Caudill Seed & Warehouse Co. v. Jarrow Formulas, Inc.
Docket: CIVIL ACTION NO. 3:13-CV-00082-CRS
Court: District Court, W.D. Kentucky; October 29, 2015; Federal District Court
Jarrow Formulas, Inc. and Caudill Seed and Warehouse Company, Inc. are engaged in a legal dispute stemming from Jarrow's hiring of a former Caudill employee, which Caudill alleges could have involved the misappropriation of trade secrets. Caudill Seed has filed a lawsuit to protect these alleged trade secrets, while Jarrow has countered with suspicions that Caudill delivered adulterated products. Competing motions for summary judgment have emerged, with the court set to grant Caudill's motion regarding Jarrow's counterclaims and deny Jarrow's motion on Caudill's claims.
The court must evaluate the facts favorably for the non-moving party in these motions. Caudill Seed, a seed distributor and developer of nutritional supplements, was previously a major supplier to Jarrow, particularly for a product called "BroccoRaphanin," which contains the health-promoting compound glucoraphanin found in broccoli seeds. Following the hiring of Kean Ashurst from Caudill, Jarrow began producing its own broccoli seed extract for its products, including BroccoMax. In 2011, scientific studies raised concerns over the efficacy of Jarrow's glucoraphanin products, prompting Jarrow to develop new "activated" formulas to enhance glucoraphanin's effectiveness, a process Caudill had already been exploring for three years.
Ashurst informed Caudill Seed that its activated product was close to commercialization, prompting Caudill Seed to reach out to production facilities. Jarrow Formulas had not researched broccoli seed ingredients before hiring Ashurst but aimed to outpace Caudill Seed in the market. Caudill Seed suspects Ashurst was hired as a corporate spy to acquire trade secrets while still employed there. Ashurst had indicated plans to leave Caudill Seed as early as 2010 and met privately with Jarrow Formulas’ president in March 2011, despite being tasked with communicating with them as a Caudill Seed client. He directed Jarrow to contact him via personal email, and from April to May 2011, sent confidential information from Caudill Seed to Jarrow Formulas.
Caudill Seed alleges that Ashurst took a research notebook and a hard drive containing proprietary materials, which he knew they required for an industry conference and to secure new accounts. Jarrow Formulas denies these allegations, asserting that their processes are distinct from Caudill Seed’s. In April 2011, Jarrow’s consultant requested Caudill Seed's research from Ashurst. Ashurst signed with Jarrow Formulas the day before leaving Caudill Seed and immediately began compiling sensitive data to send to Jarrow Formulas.
After Ashurst joined Jarrow Formulas, he completed the activated broccoli seed project, leading to commercial production in September 2011. Jarrow Formulas asserts that Ashurst developed the process at Valensa International, although Valensa representatives stated he already knew the processing parameters. Caudill Seed contends Ashurst misappropriated their trade secrets, which include research on supplements, manufacturing processes, vendor and customer information, and the hard drive and notebook. Jarrow Formulas argues that their method is fundamentally different from Caudill Seed's, as they do not extract myrosinase from broccoli but instead heat broccoli powder. They maintain their process is novel, supported by the U.S. Patent Office’s approval of their patent application.
Jarrow Formulas contests the existence of direct evidence linking Ashurst to the disappearance of a research notebook and hard drive that may contain trade secrets. Circumstantial evidence includes Caudill Seed's inability to locate these items since Ashurst's departure, despite his denial of taking them during state court proceedings. Notably, Caudill Seed did not inquire about the notebook or hard drive during discovery or in two depositions of Ashurst. Testimonies from Caudill Seed employees indicate that a red external hard drive and a composition notebook, containing sensitive R&D materials, were in Ashurst's possession and that he maintained their confidentiality. There are claims that Ashurst either took these items when he left or secured them in a lab or office. Caudill Seed's Dan Caudill noted seeing the notebook in Ashurst's possession before Ashurst transitioned to FONA and then Jarrow Formulas, after which the items were never seen again at Caudill Seed.
