Trade Secrets-Corporate Ownership Dispute

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7^th Circuit Court of Appeals

Case Name: GeLab Cosmetics LLC v. Zhuhai Aobo Cosmetics Co., Ltd.

Case No.: 23-1415

Officials: Wood, Scudder, and St. Eve, Circuit Judges.

Focus: Trade Secrets-Corporate Ownership Dispute

The founders of GeLab Cosmetics LLC, an online nail polish retailer based in New Jersey, Xingwang Chen and Shijian Li, both Chinese citizens, are embroiled in a dispute regarding GeLab’s ownership and accusations of trade secret theft. Chen claims a 60% ownership stake in GeLab, with Li holding the remaining 40%. They established a joint venture with Zhuhai Aobo Cosmetics, a China-based nail polish manufacturer, intending for Zhuhai to invest in GeLab and acquire an 80% ownership interest. However, Chen alleges that Zhuhai failed to provide the agreed investment, instead using subpar materials for GeLab’s products, producing knock-off versions under its own brand, and falsely claiming majority ownership of GeLab. Zhuhai contends that Chen was its employee and that it rightfully owns 80% of GeLab.

The dispute originated in China, where Li sued Chen for embezzlement. Chen responded by suing Li, Zhuhai, and Zhuhai’s owners in a New Jersey state court, asserting his 60% controlling interest in GeLab and denying Zhuhai’s ownership claim. The state defendants countered by seeking a declaratory judgment affirming Zhuhai’s 80% ownership. GeLab subsequently filed a separate lawsuit in New Jersey against Li alone, and the state court consolidated the two cases.

Meanwhile, amidst the ongoing New Jersey proceedings, GeLab initiated a federal lawsuit in the U.S. District Court for the Northern District of Illinois against Zhuhai and its owners, alleging violations of federal and Illinois trade secrets laws. The defendants argued that Zhuhai’s ownership of GeLab precluded any claim of trade secret theft. The district court opted to stay the federal case under the Colorado River Water Conservation District v. United States doctrine, citing judicial efficiency in awaiting the New Jersey court’s determination of GeLab’s ownership. GeLab appealed the stay.

The Seventh Circuit upheld the district court’s decision to stay the proceedings. It deemed the federal and state cases parallel, involving the same parties and issues. Moreover, the court identified exceptional circumstances justifying abstention, supported by several factors including forum inconvenience, the need to avoid fragmented litigation, the sequence of jurisdiction acquisition, applicable law sources, state-court capacity to safeguard federal plaintiff rights, progress of both state and federal cases, and concurrent jurisdiction availability.

Affirmed.

Decided 04/24/24

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