Heraeus Medical GMBH v. Esschem Inc
Opinion
The case before us involves another skirmish in a long-running, cross-border court battle over the alleged theft of a trade secret: Heraeus Medical GmbH's recipe for its bone cement. In this appeal, we consider whether Heraeus' suit against Esschem, Inc.-a company that works as a chemical manufacturer for Heraeus' main competitor-is barred by the statute of limitations under the Pennsylvania Uniform Trade Secrets Act. At summary judgment, the District Court held that all of Heraeus' claims, including those for Esschem's alleged continuing misappropriation during the three-year limitations period, are time-barred and entered judgment for Esschem. We agree that alleged misappropriations that occurred more than three years before Heraeus filed suit are time-barred, but because we hold that Pennsylvania applies the rule of separate accrual to continuing trade secret misappropriations, Heraeus may sue for misappropriations that occurred within the three-year period before filing. We thus will reverse in part and affirm in part the District Court's grant of summary judgment.
I. Background 1
Heraeus is a German company that develops and produces Palacos, a bone cement used to anchor artificial joints in joint replacement surgeries. To make Palacos, Heraeus developed its own particular process to manufacture two key components: copolymers known as R262 and R263 (the "copolymers"). Biomet also sells bone cement and is one of Heraeus' major competitors in this market. To make its bone cement, Biomet uses the same copolymers, which it buys from Esschem, a Pennsylvania company that manufactures acrylic polymers and monomers.
Heraeus holds trade secrets related to the "overall specifications for the ... bone cement," including "specifications for [the] copolymers." App. 81. These trade secrets changed hands several times over the years before allegedly falling into Esschem's possession. In 1972, thirteen years after Palacos first came on the market, Heraeus entered into a distribution agreement with Merck, pursuant to which Heraeus disclosed its trade secrets so that Merck could "obtain and maintain regulatory approval" to distribute Palacos. App. 84. Merck was also obligated under the agreement to protect Heraeus' trade secrets from disclosure to third parties without first obtaining Heraeus' consent. This arrangement was in place until 1997, when Merck and Biomet entered into a joint venture that took over the distribution of Palacos. At that point, Heraeus agreed to supply the joint venture, and only Merck, pursuant to its confidentiality agreement with Heraeus, had access to the trade secrets covering the copolymers.
In 2004, however, Biomet acquired Merck's shares in the joint venture, taking over the distribution agreement and, unbeknownst to Heraeus, also gaining access to Heraeus' trade secrets. Upon learning of the joint venture's sale to its competitor, Heraeus announced it would terminate the distribution agreement in August 2005, but by the time Heraeus severed its ties with Biomet, Biomet had already launched its own competing bone cement-a feat that Heraeus alleges its "competitors had failed to do for decades" and that it contends has since cost it 50 percent of its market share. App. 88. Suspecting that Biomet's bone cement was created using its trade secrets, Heraeus acquired and analyzed samples of Biomet's bone cement in 2005 and discovered that, except for "[m]inor discrepancies," it "w[as] virtually identical to" Heraeus' bone cement and that Esschem was manufacturing the copolymer components for Biomet. App. 89.
Over the next few years, Heraeus took legal action to protect its trade secrets. It filed suit for trade secret misappropriation against Biomet in Germany in December 2008, and shortly thereafter, in aid of that litigation, brought discovery suits in the United States against both Esschem and Biomet. 2
In its discovery suit against Esschem, Heraeus sought "documents relating to communications between Esschem and ... Biomet ... regarding the development" of the copolymers.
In re Heraeus Kulzer GmbH
,
Discovery against Esschem ended sometime between August and December 2011, but discovery and litigation against Biomet continued for several more years. In the course of the proceedings against Biomet-specifically, in a December 2011 deposition-Dan Smith corroborated what the e-mail chains had indicated: that Biomet employees were "direct participants," Appellant's Br. 11 (quoting Sealed App. 1703) in the development of the copolymers and that "their work with Esschem ... ultimately led to the copolymers manufactured by Esschem for use in Biomet's bone cement," id . Heraeus contends it was not until "that time," i.e., December 2011, that it had "sufficient information to believe that Esschem had actively participated in the misappropriation of [its] trade secrets." Id. at 12.
