Neo Gen Screening, Inc. v. Telechem International, Inc. , 69 F. App'x 550 ( 2003 )

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit
7-11-2003
Neo Gen Screening v. TeleChem Intl Inc
Precedential or Non-Precedential: Non-Precedential
Docket No. 02-3154
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos: 02-3154 and 02-4287
NEO GEN SCREENING, INC.;
NEO GEN SCREENING, L.P.,
Appellants
v.
TELECHEM INTERNATIONAL, INC.,
t/d/b/a
ARRAYIT.COM
__________________
On Appeal From the United States District Court
for the Western District of Pennsylvania
District Court Judge: The Honorable William L. Standish
(D.C. Civ. No. 01-cv-02226)
__________________
Submitted Under Third Circuit L.A.R. 34.1(a)
July 10, 2003
Before: NYGAARD, SMITH, Circuit Judges,
and IRENAS,* District Judge.
(Opinion Filed: July 11, 2003)
___________________
_________________
*Honorable Joseph E. Irenas, Senior United States District Judge for the District of
New Jersey, sitting by designation.
________________________
OPINION OF THE COURT
________________________
SMITH, Circuit Judge:
I. FACTS
Neo Gen Screening, Inc. and Neo Gen Screening, L.P. (collectively “Neo Gen”)
are in the business of biochemical and molecular research and development, conducting
newborn blood specimens tests for the detection of genetic metabolic disorders.
TeleChem International, Inc. (“TeleChem”) deals in microarray science and technology,
which is the process of placing bits of DNA onto glass slides and then determining and
pinpointing various genes and their functions.
In November of 1999, employees of Neo Gen and TeleChem met at a national
micro-sciences symposium and discussed the possibility of a collaboration between the
two companies. In February, Neo Gen sent TeleChem a proposal to conduct joint
research into the use of microarrays in newborn screening and the parties signed a
Confidentiality Agreement. The Confidentiality Agreement expressly stated that any
breach of the agreement would entitle the non-breaching party to injunctive relief.
On March 24, 2000, TeleChem accepted Neo Gen’s February proposal, agreeing to
provide resources for the undertaking (“Agreement”). On March 30, Neo Gen applied for
a small business research grant from the U.S. Department of Health and Human Services.
1
Then, the parties began to contemplate forming a new entity, NGS-ArrayIT, Inc., to
develop and sell micro-array-based diagnostic genetic tests. To that end, in April 2000,
the parties signed a Pre-Incorporation Agreement which contained provisions regarding
capitalization, stock subscriptions, formal assignment of intellectual property and
remedies for breach of the agreement. The Pre-Incorporation Agreement also stated that
TeleChem would install a clean room at Neo Gen that would remain the property of
TeleChem but under the custody of Neo Gen.
In June, Neo Gen wrote to TeleChem indicating that it felt many of TeleChem’s
responsibilities under the Pre-Incorporation Agreement were going unfulfilled. On the
other side, Neo Gen never filed the Articles of Incorporation for NGS-ArrayIT, Inc,
despite its promises to do so. Finally, on July 24, 2001 Neo Gen indicated that it elected
to terminate the Agreement. TeleChem responded on August 21, that it declined to
accept the termination letter, and wrote in November that it believed Neo Gen to be in
breach.
II. PROCEDURAL POSTURE
On November 26, 2001 Neo Gen filed a four-count complaint for breach of
contracts to develop microarray newborn screening technology, seeking damages,
injunctive relief and a declaratory judgment. After the filing of the complaint, TeleChem
attempted to retrieve the clean room and its equipment from Neo Gen. Neo Gen refused,
and allowed Nerak Industries to inspect the room, as well as showing it to a job applicant.
2
Neo Gen also posted some information about microarray technology on its website.
TeleChem filed a state law counterclaim for theft of trade secrets.