Jarrow Formulas also challenges Caudill Seed's assertion of actual trade secrets, largely referencing an expert opinion from Dr. Leslie West, who argues that the processes in question were publicly known or easily accessible. In response, Caudill Seed emphasizes the difference between patentability and trade secret protection, asserting that its research and processes qualify as protectable trade secrets. The initial lawsuit, filed by Caudill Seed in May 2011 against Ashurst for various claims including breach of contract and misappropriation of trade secrets, concluded in January 2014 with a voluntary dismissal. The current proceedings commenced in 2013.
Jarrow Formulas filed eight counterclaims against Caudill Seed in August 2013, including allegations of fraudulent inducement, statutory unfair competition, negligence per se, breach of contract, breach of implied warranties, tortious interference, declaratory judgment, and false advertising under the Lanham Act. These claims are centered on the irradiation of broccoli seeds, which Jarrow Formulas asserts is prohibited by federal regulations for dietary supplements and poses a safety risk to consumers. In response, Caudill Seed argues that Jarrow's claims oversimplify a complex regulatory issue, asserting that there is no evidence that irradiation is unsafe.
Jarrow Formulas became suspicious in 2011 that Caudill Seed was supplying irradiated seeds, despite their agreement specifying non-irradiated products. They allege that Caudill Seed provided false certificates of analysis. During a deposition, Caudill Seed's representative admitted that the FDA had prohibited irradiation for reducing bacterial load on dietary supplements since 2007 but claimed they had not irradiated their seeds and always catered to customers requesting non-irradiated seeds. However, evidence later revealed that Caudill Seed had indeed irradiated broccoli seeds after 2007, with some irradiated lots sent to Jarrow Formulas.
This evidence surfaced during state court proceedings against Ashurst, which were initially under protective order. Following the revelation, Caudill Seed faced sanctions and changing counsel. In January 2014, after the state court case was dismissed, a corporate representative admitted to the irradiation of seeds, citing legal advice from their counsel. However, inconsistencies arose, as another representative indicated that they had been advised against irradiation. Ultimately, during a court hearing, Caudill Seed waived the use of advice of counsel as a defense.
Caudill Seed initially provided false excuses regarding the irradiation of seeds but ultimately claimed that Ashurst was solely responsible for the irradiation and concealed his practices from them. Jarrow Formulas contests this claim, citing four key points: 1) Dan Caudill admitted to the irradiation; 2) Ashurst testified that he irradiated the seeds at Dan Caudill's direction; 3) after Ashurst's departure, Dan Caudill instructed employees to replicate Ashurst’s actions; and 4) Caudill Seed continued to provide irradiated products to Jarrow Formulas post-Ashurst’s resignation. Additionally, Ashurst had signed certificates of analysis falsely certifying the seeds as non-irradiated. During his deposition, Rogovin expressed suspicions about receiving irradiated products based on discussions with Ashurst. In July 2011, Ashurst supplied Rogovin with documents evidencing that Caudill Seed sent irradiated products. Despite Jarrow Formulas’ suspicions, it continued to buy and sell BroccoRaphanin-derived products without recalling them, even after confirming the use of irradiated seeds. Caudill Seed argues that the purchase of irradiated seeds did not harm Jarrow Formulas, and since Jarrow Formulas’ claims hinge on proving injury, they should be denied summary judgment.
The document outlines the standard for summary judgment, stating that the court must find no genuine dispute of material fact and that the moving party is entitled to judgment as a matter of law. The burden is on the movant to demonstrate the absence of any genuine issue of material fact. Furthermore, Caudill Seed identifies several trade secrets it claims were misappropriated, including research on supplements and manufacturing processes. Jarrow Formulas seeks summary judgment against these claims, challenging the timeliness and specificity of Caudill Seed's disclosures regarding its trade secrets.
Jarrow Formulas seeks summary judgment on Caudill Seed’s second through fifth alleged trade secrets, arguing these were not disclosed in a timely manner. Jarrow Formulas claims that Caudill Seed provided vague responses to interrogatories, identifying only limited information such as research, formulas, and a customer list, and failed to supplement these answers adequately. Jarrow Formulas argues that the penalty for this lack of disclosure should be the exclusion of evidence related to these claims, thus warranting summary judgment. They contend that they were prejudiced by Caudill Seed's delayed identification of trade secrets, as it hindered their ability to create a factual defense.
However, the court finds Jarrow Formulas’ arguments overly technical, noting that the discovery record does include relevant evidence for all six trade secrets mentioned by Caudill Seed. Therefore, Jarrow Formulas cannot claim prejudice sufficient to justify summary judgment.