Just short of three years later, on September 8, 2014, Heraeus sued Esschem for trade secret misappropriation in the Eastern District of Pennsylvania. The complaint included one count for misappropriation of trade secrets under the Pennsylvania Uniform Trade Secrets Act (PUTSA) and five counts for common law claims. 3
Following discovery, Esschem moved for summary judgment, arguing that all of Heraeus' claims were time-barred. Under the PUTSA, a plaintiff has three years from when "the misappropriation was discovered or by the exercise of reasonable diligence should have been discovered" to bring suit.
In its opposition motion, Heraeus countered that it did not discover the necessary facts to sue for trade secret misappropriation until "the end of 2011," and that any dispute over when it discovered those facts was an issue of triable fact that precluded summary judgment. App. 663. Heraeus also urged that continuing misappropriations were subject to the separate accrual rule, so that, under the PUTSA, each additional use of Heraeus' trade secrets within three years of the filing of the complaint gave rise to a separate and timely cause of action.
The District Court rejected both of Heraeus' arguments and ruled that the statutes of limitations had run on its PUTSA and common law claims. At the very latest, the Court found, Heraeus was aware of "the facts supporting its misappropriation claims" against Esschem by January 2009.
Heraeus Med. GmbH v. Esschem, Inc.
,
II. Jurisdiction and Standard of Review
The District Court had diversity jurisdiction under
We review the District Court's grant of summary judgment de novo.
Faush v. Tuesday Morning, Inc.
,
III. Discussion
On appeal, Heraeus raises the same two arguments it did below. First, it contends that it did not discover sufficient facts to state a claim against Esschem until December 2011, and therefore its September 2014 suit fell within the three-year limitations period. And to the extent there is a dispute over when Heraeus discovered sufficient facts to state a claim, Heraeus argues, this is a factual dispute for the jury.
Second, Heraeus posits that even if the limitations period began to run before September 2011, Esschem would still be liable for each time it used the trade secrets to manufacture the copolymers between September 2011 and September 2014 because continuing misappropriations under the PUTSA are subject to the separate accrual rule. We address these issues in turn. 5
A. The Commencement of the Limitations Period
A "limitations period generally begins to run 'as soon as [an] injury is sustained.' "
Davis v. Wells Fargo,
The PUTSA explicitly incorporates the discovery rule. Under the statute, a plaintiff has three years to file an action for trade secret misappropriation once she "discover[s]" or "should have ... discovered" the misappropriation.
6
According to Heraeus, it was not until it deposed Biomet's Dan Smith in December 2011 that it obtained sufficient evidence of scienter. Specifically, Heraeus directs us to two pieces of information that it asserts gave it notice of Esschem's state of mind: Smith's testimony (1) that he and another Biomet employee were "direct participants" in work with Esschem; and (2) that this work with Esschem "ultimately led to the copolymers ... for use in Biomet's bone cements." Appellant's Br. 11-12. Heraeus contends those concessions finally revealed that "Esschem knew that Biomet was using stolen trade secrets." Id. at 33.
But the argument proves too much, for if that information was sufficient to put Heraeus on notice of Esschem's scienter, then Heraeus was necessarily on notice nine months earlier when it came into possession of essentially the same information. In a March 2011 discovery production, Heraeus received, among other things, a 2004 e-mail exchange between Smith and Esschem in which Smith attempted to troubleshoot Esschem's manufacturing difficulties, and, in declining to provide more detailed copolymer specifications, noted that doing so would disclose non-public information. But follow-up e-mails to Esschem from the other Biomet employee, Rainer Specht, which Heraeus also received in discovery by March 2011, did provide Esschem with those supposedly non-public details. And soon thereafter, as Heraeus was well aware, Biomet released its competing bone cement.
This sequence and the face of these detailed exchanges about the copolymer specifications reveal that the very facts that Heraeus claims it first learned in the December 2011 deposition were in its possession by March 2011: (1) "direct participat[ion]" by Biomet employees in Esschem's development of the copolymers; and (2) that this participation is what "ultimately led" to Esschem's successful production of the copolymers. Appellant's Br. 11. Moreover, the March 2011 discovery revealed the additional fact that Esschem had reason to believe Specht's subsequent disclosure of the copolymer specifications constituted non-public information, i.e., information that was "derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy."