Telechem filed a motion for preliminary injunction on its counterclaim on April
15, 2002, asking the court to enjoin Neo Gen from using or disclosing TeleChem’s clean
room technology or TeleChem’s multi-patient microarray manufacture trade secrets. At
the close of defendant’s evidence at the preliminary injunction hearing on May 15, Neo
Gen moved to dismiss under Fed. R. Civ. P. 52, alleging that Telechem did not produce
any evidence to show Neo Gen would not be harmed by an injunction. The District Court
denied the motion as premature and directed Neo Gen to put on evidence that it would
suffer harm. Neo Gen did not put on any such evidence, but renewed its motion to
dismiss at the close of the hearing. On July 24, 2002 the District Court denied the motion
to dismiss and granted a preliminary injunction in favor of Telechem to prevent Neo
Gen’s misappropriation of trade secretes related to certain microarray technology and the
“clean room” facility owned by TeleChem.1 On August 5, Neo Gen filed its notice of
1
The preliminary injunction stated:
Except as provided for in the Small Business Innovation Research
Program (SBIR) grants obtained with TeleChem International, Inc.’s promise of
support, Neo Gen Screening, Inc. and Neo Gen Screening, L.P. are hereby
preliminarily enjoined and restrained until further order from:
(a) directly or indirectly utilizing any clean room technology belonging to
TeleChem International Inc., including but not limited to, microarray diagnostic
facility, materials, construction design, custom styling, unique presentation,
functionality, use, lighting, filtration, environmental control, contamination
minimization, ergonomics and work flow, clothing, staff training, record keeping,
3
appeal of this decision.
Neo Gen moved for modification or vacation of the July 24 injunction under Fed.
R. Civ. P. 60(b), alleging that a patent containing information about TeleChem’s
microarray technology was published by the World Intellectual Property Organization
(“WIPO”) on January 17, 2002, three months before the application for temporary
restraining order (the “Schena patent”), so the Court’s conclusion that the patent was
unpublished was an error and TeleChem committed a fraud upon the court. TeleChem
responded that its failure to disclose the patent application was inadvertent, and there was
protectable subject matter disclosed to Neo Gen beyond that encompassed within the
Schena patent application. The District Court denied Neo Gen’s motion in a November 5,
2002 order. The Court stated that any matter disclosed in a patent publication is no longer
a trade secret, but concluded that, as a result, this information would not be covered by
part (d) of its injunction order. The Court set the bond for TeleChem at $10,000. On
materials compatibility, artistic styling and custom appearance;
(b) directly or indirectly engaging in the further unauthorized disclosure or
display of the clean room technology referred to in subparagraph (a) hereof;
(c) directly or indirectly engaging in the further unauthorized acquisition
of the clean room technology referred to in subparagraph (a) hereof; and
(d) directly or indirectly utilizing any microarray manufacture trade secrets
belonging to TeleChem International, Inc, including but not limited to protocols,
patent pending methods, procedures, robotics, automation, software design, and
implementation, patented pin and printhead selection, maintenance, cleaning and
storing printing buffers or surfaces, environmental control, microarray quality
control and quality assurance, surface energetics, substrate coupling chemistry,
storage and processing, barcoding, sample tracking and throughput.
4
November 14, Neo Gen filed its Notice of Appeal of this decision.
III. JURISDICTION
The District Court had diversity jurisdiction under 28 U.S.C. § 1332 and
supplemental jurisdiction under 28 U.S.C. § 1367. We have jurisdiction under 28 U.S.C.
§ 1292(a)(1) (appellate jurisdiction over interlocutory orders granting injunctions and
refusing to modify or dissolve injunctions), both with respect to the July 24 and
November 5 decisions.
IV. STANDARD OF REVIEW
In considering the grant of a preliminary injunction and denial of a motion to
modify a preliminary injunction, we review legal issues de novo, factual findings for clear
error, and the ultimate decision to grant the injunction and deny modification for abuse of
discretion. Maldonado v. Houstoun, 157 F.3d 179, 183 (3d Cir. 1998) (reviewing grant
of a preliminary injunction); Favia v. Indiana University of Pennsylvania, 7 F.3d 332, 340
(3d Cir. 1993) (reviewing denial of motion to modify preliminary injunction). A district
court’s determination of whether a party has “unclean hands” and the amount of bond are
also reviewed for abuse of discretion. See In re New Valley Corp., 181 F.3d 517, 523 (3d
Cir. 1999); Frank’s G.M.C, Truck Center, Inc. v. General Motors Corp., 847 F.2d 100,
108 (3d Cir. 1988).
V. LEGAL ANALYSIS
A. Preliminary Injunction
5
In order for a district court to grant an injunction, the moving party must show: 1)
it is likely to succeed on the merits and 2) denial will result in irreparable harm to the
moving party. Chems. Ltd. v. Formosa Chem. & Fibre Corp., 229 F.3d 254, 263 (3d Cir.
2000); Maldonado v. Houstoun, 157 F.3d 179, 184 (3d Cir. 1998); Opticians Assoc. v.
Independent Opticians, 920 F.2d 187, 192 (3d Cir. 1990). In addition the District Court
should consider whether: 3) granting the injunction will not result in irreparable harm to
the non-moving party and/or harm to the moving party outweighs the harm to the non-
moving party and 4) granting the injunction is in the public interest. See id.; see also
Acierno v. New Castle Co., 40 F.3d 645, 647 (3d Cir. 1994).