Regarding the hard drive and research notebook, Jarrow Formulas' motion for summary judgment is also denied. They argue that Caudill Seed cannot prove that these items were transferred to Jarrow Formulas, as the evidence linking them is circumstantial. Caudill Seed maintains that the items went missing coinciding with the departure of a former employee and that they have conducted thorough searches without success. They suggest that a jury could reasonably infer that Jarrow Formulas received the contents of the hard drive based on their request for Caudill Seed’s full research file. Although a former employee denied taking the items, and despite the absence of direct evidence linking Jarrow Formulas to the items, circumstantial evidence exists that supports Caudill Seed’s claims.
A witness stated that there is no evidence of Mr. Ashurst taking specific files, but Lyons testified that Ashurst maintained both electronic and handwritten records related to Caudill Seed's research. Upon Ashurst's departure, key items, including a hard drive and laboratory notebook, went missing. Ashurst typically kept these items in his possession and used them for experiments. During depositions, neither Caudill Seed nor Jarrow Formulas questioned Ashurst about these items. The disappearance of the hard drive and notebook alone does not provide sufficient evidence for a jury to conclude that Jarrow Formulas misappropriated them. Caudill Seed argues that Jarrow Formulas used the contents of these items as trade secrets immediately after Ashurst resigned, and although Jarrow Formulas acknowledges that the hard drive and notebook contained significant research information, they contest Caudill Seed's ability to specifically identify the information as trade secrets. A genuine issue of material fact exists regarding the misappropriation claim, particularly as Ashurst denies removing the items, and Caudill Seed lacks direct evidence of this. Previous rulings indicated that claims based solely on Ashurst's actions may be barred by res judicata, suggesting that any alleged theft implicates Ashurst and cannot be attributed to Jarrow Formulas.
Claims regarding Jarrow Formulas’ alleged misappropriation of Caudill Seed's trade secrets extend beyond accusations that Ashurst took a hard drive and notebook. Under KRS 365.880(4), a "trade secret" is defined as information that holds economic value from being unknown and is subject to reasonable efforts to maintain its secrecy. Misappropriation, as defined by KRS 365.880(2)(b)(2)(c), includes unauthorized use or acquisition of a trade secret by someone who knows it was obtained improperly. Evidence suggests Ashurst maintained a notebook containing essential research on broccoli seed extract, which Jarrow Formulas may have used without authorization to develop and patent its own product. While Jarrow Formulas cannot be held vicariously liable for Ashurst's alleged theft, Caudill Seed can still assert that its trade secrets were misappropriated. There is sufficient evidence to create a genuine issue of material fact regarding whether the information on the hard drive and in the notebook qualifies as trade secrets. Jarrow Formulas challenges the specific identification of these trade secrets and the claim of harm, but the court finds that Caudill Seed has described its trade secrets adequately to withstand summary judgment. Genuine material issues exist concerning the nature of the alleged trade secrets, unauthorized use by Jarrow Formulas, and any potential injury to Caudill Seed, warranting a jury's determination on these factual questions.
Lyons asserted that Caudill Seed possesses exclusive proprietary and confidential research related to extracting and isolating compounds from broccoli seeds and sprouts, accumulated over a 17-year period. Ashurst, as the Chief Science Officer from 2002 to 2011, was instrumental in this research. The Amended Complaint reveals that Caudill Seed's competitive advantage hinges on its research and development of products involving seed and sprout production, particularly focusing on compounds like glucoraphanin, myrosinase, and sulforaphane. The company holds multiple patents and maintains confidential information regarding its agricultural and nutritional products, with sublicensing agreements for various John Hopkins patents through Brassica Protection Products, LLC.
Caudill Seed invested significant time and resources into developing and marketing substances derived from its broccoli seed research, which are known for their anticancer and antioxidant properties. Testimony from Dan Caudill highlighted concerns that critical research data may have been downloaded to a missing hard drive. The company has detailed its refined processes for manufacturing BroccoRaphanin and stabilizing myrosinase to convert glucoraphanin into sulforaphane. Evidence suggests that Ashurst shared confidential information with Jarrow Formulas prior to his departure, including the complete research file on glucoraphanin and a provisional patent application for myrosinase production.