Heraeus, however, did not file suit until September 2014-three and a half years later. Thus, any misappropriations prior to March 2011 and any that occurred between March and September 2011 (which would have been discovered as they occurred) are indeed time-barred.
The question remains whether Esschem's alleged continued use of Heraeus' trade secrets between September 2011 and September 2014 is properly viewed as part of one violation that is time-barred in its entirety, as the District Court held, or instead as a series of separate misappropriations that accrued individually and thus were timely asserted. As we explain next, the PUTSA provides the answer.
B. The Timeliness of Claims for Misappropriation After September 2011
The Pennsylvania General Assembly based the PUTSA on the provisions of the Uniform Trade Secrets Act (UTSA). But while it adopted most of those provisions, it opted to diverge from them in certain instances. One such instance is in the treatment of a "continuing misappropriation." The UTSA provides:
An action for misappropriation must be brought within 3 years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. For the purposes of this section, a continuing misappropriation constitutes a single claim.
Unif. Trade Secrets Act § 6 (Unif. Law Comm'n 1985). In the PUTSA, the Pennsylvania General Assembly tracked this language nearly verbatim, except that it omitted the final sentence, so that Pennsylvania's statute states simply:
An action under this chapter for misappropriation must be brought within three years after the misappropriation was discovered or by the exercise of reasonable diligence should have been discovered.
The parties view the omission of the final sentence very differently. Heraeus argues that the Pennsylvania legislature intended "each wrongful use of misappropriated trade secrets [to] trigger a distinct limitations period" and that, under this separate accrual rule, its claims for misappropriations between September 2011 and September 2014 are timely. Appellant's Br. 14. Esschem, on the other hand, defends the District Court's rejection of the separate accrual rule as a rule that would nullify the PUTSA's statute of limitations, and it urges that we affirm the denial of Heraeus' PUTSA claims as a single, time-barred cause of action.
As explained below, Heraeus has the better of the argument. The District Court erred in treating Esschem's continued use of Heraeus' trade secrets as a single misappropriation for three reasons: (1) the text of the PUTSA; (2) Pennsylvania's common law rule of separate accrual, which provided the backdrop against which the PUTSA was drafted; and (3) Pennsylvania's adoption of the Restatement of Torts, which also endorses the separate accrual rule for continuing misappropriations. We address these in turn.
1. The PUTSA Treats Continuing Misappropriations as Separate Violations Subject to the Separate Accrual Rule
a. The Text of the PUTSA
The UTSA, by its terms, treats a continuing misappropriation as a single claim, but Pennsylvania, like some other states, opted not to enact that particular provision.
See, e.g.
,
Pennsylvania law provides that "[t]he object of all interpretation and construction of statutes is to ascertain and effectuate the intention of the General Assembly."
Esschem, however, asks us to ignore the significance of the second sentence's omission and to imply the General Assembly's rejection of the separate accrual rule into the first sentence. But in interpreting a statute, "language should not be implied where excluded," and we will not contravene legislative intent by reading into PUTSA § 5307 the very language that the General Assembly chose to omit.
Fonner v. Shandon, Inc.
,
The comments to the UTSA reinforce this reading of PUTSA § 5307. 9 The UTSA drafters made explicit that they sought in § 6 to achieve two distinct results: (1) to "reject[ ] the continuing wrong approach," under which "the limitation period with respect to a specific act of misappropriation begins at the time that the act of misappropriation occurs"-that is, to reject the separate accrual rule; and (2) to start the limitations period upon "discover[y of] the existence of misappropriation."
Unif. Trade Secrets Act § 6 cmt. Esschem's argument that the first sentence alone is sufficient to achieve both of these results is thus not only atextual, but it also renders the second sentence mere surplusage, contrary to Pennsylvania's canons of construction.
See
Matter of Emps. of Student Servs., Inc.
,
We decline to adopt Esschem's reading. Instead, we glean from the text of the statutes that the UTSA adopted the discovery rule and single-claim treatment for continuing misappropriations, and the PUTSA embraced the UTSA's discovery rule but declined its single-claim treatment in favor of the separate accrual rule.
b. Pennsylvania's Common Law Rule of Separate Accrual
That the Pennsylvania legislature intended to follow the separate accrual rule is all the more apparent when we consider the omission of the UTSA's second sentence against the backdrop of Pennsylvania common law.
