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Florey Institute of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers

United States District Court, N.D. California

March 26, 2014

THE FLOREY INSTITUTE OF NEUROSCIENCE AND MENTAL HEALTH, Plaintiff,
v.
KLEINER PERKINS CAUFIELD & BYERS, KPCB HOLDINGS, INC., DOMAIN ASSOCIATES, LLC, DOMAIN PARTNERS V, L.P., DP V ASSOCIATES, L.P., DOMAIN PARTNERS VII, L.P., DP VII ASSOCIATES, L.P., SEARS CAPITAL MANAGEMENT, LOWELL SEARS, Individually and as Trustee of the Sears Trust and the Sears Trust Dated 3/11/91, CAXTON ADVANTAGE VENTURE PARTNERS, L.P., CAXTON ADVANTAGE LIFE SCIENCES FUND, L.P., STANLEY E. ABEL, PETER M. BREINING, and THOMAS G. WIGGANS, Defendants

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[Copyrighted Material Omitted]

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For The Florey Institute of Neuroscience and Mental Health, Plaintiff: Mark T. Jansen, LEAD ATTORNEY, Pilar Stillwater, Crowell and Moring LLP, San Francisco, CA.

For Kleiner Perkins Caufield & Byers, Domain Associates, LLC, Sears Capital Management, Caxton Advantage Venture Partners, LP, Stanley E. Abel, Peter M. Breining, Domain Partners V, L.P., DP V Associates, L.P., Domain Partners VII, L.P., DP VII Associates, L.P., Lowell Sears, Individually and as Trustee of The Sears Trust and The Sears Trust Dated 3/11/91, Caxton Advantage Life Sciences Fund, L.P., Defendants: Maren Jessica Clouse, Robert B. Hawk, Stacy R. Hovan, Hogan Lovells U.S. LLP, Menlo park, CA.

For KPCB Holdings, Inc., Defendant: Maren Jessica Clouse, Robert B. Hawk, Hogan Lovells U.S. LLP, Menlo Park, CA.

For Thomas G. Wiggans, Defendant: Steven Mark Schatz, LEAD ATTORNEY, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA; Catherine Eugenia Moreno, PRO HAC VICE, Benjamin Matthew Crosson, Charles Tait Graves, Wilson Sonsini Goodrich & Rosati APC, Palo Alto, CA.

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ORDER GRANTING MOTIONS TO DISMISS

Samuel Conti, UNITED STATES DISTRICT JUDGE.

I. INTRODUCTION

Now before the Court is the above-captioned Defendants' motions to dismiss Plaintiff the Florey Institute of Neuroscience and Mental Health's (" Plaintiff" ) first amended complaint. ECF No. 43 (" FAC" ). All Defendants except Thomas G. Wiggans join in one motion to dismiss, ECF No. 53 (" KPCB MTD" ), while Mr. Wiggans filed his own motion, ECF No. 77 (" Wiggans MTD" ).[1] The motions are fully

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briefed.[2] The Court finds the matter appropriate for resolution without oral argument. Civ. L.R. 7-1(b). As discussed below, the motions are GRANTED.[3]

II. BACKGROUND

The Court summarized the facts of this case in its September 26, 2013 Order. ECF No. 41 (" Sept. 26 Order" ). It repeats some of the germane facts below, followed by a procedural summary.

A. Factual Background

In 1982, Plaintiff entered a research collaboration and IP licensing agreement with Genentech. FAC ¶ ¶ 28-31. The agreement concerned Plaintiff's extensive work on the relaxin peptide, whose many uses include treating acute heart failure. Id. ¶ ¶ 1-11. In 1993, Genentech established a separate entity that became Connectics Corporation (" CNCT" ). Id. ¶ 32. CNCT was tasked with working on Genentech's relaxin projects. Id. That same year, Plaintiff granted Genentech's request to sublicense Plaintiff's intellectual property to CNCT, as it was required to do under the contract at the time. Id. ¶ 34. In 1994 that agreement was replaced by an amendment that granted Genentech the right to receive royalties on any licensed product sales by CNCT, and CNCT in turn agreed to pay Plaintiff royalties and other payments that would be due from Genentech per the 1982 Agreement. Id. ¶ 30.

In 1995, CNCT informed Plaintiff in a letter from Defendant Wiggans (then the CNCT CEO and president) that it wanted to enter a new research agreement with Plaintiff. Id. ¶ 35. CNCT wanted to reduce the royalty rate under the existing contracts, because it believed the high rate would deter corporate drug-development partners, so it proposed reducing the royalty rate and adding terms that would give Plaintiff a share of future up-front and milestone payments paid by CNCT's future drug-development partners. Id. CNCT and Plaintiff negotiated between 1995 and 1998, after which they reached an agreement. Id. ¶ ¶ 32-35 & Ex. 1 (" 1998 Agreement" ). The 1998 Agreement reduced future royalty payments, but guaranteed Plaintiff 1 percent of future up-front payments and 15 percent of later milestone payments. Id. ¶ 38; 1998 Agreement § 5.2.

During the negotiations, Plaintiff expressed concerns that CNCT might try to avoid future payment obligations by structuring future drug development agreements and related payments to avoid the parties' intent. Id. ¶ 38. Plaintiff contends that it sought assurances to this effect from CNCT, after which " CNCT reassured [Plaintiff] that its concerns were unfounded, stating that CNCT would not attempt to convince a drug development company partner to restructure any future payments so as to avoid the duty to compensate [Plaintiff] for its relaxin know-how and related patent rights, and also pointed out that the duty to compensate [Plaintiff] would be apparent from the structuring of any future relationships and the nature, timing, and conditions for future payments from any drug development partner." Id. ¶ 38.