Neo Gen argues that TeleChem failed to introduce any evidence showing the
injunction would not result in irreparable harm to Neo Gen. In addition, it argues that the
denial would not result in irreparable harm to TeleChem, because monetary compensation
would be sufficient to rectify any injury, and the Pre-Incorporation Agreement contained
a liquidated damages clause providing for such monetary damages. Finally, it argues that
TeleChem is unlikely to succeed on the merits by showing that the clean room was a
protected trade secret because it was susceptible to reverse engineering and Neo Gen was
able to obtain one from a third party.
As a court sitting in equity, the District Court’s task was to weigh the four factors,
but it was not incumbent on TeleChem to prevail on all four factors, only on the overall
need for an injunction. A sufficiently strong showing on either the likelihood of success
6
or irreparable harm may justify an injunction, though a petitioner’s showing on the other
factors may be lacking. Neo Gen is correct that the burden of introducing evidence to
support a preliminary injunction is on the moving party with respect to the first two
issues; however, the same is not true of the second two issues. See Acierno, 40 F.3d at
653 (noting that the burden is on the moving party on the first two issues, but the district
court should itself consider the second two). As a matter of logic, the moving party
cannot have the burden to introduce evidence showing the harm that will be suffered by
the opposing party if the injunction is issued. Rather, the moving party has the burden to
show the harm it will suffer if no injunction issues, and if the non-moving party feels it
will suffer greater harm or irreparable harm from the injunction, it has the burden to so
demonstrate. Based on the facts of record, there does not appear to be any immediate
threat of irreparable harm to Neo Gen from not being allowed to disclose these secrets,
especially since it is allowed to continue using the technology in its currently ongoing
small business grants.
In contrast, the disclosure of trade secrets would result in irreparable harm to
TeleChem that would not be remedied by monetary damages. Compare BP Chemicals,
229 F.3d at 263 (where witness testified that if defendants used trade secrets they illegally
obtained from BP in building their plant they would damage BP’s reputation, its
credibility and ability to license its technology, such injuries were difficult to calculate
and money damages would be inadequate); Campbell Soup Co. v. ConAgra, Inc., 977
7
F.2d 86, 92 (3d Cir. 1992) (noting that “a threat of disclosure [of trade secrets] may
establish immediate irreparable harm”); FMC Corp. v. Taiwan Tainan Giant Indus. Co.,
730 F.2d 61, 63 (2d Cir. 1984) (holding that loss of trade secrets was an irreparable harm
that could not be measured in money because “a trade secret once lost is, of course, lost
forever”); with Acierno, 40 F.3d at 647 (reversing grant of preliminary injunction
compelling county to issue a building permit because plaintiff would not suffer
irreparable harm by delaying building and injunction did not maintain the status quo).
This conclusion is further supported by Dr. Schena’s testimony that TeleChem’s
commercial interests will be destroyed if certain trade secrets are published. The
existence of a liquidated damages clause in the Pre-Incorporation Agreement does not
show that TeleChem will not suffer irreparable harm if its trade secrets are disclosed,
especially since the Confidentiality Agreement expressly stated that any breach of the
agreement would entitle TeleChem to injunctive relief.
Finally, Neo Gen is incorrect that the details of TeleChem’s clean room cannot be
a trade secret. Under Pennsylvania law, a trade secret “may consist of any formula,
pattern device or compilation of information which is used in one’s business, and which
gives him an opportunity to obtain an advantage over competitors who do not know or
use it.” Felmee v. Lockett, 351 A.2d 273, 277 (Pa. 1976). While the general concept of a
clean room is not protected, clean rooms may differ in the details of their construction and
efficiency, and it is those details that can provide a competitive advantage and are
8
protected. Based on the undisputed fact that TeleChem took elaborate steps to construct
the clean room in secrecy, that it spent a great deal of money on construction, and that it
created a confidentiality agreement which covered the clean room, the District Court did
not err in determining that the clean room was a trade secret. See Christopher M’s Hand
Poured Fudge, Inc., 699 A.2d 1272, 1275 (Pa. Super. 1997) (secrecy measures and the
money expended are among the factors to be considered in determining whether
something is a trade secret). While a product susceptible to reverse engineering cannot
be a trade secret, the details of TeleChem’s clean room would not be susceptible to
reverse engineering because such engineering is only available where the party obtained
the technology through a “marketed product” and not pursuant to a confidentiality
agreement. See, e.g., Richardson v. Suzuki Motor Co., Ltd., 868 F.2d 1226, 1242 (Fed.
