The FTC Ruling and Its Impact on Trade Secrets
In the second episode of the Reasonable Measures podcast, Tim and Chris delve into two major topics: the FTC’s recent decision to ban non-compete agreements and the ongoing Vanda Pharmaceuticals case. Tim introduces the FTC ruling, highlighting its far-reaching implications. With non-competes historically serving as an indirect method of protecting trade secrets, their ban could lead to increased reliance on direct protections, such as trade secret litigation. Chris notes that California’s longstanding prohibition of non-competes demonstrates that innovation can thrive without these agreements. The duo agrees to explore the issue further in a future episode, emphasizing its significance for businesses and intellectual property law.
Vanda Pharmaceuticals and the FDA’s Alleged Disclosure
The second half of the discussion centers on Vanda Pharmaceuticals’ lawsuit against the US government, stemming from allegations that the FDA improperly disclosed confidential trade secret information to generic drug manufacturers. Vanda claims this disclosure—related to drug specifications and manufacturing processes—constitutes a violation of federal trade secret protections. To address the unusual circumstances of this case, Vanda’s legal team has argued that the FDA’s actions amount to a “takings” claim under the Fifth Amendment, a creative approach typically associated with real estate law.
The court’s decision allows Vanda’s takings claim to proceed, acknowledging that the government’s sharing of confidential information might have devalued Vanda’s intellectual property. However, the court dismissed the breach of contract claim, ruling that the regulatory framework for drug approvals does not constitute an implied contractual relationship. The case stands out for its unique fact pattern, deviating from the usual trade secret disputes involving employee departures and competitor misuse.
As the case continues, Tim and Chris reflect on its potential implications for trade secret protections and government accountability. They express admiration for the creativity of Vanda’s legal strategy, noting that the outcome could set a precedent for similar claims in the future. The episode concludes with a promise to revisit both the FTC ruling and the Vanda case in subsequent discussions, as these issues evolve.
収穫：
- The FTC ruling to ban non-compete agreements is a significant development in the trade secrets landscape.
- The Vanda Pharmaceuticals case highlights the issue of the FDA disclosing confidential information to competitors.
- The court’s decision allows the federal takings claim to proceed, but dismisses the breach of contract claim.
- The outcome of the Vanda Pharmaceuticals case will have implications for the protection of trade secrets and the handling of takings claims.
Transcript:
Tim (00:02.03)
We’re on a roll, Chris. This is the second episode of what’s now going to be called the Reasonable Measures podcast. Thank you for coming up with this brilliant name last week. You saw sort of our relationship in action. I ask you a question, I sit back, and you come up with an answer. So nice work on that. Thank you.
Chris (00:23.447)
Thanks, Tim, you have the easy job.
Tim (00:25.421)
So a few things to talk about today and to reiterate what we thought would be our format going forward. A handful of talking points about what’s going on in the market, topical things. And then we’ll jump into a case. Today we’re going to talk about Vanda Pharmaceuticals and their case against the US government. Before we get to that, a handful of things to go through. Number one, you’re in the Bay Area at a conference, one of our favorite conference producers, the folks at KISCO. How’s that going?
Chris (01:07.959)
Oh, it’s going great. It’s a three-day conference. The first day was all about trade secrets the whole day. And then days two and three are about IP leadership and coming up with good ways of managing companies’ intellectual property in general. So not only trade secrets, but patents, trademarks, and copyrights. So it’s a great crowd and lots of good conversation. There are a lot of hot topics going on, especially this week. So there’s a lot to talk about.
Tim (01:38.796)
Awesome. I saw a handful of our friends. Jim Pooley’s there. So is Ben Herbert. It looked like a good group of people. So, OK, cool. Well, the big news that came out, I think day one of the conference, it’s been a couple of days now, is the FTC ruling to ban non-compete agreements. And so I think this is such big news that we need to dedicate probably a half hour to this. So maybe that’ll be episode three.
The Wall Street Journal headline this morning in the editorial, Lena Kahn’s latest rule instantly invalidates 30 million contracts without congressional authority. Pretty big deal in our world. And so I know it’s something that we’ve been talking about since the FTC put out the proposal. A lot of folks in our community have been talking about this and thinking about this.