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The 1998 Agreement includes no clause to that effect, but Plaintiff states that it relied on CNCT's statements in entering the 1998 Agreement and agreeing to its licensing and royalty provisions. Id.

In 2001, CNCT ceased its development efforts after its clinical trials for scleroderma -- its focus on relaxin research up to that point -- were deemed unsuccessful. Id. ¶ ¶ 45-46. In 2002, CNCT's relaxin team established a new commercial entity, Corthera (at first called BAS Medical, Inc.). Id. In 2003, Defendants Kleiner Perkins and Breining, a Corthera founder, approached Plaintiff to seek assignment of the relaxin-related license from CNCT to Corthera. Id. ¶ ¶ 46-47.

In July 2003, Corthera negotiated an amendment to the 1998 Agreement that extended the agreement's terms, permitted assignment of CNCT's rights and obligations under the 1998 Agreement to Corthera, and further reduced Plaintiff's royalty rates to 2 percent of net sales. Id. ¶ ¶ 48-49 & Ex. 2 (" 2003 Amendment" ).[4] The 1 percent up-front payments and 15 percent milestone payments, described in the 1998 Agreement, would remain the same. Id. Corthera's rationale for negotiating these changes was the same as CNCT's: it was too small to commercialize relaxin itself, so it needed to license Plaintiff's IP and know-how to a bigger partner, which might balk at the royalty payments -- thus the change in payment terms. See id. Concurrently with the spring 2003 negotiations, Corthera brokered an agreement with CNCT for the assignment of CNCT's rights under the 2003 Amendment, and shortly after Plaintiff had agreed to that Amendment, Corthera announced that CNCT had assigned to Corthera its worldwide rights to relaxin. Id. ¶ 50. Plaintiff contends that after Corthera had obtained Plaintiff's IP rights, Defendants made substantial investments to Corthera. Id.

From 2003 through 2009, Plaintiff and Corthera collaborated on relaxin research. Id. ¶ ¶ 51-52. Plaintiff alleges that throughout this time, Defendants knew that Plaintiff was working on Corthera's relaxin projects and that Plaintiff had granted Corthera a license to its relaxin patents in expectation of future payments. See ¶ 52. During this period, in 2007, Corthera hired Defendant Abel as its new CEO and changed its focus from dermatology applications to cardiovascular treatments. Id. ¶ 53. In May 2008, Corthera reported that ongoing clinical trials indicated that relaxin could prove beneficial for cardiac treatment, and in March 2009, Corthera completed those clinical trials, demonstrating positive results for relaxin in patients with acute heart failure. Id. ¶ ¶ 54-55. It initiated phase III clinical trials in October 2009. Id.

Shortly thereafter, in December 2009, Plaintiff learned from a press release issued by Corthera's outside counsel, Kaye Scholer, that the pharmaceutical company Novartis had agreed to purchase Corthera up-front for $120 million in cash, characterized as a stock-purchase agreement that would leave Corthera as a wholly owned subsidiary of Novartis. Id. ¶ 56 & Ex. 3 (" Dec. Press Release" ). Under the Novartis-Corthera agreement, Novartis was to make additional milestone payments of up to $500 million to the Corthera shareholders (not Corthera itself). Id. In January 2010, Novartis purchased all of Corthera's stock, and its outside counsel issued a press release stating that Novartis had acquired " exclusive worldwide rights to relaxin . . . through the acquisition of . . . Corthera, Inc." Id. Exs. 4 (" Novartis Agreement" ), 5 (" Kaye Scholer Press Release" ).

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Up to that point, Defendants controlled most of Corthera's stock, comprised a majority of Corthera's board, and controlled and directed Corthera's entry into the Novartis Agreement. Id. ¶ ¶ 56-63. Defendant Wiggans was also on Corthera's board during this time. Id. ¶ 35.

B. Procedural Background

Plaintiff originally pled four causes of action against all Defendants except the New Defendants and Mr. Wiggans: (1) conversion, (2) misappropriation, (3) unjust enrichment, and (4) constructive trust. Defendants moved to dismiss, and the Court granted that motion in part and denied it in part. Sept. 26 Order at 1.

The Court held, first, that no assignment occurred in the Corthera-Novartis deal as a matter of law. Id. at 12-13. Second, as to conversion, the Court held that Plaintiff failed to state a claim because it did not sufficiently plead what Defendants had allegedly converted: IP or some unspecified payment right. See id. at 13-14. Third, the Court held that Plaintiff failed to state a claim for misappropriation because its pleadings were unacceptably vague as to what had been misappropriated and who misappropriated it, partly because Plaintiff's misappropriation claim relied on its conversion claim. Id. at 14-16. Finally, the Court rejected Defendants' motion to dismiss Plaintiff's unjust enrichment claim in part because Defendants had mischaracterized Plaintiff's claim, rendering their arguments inapposite. See id. at 16-17. The Court allowed Plaintiff to plead the unjust enrichment claim in the alternative. Id. at 18.

Now, based on the facts described above from Plaintiff's FAC, Plaintiff asserts four causes of action against Defendants: (1) conversion of intellectual property, (2) conversion of proceeds owed to Plaintiff, (3) misappropriation, and (4) unjust enrichment under quasi-contract. Defendants move to dismiss. The two motions to dismiss now focus primarily on whether Plaintiff has stated claims under those four ...


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