months, Globus had started its first-ever project to design and manufacture an adjustable-size interbody spacer. Dr. Bianco first learned of Globus's internal project only when Globus began marketing its adjustable spacer product. Dr. Bianco then sued Globus for misappropriation of trade secrets and breach of contract under Texas law.
The jury awarded Dr. Bianco $4.3 million on the trade secrets claim, and Federal Circuit Judge Bryson (sitting by designation) upheld the verdict. Even though Dr. Bianco could not establish breach of contract, the evidence was sufficient to show that Dr. Bianco had taken efforts to keep his drawings secret, and only disclosed them to Globus in the context of a confidential relationship with the expectation of compensation. Judge Bryson found there was sufficient evidence for the jury to conclude that Globus's product design executives relied on Dr. Bianco's trade secret drawings when they embarked on the project of developing an adjustable-size spacer.
Good Practice Takeaways:
In this case, both parties' rights could have been better protected by entering into, and being sure to preserve, a clear Non-Disclosure Agreement defining the parties' rights regarding their respective trade secrets before the initial discussion of the plaintiff's ideas. Without that agreement, both parties were at risk of having to establish their rights in litigation through testimony recounting years-old conversations, rather than express terms of a clear written contract.
Further, like Scenario 1, this case illustrates the value of avoiding even inadvertent misappropriation by walling off the teams evaluating in-licensing opportunities from the decisionmakers or key personnel responsible for in-house product design and development. Otherwise, there is a greater risk that even a truly independent idea or development decision could be interpreted by a jury as trade secret misappropriation from the in-licensing candidate.
Scenario 3: Joint Research Collaborations
This common scenario occurs when two parties engage in a joint research and development collaboration–where both parties typically bring their respective pre-collaboration trade secrets to the table, and then expect to generate additional trade secrets during the collaboration.
Case Example: Polyzen, Inc. v. RadiaDyne, LLC
The plaintiff Polyzen, a medical device manufacturing company with expertise including medical balloons, was engaged by the defendant RadiaDyne, a medical device company focused on cancer radiation treatment. RadiaDyne and Polyzen were to collaborate on a rectal medical balloon device for use in prostate cancer radiation therapy–with Polyzen providing RadiaDyne with a balloon design and prototype and eventually larger scale supplies. The parties entered into a "Development and Commercialization Agreement" (DCA) that assigned RadiaDyne ownership of the "RadiaDyne Product" (i.e., the "specific design of [the balloon device] with Polyzen's Balloon Process Technology"). The agreement also assigned Polyzen ownership of the "Polyzen Balloon Process Technology" (i.e., Polyzen's proprietary "PU film welded balloon technology .... designed to articulate desired shape and profile of balloons for various applications").
During the collaboration, RadiaDyne forwarded several of Polyzen's balloon design drawings and specifications to a competing medical device manufacturer. When the parties were eventually embroiled in litigation (including patent infringement and breach of contract claims), Polyzen alleged that RadiaDyne misappropriated Polyzen's trade secrets under North Carolina law by disclosing Polyzen's balloon designs to its competitor without Polyzen's consent.
On RadiaDyne's motion for partial summary judgment, the court rejected three of Polyzen's misappropriation claims–finding that the disclosed documents concerned "the specific design of the rectal balloon catheter," and thus were "RadiaDyne Products" owned by RadiaDyne under the DCA. For one of the documents, however, the court found disclosure of details regarding the number of layers, layer depth, and apparent materials for Polyzen's balloon design–all of which were arguably "Polyzen Balloon Process Technology" owned by Polyzen under the DCA–and thus denied summary judgment and allowed Polyzen's misappropriation claim to proceed on the disclosure of that document.
Good Practice Takeaways:
This case illustrates the importance of clearly defining IP ownership rights, including trade secrets ownership, in the context of a joint research and development collaboration. When each party brings their own proprietary technology and trade secrets to a collaboration, it is critical to carefully weigh the risks of how those trade secrets may be used and disclosed to others by the collaboration partner under the agreement terms, and to protect especially against the unauthorized disclosure of highly-sensitive proprietary information that is core to a party's business.
Originally published in Bloomberg Law, June 2024
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