And I know you are actively drafting a piece that we’ll put up on the website here soon. But I think this idea of, you know, I’ve largely sort of thought about non-compete agreements as sort of the lazy person’s way of managing trade secrets, right? You control the person, you don’t really control the data per se. And I think, you know, what certainly what California has proven to all of us is that, you know, life goes on without non-compete agreements. Non-compete agreements have been, at minimum, hard to enforce there for a long time. And so anyway, love to hear your quick feedback on the FTC. And I don’t want to get too deep on this because I do think it deserves a longer discussion.
Chris (03:25.463)
Yeah, definitely. I mean, we can dedicate episode three to the FTC. And it was funny, the ruling or the rule came out at 11 a.m. local time, the first day of the conference. So starting around 10:45, everyone’s checking their laptops and checking their watches. It was very much like the ball dropping on New Year’s Eve. And no one was really focused on what we were supposed to talk about. But it is a real significant ruling from the FTC that invariably is going to be litigated like crazy because it is a very real substantive change to non-competes. And like you mentioned, California, it hasn’t been difficult to enforce. It’s been completely unenforceable. So California has for a very long time taken the position that non-competes are just not constitutional in the state. So they’re just not available.
Yet somehow, miraculously, California has been wildly successful in launching startups, having great technology companies, and Silicon Valley is the hotbed of innovation even now. So people’s concern that getting rid of non-competes will just grind the innovation machine to a halt doesn’t make sense. Look at California, where I am today. So it’s going to be real interesting, but it’s actually a great thing for protecting trade secrets directly. Because non-competes, like you mentioned, controls the flow of people. So your people can’t leave your company and join a competitor. And indirectly, it helps protect trade secrets, because if the person can’t move, they can’t bring trade secrets with them. But it’s very much indirect, like that’s not the main intention.
So if you can’t protect it indirectly, you’ll have to protect directly. And all of the laws and procedures around trade secrets are only going to become more critical. And we’re definitely going to see an increase in the amount of trade secret litigation because non-competes, if this rule actually goes through and is enforced, will be unavailable to trade secret owners. So this is big, big news.
Tim (05:49.804)
All right, so we’ll start prepping for episode three. So let’s table this discussion for now and jump into Vanda. So Vanda Pharmaceuticals, Incorporated is the plaintiff versus the United States, the defendant. And so what we’re going to look at here today is a decision that came down January 18, 2024, so pretty new.
And so a little bit about the company. So Vanda is a $250 million market cap, so a small-cap pharma company. According to this filing, they sort of have a business model of rescuing failed therapeutics, sort of breathing new life into something that has failed along the way. And this particular ruling is around two motions.
And so the US is asking to dismiss two things. So there’s two things that are at play here, Chris. So Fifth Amendment takings claim and a breach of an implied contract. So before this case, and I think what’s just incredibly fun for me, and it’s weird to even hear myself say that, is that I love reading these things and seeing things I’ve never seen before. So I have no idea what a takings claim is. I know what the Fifth Amendment is, I think, in principle. But this is a super interesting trade secret case, because essentially what Vanda is saying is that, hey, these folks at the FDA disclosed our confidential information to competitors, and that’s not good. So I have tons of questions for you, but I would love, you know, with that little bit of setup to sort of hear your thoughts on the case.
Chris (07:59.927)
Sure, Tim. And this one is interesting to me because it is so different. If you read enough trade secret cases, after a while, they tend to fall into familiar patterns or familiar buckets where an employee typically will leave, they’ll take information with them to a competitor, and then the competitor uses that information to develop products more quickly or compete with that first company. And you see that same pattern over and over and over again.
This Vanda case is fascinating because it doesn’t fall into that pattern. So Vanda produces brand name drugs and they go to the FDA to get marketing approval for various conditions, which is great. And part of the deal with the FDA is I’m going to submit a lot of information to you in getting my drug approved. And the FDA is not supposed to share confidential information from the applicant company with others. And it’s even in 18 USC 1905, where if the government receives trade secrets in the course of their official duties, they’re not supposed to share it.
