By Ian DiBernardo, Jason Sobel, and Marcus Strong, Brown Rudnick LLP
A recent $115 million jury verdict against Walmart for misappropriation of trade secrets should serve as a wake-up call to the food industry. Although the verdict is perhaps the first high-profile award in the food industry, it reflects an overall increased importance of trade secrets.
Food science companies are quick to tout their patented technologies. Investors frequently look to “check the box” for portfolio companies’ having filed for patents. However, trade secrets—commonly viewed as any nonpublic know-how or other information that is protected by the holder and provides a competitive advantage—rightfully have taken on greater importance in differentiating companies and protecting market positions.
Recent court decisions invalidating patents directed to natural phenomena, reducing the likelihood of injunctions, and limiting damages have caused many industries to reevaluate the benefits and value of trade secret protection. An increasingly mobile workforce and the increased ease with which information can be transferred also has drawn attention to trade secrets.
Companies at the intersection of food and technology own, or have exposure to, potential trade secret information. With the ever-growing market in food products and food distribution technology, companies big and small are developing and testing new ingredients and food technologies at unprecedented levels. Development and testing periods may continue for many months or even years, especially given potential safety and regulatory concerns. Over this time period, trade secret information and know-how may be shared with development and marketing partners, as well as customers. The sharing of trade secrets not only places the innovator at risk of losing control of its asset, but also places the recipient at risk of a claim of misappropriation.
One common scenario was on display in Zest Labs, Inc. et al. v. Walmart Inc., where, following a trial in the Eastern District of Arkansas, a jury found that Walmart misappropriated a food freshness preservation system created by plaintiff Zest Labs, a food technology startup. In 2010, Zest began developing its Zest Fresh solution, using tracking devices and intelligent pallet routing to manage and preserve produce and protein freshness. Like others in the industry, Zest sought to address the ongoing waste in U.S. fresh food distribution and sales known as “fresh food shrink.” Zest and Walmart started discussions in 2014 and entered into multiple agreements, including a nondisclosure agreement in 2015, pursuant to which Walmart evaluated and tested Zest’s solution through 2017. Soon after terminating its trial with Zest Fresh, Walmart announced its own system for freshness preservation and tracking bearing similarities to Zest’s solution.
Walmart publicly claimed its system was developed internally as part of an engineer “hackathon,” but Zest believed Walmart’s system constituted a misappropriation after noticing similarities to its own system. According to court documents, once litigation commenced and discovery of Walmart was had, Walmart’s internal emails showed executives engaged in both the testing of Zest Fresh and the later development of Walmart’s own freshness tracking system. Zest argued more broadly that Walmart breached the parties’ nondisclosure agreement and Walmart’s own ethics policy by disclosing Zest’s confidential information. Indeed, Zest’s experts opined that information about Zest Fresh was used to prepare Walmart’s patent application disclosures. Zest claimed that Walmart inappropriately used its information to develop a freshness indicator, dynamic shelf-life program, and retention sampling application. After a 10-day trial, the jury awarded Zest $60 million for the misappropriation of trade secrets, $5 million for breach of contract, and $50 million in exemplary (punitive) damages because the misappropriation was willful.
The verdict highlights the increased risk for both innovators and their customers. But this is just one common commercial scenario that creates an environment for allegations of trade secret misappropriation. Companies in the food industry should be on high alert in these common scenarios:
(i) a company’s former employee, usually a key employee with special skills and knowledge, either joins a competitor or starts up their own competitive enterprise;
(ii) potential partners hold confidential discussions for the purpose of collaborating on bringing an innovative product or service to market, the discussions end, and one party proceeds alone; and
(iii) a company provides proprietary technologies or services and its customer (or licensee) replaces them with similar technologies or services.
Regardless of the scenario that exposes an innovator or their customers to risk, legal and operational protections can serve to mitigate concerns of misappropriation. These include, for example, augmenting standard confidentiality terms governing disclosures, considering the timing and extent of disclosures, and limiting who is given access to information.
The case also highlights the expensive cost of litigating a trade secret misappropriation case. As reflected in Zest’s application to recover its legal fees, it spent over $13.5 million through the jury verdict. Although litigation funding increasingly is available to claimants like Zest, many companies may lack the resources to actively pursue claims.
Walmart’s defensive legal costs may have been even higher than Zest’s; Zest’s application to the court for reimbursement of its fees indicated that Walmart hired higher price counsel. Even if Walmart had avoided the $115 verdict (plus the $16 million in prejudgment interest and potential $13.5 million in Zest’s fees), it could have been out tens of millions of dollars in defense costs. Furthermore, a losing defendant faces a potential injunction and being left without any suitable solution.
Therein lies the value of risk mitigation for both innovators and entities to whom they disclose their confidential solutions. Standard nondisclosure agreements may not be sufficient to protect either participant. More nuanced legal protections are often appropriate, and business operations protections on behalf of both innovators and recipients of their trade secret information can help avoid claims altogether.
The Zest Labs verdict is not an anomaly; additional trade secret claims in the industry are likely. With the current pace of innovation and investment in the food science industry, trade secrets—and mitigating the risk of misappropriation claims—must be in clear focus.
Jason Sobel is a Partner in Brown Rudnick’s Intellectual Property and Technology Practice Groups. He provides counsel to clients in a wide range of industries, including extensively in the food science and ingredients industry, developing IP portfolios, negotiating business transactions and shepherding client through complex, multi-party, bet-the-company litigation.
Ian DiBernardo is a New York-based Partner and Chair of the Intellectual Property Litigation Practice Group. He is also Practice Group Leader of the U.S. Technology Group. Ian counsels emerging and established companies, focusing on intellectual property and technology transactions and litigation. He has handled matters involving functional ingredients, nutraceuticals, protein bars, and supplements.
Marcus Strong is a Brown Rudnick Associate focusing on litigation.