Court held that institute’s allegations if true could establish that the buyer knew or should have known that the seller’s owners had stolen the trade secrets from the medical research institution.
M&A Stories
February 3, 2022
Introduction:
In this blog, we discuss a legal case where a medical research institute sued a buyer for purchasing a biotech company that was founded by former research scientists employed at the institute. The lawsuit alleged that the buyer had acquired trade secrets stolen from the research institution. Let’s delve into the details of the case.
The Deal:
The biotech company being sold had been founded by research scientists who had previously worked at a pediatric medical research institution. Their research focused on using exosomes (produced by human cells) to identify and treat various diseases. Upon leaving the institute, these scientists stole exosome-related trade secrets and used the information to establish their own company in China, which sold exosome-related kits and services. They also obtained patents in China using the stolen trade secrets.
The Buyer:
The buyer of this company was a healthcare management provider and biotechnology developer. They acquired the company founded by the former research scientists from the medical research institution.
The Lawsuit:
After the acquisition, the medical research institution filed a lawsuit in an Ohio federal district court, accusing the buyer and its owner of misappropriating their exosome-related trade secrets. The buyer and its owner sought to have the lawsuit dismissed, claiming they were unaware that the trade secrets had been stolen.
Court Ruling: The court denied the buyer’s motion to dismiss the lawsuit, considering the institution’s allegations. If proven true, these allegations could suggest that the buyer knew or should have known that they were acquiring stolen trade secrets. The court pointed out several reasons for this:
1. The research institution was known for its expertise in exosome-based therapeutics, holding numerous patents related to exosomes.
2. The seller’s owners publicly listed on their LinkedIn profiles that they had researched exosomes for the research institution.
3. It was public knowledge that the seller’s owners had filed patent applications in China for technology already patented by the research institution in the United States.
4. The buyer and its owner were aware that the seller’s owners were still employed by the research institution when they filed the Chinese patent applications.
5. The buyer’s owner’s involvement in the industry, access to the seller’s owners’ biographic data and employment agreements indicated that they had knowledge of the trade secrets’ origin.
This case is referred to as Research Institute At Nationwide Children’s Hospital v. Yu Zhou., Case No. 2:19-cv-4574, United States District Court, S.D. Ohio, Eastern Division, (December 21, 2021).
Conclusion:
This case serves as a reminder for companies looking to acquire technology businesses to conduct thorough due diligence. Failing to investigate the origin of trade secrets could expose buyers to legal repercussions, even if they claim to be unaware of any misappropriation.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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