Jarrow Formulas contends that Caudill Seed's production processes were publicly known or easily discoverable, arguing against the designation of this information as trade secrets. To qualify as a trade secret, information must have independent economic value, not be readily ascertainable through proper means, and be subject to reasonable efforts to maintain its secrecy, as outlined in Auto Channel v. Speedvision Network, LLC.
Jarrow Formulas claimed that the manufacturing process for activated glucoraphanin was either known or easily deduced from existing knowledge. Notably, Jarrow Formulas began producing this product commercially just four months after hiring Ashurst from Caudill Seed, despite having no prior experience in manufacturing broccoli seed extract. Ashurst admitted to sharing Caudill Seed's confidential information while still employed there, referring to his guidance as a 'road map' for production. Testimony from Rogovin highlighted the importance of technical knowledge in processing diverse ingredients, acknowledging that while encapsulating nutritional ingredients isn't complex, proficient management of production requires expertise. Rogovin confirmed that Jarrow Formulas utilized Ashurst's expertise to create its broccoli seed powder. Additionally, John Minatelli from Valensa testified that Ashurst swiftly provided critical parameters for supercritical fluid extraction during initial discussions, reinforcing the rapid development timeline. The legal context cites that trade secrets can encompass combinations of publicly known elements, as upheld in relevant case law, indicating that a trade secret does not require the same inventiveness as a patent.
A trade secret can arise from a unique combination of publicly available components that, when integrated, provide a competitive advantage. In *Imperial Chem. Indus. Ltd. v. Nat’l Distillers and Chem. Corp.*, the Second Circuit held that it is not a defense to claim that a process could have been developed independently without using information from a confidential relationship. Even if the information was a convenience rather than a necessity, it remains a protectable secret. In *Norbrook Laboratories Ltd. v. G.C. Hanford Mfg. Co.*, the court recognized that trade secret protection can apply to processes developed through extensive trial and error, emphasizing that significant investment in time and resources in experimentation can establish a trade secret. The court highlighted that even publicly accessible components required considerable research and effort to create a commercially viable process, noting that defendants sought to circumvent the necessary challenges of development.
The case also indicated that knowledge regarding manufacturing processes, including specific procedures, temperatures, and equipment, can constitute a trade secret. Caudill Seed's allegations suggest that Ashurst provided detailed procedural information to its manufacturing vendor, which included well-defined steps akin to a recipe. Additionally, knowledge of manufacturing vendors, their capabilities, and pricing, although potentially obtainable through public means, can qualify as a trade secret if not easily accessible.
Caudill Seed alleges that its provisional patent application, which included general processes and a specific manufacturing "cookbook" for activated glucoraphanin, along with associated research, vendor lists, and customer information, constituted trade secrets. These trade secrets purportedly enabled Jarrow Formulas to rapidly develop and launch its own activated glucoraphanin product within a few months. In contrast, Jarrow Formulas argues that it did not rely on Caudill Seed's processes, asserting that its product differs significantly and that Caudill Seed's methods were unsuccessful and abandoned. The court finds that Caudill Seed has presented enough evidence to challenge summary judgment regarding whether its processes provided a competitive advantage that Jarrow Formulas misappropriated. The determination of whether information qualifies as a trade secret remains a factual question. While the court does not conclude that Caudill Seed has definitively proven its information qualifies as trade secrets, it acknowledges that Caudill Seed has sufficiently identified its claims.
Jarrow Formulas has also moved to exclude the testimony of Caudill Seed’s damages expert, William E. Wingate, III, arguing that his opinions are unreliable due to lack of independent verification, an overly broad timeframe for cost calculations, failure to distinguish costs related to the alleged trade secrets, and inadequate allocation among the various trade secrets. Despite Jarrow Formulas’ attempts to dissect and challenge Caudill Seed’s trade secret claims, Caudill Seed maintains that Jarrow Formulas appropriated its entire proprietary framework, which allowed for swift establishment of a new business in activated glucoraphanin. Furthermore, Caudill Seed reports significant disruption to its research operations post-Ashurst’s departure, resulting in extensive delays in reassembling lost information and launching its own activated product, which ultimately occurred two years after Jarrow Formulas’ product introduction.
