Investors Must Defend Claim Firm Was Cheated

     SAN FRANCISCO (CN) – A neuroscience company can assert an unjust enrichment claim against venture capitalists who allegedly tried to abscond with its intellectual property and cheat it out payments for a new heart drug, a federal judge ruled.
     The Florey Institute of Neuroscience and Mental Health sued the six-member consortium of venture capitalists for allegedly misappropriating Florey’s intellectual property and know-how through an entity they created, Corthera Inc., and selling the rights to its relaxin drug to pharmaceutical company Novartis.
     The named defendants are Kleiner Perkins Caufield & Byers, Domain Associates LLC, Sears Capital Management, Caxton Advantage Venture Partners LP, Stanley E. Abel, and Peter M. Breining. Corthera and Novartis are not named as defendants.
     Florey said in its complaint that it has been doing research on peptides such as relaxin for more than 30 years and is responsible for much of what is known today about relaxin.
     Florey claims it had an agreement with Corthera by which Florey would receive 2 percent of net sales from the proceeds of sales of relaxin-related licensed products, as well as a percentage of any up-front payments and any drug development milestone payments resulting from any relaxin development partnering deals.
     However, Florey learned through a press release in December 2009 that Novartis had agreed to purchase Corthera for $120 million in cash, leaving Corthera as a wholly owned subsidiary of Novartis.
     The press release also allegedly stated that Novartis purchased Cothera in order to acquire the rights to Florey’s relaxin intellectual property, and would pay Corthera’s shareholders up to $500 million in milestone payments related to relaxin commercialization.
     Florey claims Corthera structured its agreement with Novartis to avoid making any payments to Florey.
     On September 26, U.S. District Judge Samuel Conti rejected the venture capitalists’ argument that Florey failed to pierce the corporate veil using the alter ego theory and cannot sue the corporation’s former stockholders for the corporation’s alleged acts.
     “The problem with this argument is that plaintiff has alleged that defendants specifically directed or authorized the torts in question here,” Conti wrote in his 19-page ruling. “Defendants’ insistence that plaintiff fails to plead an alter ego theory is therefore irrelevant. It is not the theory on which plaintiff relies in naming defendants in its complaint.”
     The shareholders’ arguments that Florey is improperly seeking to hold them liable for Corthera’s contractual arguments is appropriate at this stage as Florey is “not exactly saying that Corthera should have paid plaintiff – plaintiff is saying that defendants’ actions were constructed specifically to preempt those contractual payments and to divert future payments to defendants,” Conti wrote.
     However, at this point Florey’s conversion and misappropriation claims against the shareholders do not hold up, Conti said.
     “So far as plaintiff pleads that defendants converted plaintiff’s intellectual property rights, plaintiff’s conversion claim fails because plaintiff has not plausibly alleged that defendants themselves wrongly disposed of the rights in question,” he explained, adding, “Plaintiff’s pleadings and arguments suggest that Novartis obtained access to the intellectual property rights that Corthera licensed from plaintiff, but nothing in plaintiff’s complaint states that defendants themselves – as opposed to Corthera or Novartis – managed to dispose of plaintiff’s intellectual property.”
     Likewise, the misappropriation claim fails because Florey’s “allegations simply do not support the charge that defendants actually appropriated and used plaintiff’s property,” Conti wrote.
     “If anyone actually appropriated or used plaintiff’s intellectual property and know-how, plaintiff’s pleadings seem to point more to Corthera or Novartis. If defendants are being paid for Corthera’s up-front payments and milestones, then apparently Corthera is partnering with someone and is therefore breaching the terms of its contracts with plaintiff, or Novartis is infringing some property right. Plaintiff has not made clear why defendants should be held liable for that by virtue of a merger, even if plaintiff does allege that defendants structured the sale to benefit themselves at plaintiff’s expense,” he continued.
     However, Florey can continue with its claim for unjust enrichment on allegations that the shareholders knew of Florey’s contracts with Corthera but wanted to use Corthera’s future work to enrich themselves, and therefore set up the merger between Novartis and Corthera. The merger was allegedly structured in a way that diverted Corthera’s payments from Florey to the shareholders, which supports an unjust enrichment claim.
     Conti said he would allow Florey to file an amended complaint to fix its deficient misappropriation and conversion claims.

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