So what happened here is interesting because there is no competitor. So it’s not like the FDA released a drug and started competing. They just shared some information with generic applicants. So a bunch of companies were trying to get approval for a generic equivalent of two Vanda drugs. And in the process of negotiating with the FDA, the FDA shared some specifications for the drugs with that generic company. And Vanda is upset, but a typical trade secret assertion doesn’t really work because the fact pattern is so different. So Vanda’s lawyers are super creative. Like I love whoever came up with this idea of saying it’s a taking by the government. And you mentioned, Tim, you’re not familiar with takings. You actually are. You just didn’t realize it yet.
So this usually happens regarding real estate, where if the government wants to build a new highway or build new train tracks or a new federal building, and they need to take people’s land—like if there’s a neighborhood there that needs to be demolished to make room for a federal courthouse—the government can’t just take it. They have to fairly compensate you for the value of whatever property you’ve taken.
So what Vanda is saying here very creatively is that by sharing that information, it was actually taking something of value away from Vanda. So again, it’s super creative lawyering, which I always enjoy reading about. I like to think I’m creative, but this one is super creative. It’s impressive.
Tim (11:14.399)
So there were a couple of things where they talked about starting to talk about some of the specifics that were disclosed. And I thought, as both chemistry nerds, it sort of fit into our, and I’m looking for it here in the complaint, or the…
Chris (11:40.886)
So it had to do with the dissolution rate. So how quickly these drugs dissolve once they’re swallowed or ingested. And it’s further complicated or further interesting that Vanda originally applied with certain dissolution specifications, like parameters. And the FDA didn’t like that. And the FDA actually suggested, hey, if you change it to a different specification…
Tim (11:46.239)
There you go.
Chris (12:11.287)
We will allow your drugs. We’ll grant you the marketing rights. And Vanda, of course, said, yes, that’s great. But then years later, the generic companies applied. And also, the FDA didn’t like their dissolution specifications but then suggested the exact same ones that Vanda agreed to. So it’s, again, a further complicated or further interesting situation where…
The FDA actually suggested it. They weren’t asked. They provided that willingly. And then, of course, the generic said yes, and then they got approval as well. And then Vanda got obviously really upset about it. So…
Tim (12:52.54)
Yeah, so I see here the claimed confidential information regarding the manufacturer’s process for detecting and controlling impurities in the drug’s active ingredient, as well as, quote, the methods through which it controls the size of the crystals of the product itself. So anyway, it comes back to good old chemistry, which is pretty cool. So…
The decision ended up being kind of split, yeah? So it may walk us through what the court decided here.
Chris (13:32.599)
Sure, so this case is still ongoing. It’s still actively being litigated. And this is really a very first step. So what always happens is the plaintiff files a complaint saying defendant did various bad things. And invariably, the defendant will immediately file a motion to dismiss saying there’s some defect or some problem with the plaintiff’s complaint and they should just end the litigation right here.
So there were really three things that the defendant, the government or the FDA in this case, were saying. So first they said that the federal takings isn’t appropriate. Second one had to do with breach of contract. And the third one was actually a statute of limitation argument for the very oldest of the generic companies. So what the court said is the first thing that the federal takings can proceed to trial or to further in the litigation. But the other two were dismissed. So it’s kind of a mixed ruling, but the litigation will proceed. And fortunately for us in the trade secret business, the most interesting argument will be carried forward, and we’ll see how that goes. Again, it’s very creative, and whether you win or lose, it’ll be interesting to see how the court handles a takings clause with this fact pattern.
Tim (15:07.548)
OK, so the breach of an implied contract. So basically, what the courts are saying here is there may be some other statute or regulatory requirement that the FDA keep this stuff confidential, but there is no implied contract here. Is that a correct read?
Chris (15:35.319)
Yeah, I mean, they were saying that the process of applying for drug approval was somehow a contract that got breached. And the court basically said, no, that’s not the right way to think about this. Breach of contract would typically be between two companies where I agreed to do something for you and you pay me or give me something back. And then someone doesn’t do what they’re supposed to.
Here, they said this fact pattern isn’t really appropriate for a breach of contract claim. So the motion to dismiss was granted for that. So Vanda will not be able to carry that cause of action forward. But the idea of the federal takings will still proceed.