Jarrow Formulas' assertion that Caudill Seed has failed to provide evidence of damages is incorrect. The court acknowledges that a factual dispute exists regarding whether damages were incurred and the amount owed if plaintiffs prevail. Caudill Seed has presented sufficient evidence, including an expert report quantifying alleged damages, to create a genuine issue for trial. Jarrow Formulas' motion to exclude expert testimony primarily challenges the factual basis of the damage calculations, which will be evaluated at trial. For summary judgment, Jarrow Formulas has not proven the absence of a genuine issue of material fact regarding damages.
Regarding Jarrow Formulas' counterclaims, Caudill Seed argues that summary judgment should be granted because each counterclaim necessitates proof of damages, which Jarrow Formulas has not demonstrated. Legal precedents underline that standing and recovery on the claims require proof of injury. Specific cases highlight that claims such as fraud, unfair competition, negligence, breach of warranty, and tortious interference all necessitate evidence of actual damage. Jarrow Formulas contends that Caudill Seed misinterprets the injury requirement in its Lanham Act claim.
Counterclaims from Jarrow Formulas require only that a reasonable jury could infer harm, as established in prior case law. Senior Judge Heyburn previously confirmed Jarrow Formulas had standing to sue, citing that Caudill Seed’s actions proximately caused harm. However, it is argued that there is minimal evidence of actual harm to Jarrow Formulas from Caudill Seed's sale of irradiated seeds. Despite Jarrow Formulas’ suspicions, it did not reject any shipments, conduct tests for irradiation, or recall affected supplements, and its sales of BroceoMax, made with irradiated seeds, increased during the relevant period. Jarrow Formulas did not indicate suffering any governmental penalties or reputational harm due to the alleged violations of FDA regulations by Caudill Seed.
Although Caudill Seed may have violated laws and contracts, Jarrow Formulas did not show material negative effects from these actions, prompting the court to grant summary judgment in favor of Caudill Seed on all claims. The court noted that claims of fraudulent inducement, negligence per se, and tortious interference require proof of injury, which Jarrow Formulas failed to provide. Each tort claim is further undermined by Kentucky's economic loss rule, which prohibits recovery for economic losses through tort suits in commercial transactions, asserting that such issues should be settled through contract law rather than tort law. Consequently, even if Jarrow Formulas could demonstrate injury, the harms cited—diminished product value and consequential damages from purchasing irradiated seeds—are categorized as economic losses tied to their contractual relationship with Caudill Seed.
Jarrow Formulas has asserted that the consumption of irradiated products may pose health risks but has failed to provide any evidence of harm to customers or property. The economic loss rule applies to its claims, which Jarrow Formulas contests, particularly with respect to fraudulent inducement and negligence per se. It argues that the Kentucky Supreme Court would not categorize fraud claims under the economic loss rule, referencing supportive cases from Texas and Virginia that prioritize fraud prevention as a public policy goal. However, previous Kentucky case law indicates that if fraudulent inducement is closely linked to a breach of contract, recovery is barred under the economic loss rule.
In relation to tortious interference, Jarrow Formulas claims that the economic loss rule does not apply because the contracts were between Jarrow Formulas and C.S. Health, not Caudill Seed. It contends that Caudill Seed, as a third party, interfered by providing irradiated seeds to C.S. Health, which then supplied them to Jarrow Formulas. Caudill Seed counters this by referencing a Sixth Circuit case suggesting that entities with shared interests might be viewed as a single entity, thus barring interference claims. Caudill Seed maintains that it and C.S. Health operate as one, with C.S. Health being a wholly owned subsidiary. Jarrow Formulas disputes this characterization, especially regarding the ownership of C.S. Health. The court supports Caudill Seed's position, affirming its relationship with C.S. Health.
Jarrow Formulas acknowledged in court documents that the two Caudill entities share the same principal place of business in Louisville and are jointly and severally liable for any injuries to Jarrow Formulas. C.S. Health was previously an internal division of Caudill Seed until it became a separate entity in April 2010, with Edgar Patton Caudill serving as the sole Member and Manager of C.S. Health and as President and CEO of Caudill Seed. Despite contracts being nominally between C.S. Health and Jarrow Formulas, the two entities functioned as a single unit in fulfilling orders. The Court agrees with this assessment and asserts that the economic loss rule prevents Jarrow Formulas' claim.
