Cognate Can't Sue Ex-Executive for Trade Secrets Theft Twice

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By John T. Aquino

March 14 — Cognate BioServices can't bring claims of trade secret misappropriation and fraud against a former chief executive in federal district court after a state court jury's verdict, a federal district court ruled March 10.

The biotech contract services manufacturer alleged in the U.S. District Court for the District of Maryland that Alan Smith took trade secrets from a company laptop he hadn't returned when he left the company.

But a state circuit court jury found in favor of Smith, and because the parties and claims in the state court case were identical to those in federal court, Cognate couldn't relitigate them in federal court, the district court held.

State Jury Found for Defendant

According to court records, Cognate BioServices Inc., which is based in Hanover, Md., provides human cell therapy products , and Smith was its president and chief executive officer from December 2003 until his employment ended in May 2010.

On May 5, 2010, Smith became head of U.S. operations for MacroCure Ltd., an Israel-based biotechnology company doing business in the U.S. and a former Cognate customer. Smith formed Alan Smith Consulting Inc. on Aug. 27, 2010.

In May 2012, Smith sued Cognate for $554,955 in unpaid wages in the Maryland Circuit Court for Baltimore County. In June 2013, Cognate filed counterclaims against Smith, alleging that he was liable to Cognate for constructive fraud, conversion, breach of contract, misappropriation of trade secrets and misappropriation of products.

On June 19, 2012, Cognate filed a federal complaint in the District of Maryland alleging that, after his employment with Cognate had ended, Smith improperly accessed the company-owned laptop that he hadn't returned and copied the trade products and trade secrets belonging to Cognate and its clients HealthBank Inc., Oncocidex Inc., Theradigm Inc. and Vesta Therapeutics Inc., all of which have offices in Hanover, Md.

The complaint, filed by Cognate, HealthBank, Oncocidex, Theradigm and Vesta, asserted causes of action of violation of the Computer Fraud and Abuse Act, 18 U.S.C. §1030; misappropriation of products; and misappropriation of trade secrets in violation of Maryland Uniform Trade Secrets, COM LAW §§11-1201 through 11-1209 .

On March 6, 2014, a Maryland circuit court jury found in favor of Smith on all his claims, awarding him several hundreds of thousands of dollars in damages, and found against Cognate on all its counterclaims.

On April 16, 2015, Smith filed a motion to dismiss the federal court action, or for summary judgment on “res judicata” grounds, arguing that the state court action precludes the plaintiffs from bringing litigation for the same claims in federal court.

Same Claims, Same Parties, No Case

In an opinion authored by Judge Catherine C. Blake, the district court noted Cognate's argument that Smith's fraudulent concealment during discovery in the state court action prevented litigation of the claims that form the basis of the federal suit.

Blake responded, “Although Smith's and MacroCure's conduct during discovery may be far from exemplary, appealing the state court verdict is the proper avenue for addressing these issues, rather than trying to re-litigate them in federal court.”

Cognate next argued that new facts had arisen that couldn't have been alleged in the previous lawsuit, specifically that Smith has left MacroCure to work at LifeNet, where he could be continuing to use the proprietary information of Cognate and its clients. “But LifeNet is not mentioned once in the amended complaint and, therefore, this argument is not properly before the court,” Blake said.

Blake analyzed whether the federal litigation must be dismissed under either the doctrine of res judicata—a judgment in one case prevents a party to that suit from trying to re-litigate the same issue in another legal action—or collateral estoppel—a legal issue that has been finally decided by a court between the same parties cannot be ruled on again. She wrote, “The facts underlying the state court counterclaims are the same as those supporting the allegations in this case. The plaintiffs, therefore, actually litigated these claims in the state court action, and allowing them to raise the same arguments here would ‘nullify' that court's verdict.”

The court concluded that, having determined that the parties in the case were the same or in privity with those in the state court action, the claims presented were identical to those determined by the state court jury and there had been a final judgment on the merits, Cognate and the other plaintiffs were precluded from bringing the litigation in federal district court.

To contact the reporter on this story: John T. Aquino in Washington at jaquino@bna.com

To contact the editor responsible for this story: Randy Kubetin at rkubetin@bna.com