Cir. 1989); SI Handling Sys. v. Heisley, 753 F.2d 1244, 1255 (3d Cir. 1995).
Accordingly, the District Court’s decision to grant the preliminary injunction was
not an abuse of discretion.
B. Modification or Vacation of Injunction
Fed. R. Civ. P. 60(b) permits the district court to grant relief from a final judgment
if the party seeking modification can show fraud, misrepresentation, or “a significant
change in either factual conditions or in law” that renders continued operation of the
judgment inequitable. Accordingly, we must “focus our inquiry on the circumstances that
led to the entry of the injunction and compare them with current circumstances for the
9
purpose of deciding whether continuation of the injunction without the requested
modification would be so inequitable that the district court’s refusal to grant the motion to
modify is reversible error.” Favia, 7 F.3d at 340.
Neo Gen claims it was entitled to modification based on fraud and changed
circumstances. First, Neo Gen argues that TeleChem committed a fraud upon the court
by knowingly and intentionally failing to disclose the published patent application, and its
injunction is barred by the doctrine of unclean hands. See Keystone Driller Co. v.
General Excavator Co., 290 U.S. 240, 245 (1933) (party cannot be awarded equitable
remedy where it has gained an advantage by fraud or deceit); In re New Valley Corp., 181
F.3d 517, 525 (3d Cir. 1999) (same). However, Neo Gen cites to no evidence which
shows that TeleChem’s omission was knowing or intentional, such that the District
Court’s implicit conclusion to the contrary would be clear error. Absent such evidence,
we cannot conclude that the District Court abused its discretion in rejecting the claim that
an injunction was barred by TeleChem’s “unclean hands.”
Neo Gen also argues that even if the injunction stands, it must be modified because
the non-secret Schena patent material is still encompassed within the language about
“pending patents.” Moreover, it argues that TeleChem has not shown any evidence of
any microarray technology to be protected beyond what is in the published material,
which would mean that TeleChem would be unlikely to prevail on the merits because of
changed circumstances. Neo Gen’s first argument is wrong; the injunction prohibits only
10
the utilization of microarray trade secrets, so any material contained in the published
patent application is not a trade secret addressed by the injunction. Second, by rejecting
Neo Gen’s motion, the court implicitly found that there continued to be some microarray
trade secrets that were not published. Neo Gen does not point to any evidence
demonstrating that this finding was clear error. 2 Thus, it was not an abuse of discretion
for the District Court to refuse to modify the injunction order.
C. Abuse of Discretion in Setting the Bond
Fed. R. Civ. P. 65(c) requires that before granting a preliminary injunction the
court must require the applicant to post a bond “in such sum as the court deems proper,
for the payment of such costs and damages as may be incurred or suffered by any party
who is found to have been wrongfully enjoined or restrained.”
Neo Gen argues that the amount of the bond was insufficient to cover the potential
harm Neo Gen may incur and constituted an abuse of discretion. Specifically, Neo Gen
claims that the bond should have been set based on the liquidated damages clause in the
Pre-Incorporation Agreement of $1,000,000. However, there was nothing in the Pre-
Incorporation agreement that permitted Neo Gen to disclose TeleChem’s trade secrets, so
even if the liquidated damages clause was compensatory and not punitive, it was
unrelated to any harm suffered by Neo Gen here. As noted, supra, Neo Gen produced no
2
In addition, if it is true that TeleChem does not have any microarray secrets that
were not revealed in the Schena patent application, this portion of the injunction will have
absolutely no effect on Neo Gen, so its continuation would not be inequitable.
11
evidence of any irreparable harm to it from the injunction. Therefore, a nominal bond
was appropriate here.
Finally, Neo Gen points out that the District Court set the bond for the temporary
restraining order (“TRO”) at $10,000, and the Eighth Circuit has found that a trial court
abuses its discretion by not examining the need for additional bond after setting the bond
for a TRO. See Rathman Group v. Tannenbaum, 889 F.2d 787 (8 th Cir. 1989). However,
unlike the court in Rathman, the District Court in this case did set an additional bond; it
just happened to set the injunction bond at the same amount as the TRO. Absent any
evidence by Neo Gen showing that its potential harm would be greater than $10,000, we
cannot find that the District Court abused its discretion in setting the bond.
VI. CONCLUSION
The July 24 and November 5, 2002 orders of the District Court shall be affirmed.
______________________________________
TO THE CLERK:
Please file the foregoing Opinion.
/s/ D. Brooks Smith
Circuit Judge