Jarrow Formulas' California statutory unfair competition claim is argued to be preempted by federal law, according to Caudill Seed, which contends that Congress intended to regulate dietary supplements exclusively. Jarrow Formulas counters that its claims of “fraudulent” business practices do not require proof of legal violation and rely on Caudill Seed’s false certifications regarding product irradiation. Caudill Seed asserts that preemption is a federal law issue, referencing Sixth Circuit precedent that prohibits state-law claims that essentially allege violations of the FDCA. The fraud alleged by Jarrow Formulas involves seeds that allegedly did not meet federal standards, indicating that the claim is inherently about FDCA violations and thus preempted.
Regarding claims for breach of contract and implied warranties, Caudill Seed argues that Jarrow Formulas' claims fail for three reasons: 1) Jarrow Formulas accepted and resold the product, 2) it did not comply with the notice provision in KRS 355.607(3)(a), and 3) it waived claims by accepting the goods despite knowing of their nonconformity. Jarrow Formulas disputes these points, claiming a genuine issue of material fact exists regarding its knowledge of the seeds' irradiation status. However, it is suggested that a reasonable jury may side with Caudill Seed, as Jarrow Formulas likely knew or should have known about the irradiation when it accepted and sold the seeds.
Jarrow Formulas was aware of the irradiation of products earlier than it disclosed. Jarrow Rogovin, in a deposition, expressed suspicion about receiving irradiated products as early as May 2011, citing a lack of trust in Dan Caudill and information from Ashurst regarding irradiated seed. Although Rogovin claimed ignorance of testing methods for irradiation, he indicated that he would have tested had he known. Chairman Ben Khowong also acknowledged in June 2011 being informed of test results indicating issues with Caudill Seed's product, including irradiation. Jarrow Formulas continued to accept and purchase these non-conforming goods, which waived their contract claims under KRS 355.2-602(1) and 355.2-607(2).
In relation to a declaratory judgment claim, Jarrow Formulas sought a declaration that Rogovin did not instruct Ashurst regarding the alleged theft of trade secrets, though the court questioned the propriety of this claim as it pertains to factual matters. Regarding the Lanham Act false advertising claim, Jarrow Formulas failed to demonstrate that Caudill Seed's actions led to economic or reputational harm, noting that their sales had actually increased. Consequently, the court granted summary judgment in favor of Caudill Seed on Jarrow Formulas’ counterclaims and denied Jarrow Formulas’ motion for summary judgment.
Additionally, Ashurst, who had previously worked at Caudill Seed, started consulting for Jarrow Formulas immediately after leaving Caudill Seed, where he had access to proprietary research and formulas.
Jarrow Formula's BroccoMax nutritional supplement incorporated BroccoRaphanin, and an email referencing "BroccoMax" was interpreted by Clouatre as a request for Caudill Seed's research file. Caudill Seed alleges Jarrow Formulas is downplaying its knowledge of the irradiation of seeds, asserting that Jarrow's claims about first learning of the issue in October 2013 are misleading. Caudill contends that Ashurst, a Jarrow employee prior to that date, was aware of the irradiation, suggesting Jarrow must have known earlier. Notably, Jarrow filed counterclaims two months before gaining access to state court discovery and had previously acknowledged knowledge of the irradiation. Caudill argues that Jarrow's claims regarding the non-irradiation of lots and the labeling of irradiated seeds are disproven by discovery findings. Despite Ashurst not providing proof, Caudill believes Jarrow had sufficient information to ascertain the irradiation independently, as Jarrow's experts indicated testing for irradiation was possible, yet no tests appear to have been conducted. Jarrow purchased approximately 775 kilograms of irradiated broccoli seed from Caudill and utilized nearly all of it. Additionally, it is noted that Jarrow's recall policies obligate them to recall any non-compliant products, raising questions about their failure to recall products made from the irradiated seeds. The counterclaims against Jarrow include fraudulent inducement, statutory unfair competition, negligence per se, breach of contract, breach of implied warranties, tortious interference, declaratory judgment, and Lanham Act false advertising. The court has yet to fully address a related motion as Caudill Seed requested a stay on its consideration, but it will ensure that the matter is adequately briefed.