As explained by our former Chief Judge Edward Becker when he sat on the District Court in
Anaconda Company v. Metric Tool & Die Company
, Pennsylvania courts have adopted the "property" view of trade secrets, under which the basis of a claim for trade secret misappropriation is the violation of a property right, in contrast to the "confidential relationship" view, under which a misappropriation is based on a violation of a duty of confidentiality.
Esschem takes issue with
Anaconda
's holding on the ground that no Pennsylvania court "ever applied the separate accrual rule to common law trade secret claims." Appellee's Br. 49-50. But
Anaconda
's reasoning is sound, and although no Pennsylvania court has explicitly discussed this reasoning, other courts have, confirming the separate accrual rule's roots in the property view and its
incompatibility with the confidential relationship view.
Compare
Underwater Storage, Inc. v. U.S. Rubber Co.
,
We hold today that this common law rule was not displaced by the PUTSA. The Pennsylvania Supreme Court has long instructed that "provisions in derogation of the common law are to be held strictly,"
Gibson v. Commonwealth
,
c. Pennsylvania's Adoption of the Restatement of Torts
Our reading of the PUTSA is also in line with the approach taken by the Restatement of Torts, which courts in Pennsylvania "have generally accepted ... as the basic outline for [Pennsylvania's] trade secrets law."
O.D. Anderson, Inc. v. Cricks
,
Ultimately, the General Assembly drafted the PUTSA against the backdrop of Pennsylvania's adoption of the Restatement of Torts and its common law rule of separate accrual rule for trade secret misappropriation claims, and it deliberately omitted a sentence from the UTSA that rejected the separate accrual rule. Adopting Esschem's reading of the PUTSA, and finding that it eliminated the separate accrual rule, requires us to ignore legislative intent along with several unambiguous directives from the Pennsylvania Supreme Court. As a result, we hold that, under Pennsylvania law, the separate accrual rule applies to continuing misappropriations. 11
2. Esschem's Arguments to the Contrary Are Unavailing
Esschem raises two primary objections to this application of the separate accrual rule. Neither is persuasive.
First, following the District Court's lead, Esschem argues that applying the separate accrual rule to a claim for a continuing misappropriation "would nullify the ... statute of limitations provision." Appellee's Br. 41-42. A "continuing misappropriation" subject to the separate accrual rule may be a "continuing violation" in the colloquial sense, but it is conceptually distinct from the "continuing violation doctrine." The District Court appears to have conflated the two.
The "continuing violation doctrine" applies only to a narrow class of continuing violations for which courts have concluded that a claim accrues over time as a result of a "continuing pattern, practice, [or] policy" that is unlawful in nature.
Havens Realty Corp. v. Coleman
,
The same is not true for continuing violations subject to the separate accrual rule, where each violation "starts the statutory period running again" and "the commission of a separate new overt act [within the limitations period] generally does not permit the plaintiff to recover for the injury caused by old overt acts outside the limitations period."
Klehr v. A.O. Smith Corp.
,
But the separate accrual rule does not "eliminate the statute of limitations altogether" or allow a plaintiff to "sit by for nearly a decade and ... override PUTSA's three-year statute of limitations,"
Heraeus
,
Second, Esschem contends that Heraeus cannot benefit from the separate accrual rule because it did not "assert [in its complaint] distinct claims for each new batch of copolymers that Esschem has sold to Biomet," and cannot do so because Esschem's "ongoing sale of products" does not constitute a continuing misappropriation. Appellee's Br. 53. Because the alleged misappropriation is not a continuing one, the argument goes, but a singular one with lingering effects, Heraeus' claim is time-barred even under the separate accrual rule.
Esschem is right that an injury that is "the lingering effect[ ] of past unlawful conduct" is "not a continuing violation and ... thus not actionable in [its] own right." Elad Peled,
Rethinking the Continuing Violation Doctrine: The Application of Statutes of Limitations to Continuing Tort Claims
,
The PUTSA's broad definition of misappropriation includes a trade secret's "use," which Black's Law Dictionary defines as "[t]he application or employment of something; esp., a long-continued possession and employment of a thing for the purpose for which it is adapted, as distinguished from a possession and employment that is merely temporary or occasional." Black's Law Dictionary (10th ed. 2014). The wrongful use that Heraeus claims against Esschem is not merely sales, but the continued employment of Heraeus' trade secrets in Esschem's manufacturing process. Such conduct, if proven, is well within the broad meaning of "use" and in line with other courts' understanding of continuing misappropriations.
See
Underwater Storage
,
Cadence Design Sys., Inc. v. Avant! Corp.
,
IV. Conclusion
For the foregoing reasons, we will reverse in part and affirm in part the District Court's grant of summary judgment and remand for proceedings consistent with this opinion.
The facts set forth here are drawn from a combination of the District Court's recital of the facts and the parties' submissions on summary judgment. To the extent certain background facts appear only in the District Court opinion, we note that the District Court appears to have drawn them from the complaint, although Esschem indicated it was "without knowledge or information sufficient to form a belief" about many of those facts. Esschem's Answer at 1-10, ECF No. 87. Nonetheless, because these allegations pertain only to general background and Esschem does not take issue with them on appeal, we will reference them where relevant.
In re Heraeus Kulzer GmbH
, No. 09-MC-00017,
Those common law claims were: (1) conspiracy to misappropriate a trade secret; (2) unjust enrichment; (3) unfair competition; (4) tortious interference with economic advantage; and (5) conversion.
The District Court correctly identified the tension between those jurisdictions that treat continuing misappropriations as a single claim and those that treat continuing misappropriations as a series of separate misappropriations subject to the separate accrual rule. As we explain below, however, it was mistaken in conflating the effect of the separate accrual rule with the effect of the continuing violation doctrine on the statute of limitations. See infra Section III.B.2.
The District Court dismissed Heraeus' common law claims for the same reasons it dismissed its PUTSA claims. On appeal, however, Heraeus directs its arguments only to its PUTSA claims and thus has waived any challenge to the denial of its common law claims.
In full, this provision reads: "An action under this chapter for misappropriation must be brought within three years after the misappropriation was discovered or by the exercise of reasonable diligence should have been discovered."
In a filing below, Heraeus itself touted this logic, describing the information in Specht's later e-mails as "the same information that Esschem had previously requested [from Biomet] ... [but] had been told that Biomet could not provide." App. 142.
The District Court held, and Esschem argues on appeal, that Heraeus had sufficient information to state a claim against Esschem at various points between 2005 and 2010, such as in January 2009, when Heraeus brought its discovery suit against Esschem in the United States. At that time, Heraeus sought information from Esschem about its communications with Biomet because it believed that Biomet had "instruct[ed Esschem] to manufacture [the copolymers] using Heraeus' highly confidential information and trade secrets." App. 651. Esschem maintains that this suspicion was enough for Heraeus to bring suit for Esschem's alleged misappropriations. As Heraeus points out, however, without evidence that Esschem knew the instructions it was receiving from Biomet were derived from Heraeus' trade secrets, the possibility that Esschem was "a total innocent" remained. Appellant's Reply Br. 23. In any event, we need not determine whether Heraeus could have stated a claim at some point before March 2011 because, outside of any claims that accrued in the three-year period before filing, its September 2014 suit was untimely even if the limitations period began to run earlier than March 2011.
"The comments or report of the commission ... which drafted a statute may be consulted in the construction or application of the original provisions of the statute" as long as those materials were available when the statute was drafted.
See generally
Van Prods. Co. v. Gen. Welding & Fabricating Co.
,
In so holding, we are mindful of the Philadelphia Court of Common Pleas' decision in
WebDiet, Inc. v. NutriSystem, Inc.
, in which it held that the "misappropriation of trade secrets is [not] a continuing tort under the PUTSA," using "continuing tort" to refer to the separate accrual rule. No. 4055 Commerce Program, 2016 Phila. Ct. Com. Pl. LEXIS 133, at *18-19 (Pa. C.P. Apr. 12, 2016). However, the Court's treatment of this issue is but a few lines long and it relied solely on the statement in the comment to § 6 of the UTSA that the "Act rejects a continuing wrong approach."
See, e.g.
,
Ledbetter v. Goodyear Tire & Rubber Co., Inc.
,
Reference
- Full Case Name
- HERAEUS MEDICAL GMBH, Appellant v. ESSCHEM, INC.
- Cited By
- 15 cases
- Status
- Published