IP Law Daily Inventor owned probiotic compound ‘know how’; trade secret misappropriation claims against him dismissed
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Wednesday, October 10, 2018

Inventor owned probiotic compound ‘know how’; trade secret misappropriation claims against him dismissed

By Joseph Arshawsky, J.D.

In an action over ownership of trade secrets in a probiotic compound sold under the mark "VSL#3," as a matter of contract law the inventor owned the "know how" and therefore the inventor’s former business partners’ claims against the inventor for using his formula, processes, and data to develop a generic version of the drug, based on misappropriation of the "know how" were dismissed by the federal district court in Greenbelt, Maryland (De Simone v. VSL Pharmaceuticals, Inc., October 9, 2018, Chuang, T.).

In 1998, Claudio De Simone, a professor who did extensive research in the field of probiotics, and two fellow researchers were granted U.S. Patent No. 5,716,615 ("the ’615 Patent") for "Dietary and Pharmaceutical Compositions Containing Lyophilized Lactic Bacteria, Their Preparation and Use," with that patent expiring in February 2015. The ’615 patent consisted of a pharmaceutical combination of eight strains of pure lactic acid bacteria used as treatment for a number of medical conditions, and was the basis for the probiotic now sold as VSL#3. To produce the VSL#3 product under the patent, De Simone also developed certain "know-how," a type of trade secret which in this instance consists of a unique biochemical profile, formulae, processes, data, and other technical and non-technical information necessary to make, develop, and use VSL#3.

In 1999, De Simone entered into an agreement with Sigma-Tau Group, a large Italian pharmaceutical conglomerate, which granted to Sigma-Tau "an exclusive option for an exclusive license" related to his right on the patent and on the "Know-How" for the purpose of commercializing the ’615 patent in the United States as a drug. In 2000, De Simone and Sigma-Tau formed VSL Pharmaceuticals, and De Simone was installed as its chief executive officer. VSL partnered with Danisco USA to manufacture a product based on the ’615 patent. To ensure that VSL could continue to supply the U.S. market after the expiration of the patent in February 2015, De Simone and VSL executed in January 2010 an agreement in which De Simone granted VSL "the exclusive right to [De Simone's] Know How" for the manufacture, production, marketing, and sale of VSL#3 for the U.S. market.

In 2014, the VSL Board of Directors notified De Simone that VSL owned the rights to all intellectual property related to VSL#3. Subsequently, De Simone resigned from his VSL board position and terminated the 2010 Know-How Agreement. De Simone then partnered with ExeGi Pharma LLC to launch a generic version of VSL#3, known as "Visbiome." After the ’615 patent expired in February 2015, VSL continued to order VSL#3 for sale and Sigma-Tau continued to market the product in the United States. Danisco, for its part, continued to fill VSL's orders.

In May 2015, De Simone informed Danisco that because the 2010 Know-How license had been terminated, VSL and Sigma-Tau were "no longer authorized purchasers" of VSL#3 and "all references to Buyer in the Supply Agreement shall apply solely to me and not to VSL." De Simone filed suit against VSL and Sigma-Tau, seeking a declaratory judgment that he owned the Know-How used to formulate and produce VSL#3, and alleging in part misappropriation of trade secrets. In June 2015, VSL filed a Motion for a Preliminary Injunction seeking to enjoin De Simone from interrupting VSL's supply of VSL#3, imparting the Know-How to ExeGi; and seeking to enjoin ExeGi from using any part of the Know-How that it may already possess. The court determined in September 2015 that VSL was not entitled to a preliminary injunction blocking De Simone from using the Know-How to develop a generic version of the drug, the federal district court in Greenbelt, Maryland has ruled, but he was enjoined from interfering with the business partners’ supply chain until the expiration of the Supply Agreement.

De Simone and ExeGi filed a motion for summary judgment seeking judgment on all of their claims and all counterclaims asserted by VSL. VSL filed a cross motion for partial summary judgment. The issues in dispute were which party owns the Know-How; whether De Simone, as the Chief Executive Officer of VSL, breached a fiduciary duty as he departed the company to launch Visbiome ("the De Simone Formulation"); whether De Simone and his new company, ExeGi, infringed the VSL#3 trademark owned by VSL while launching and marketing Visbiome; and whether either side has engaged in false advertising as each seeks to market the competing probiotics. The court decided as a matter of contract interpretation that DeSimone owned the "Know-How," and its rulings flowed from that determination.

Discovery since the preliminary injunction motion. Discovery has produced no additional direct evidence of the parties' intent on whether the Mendes Assignment transferred ownership of the Know-How to VSL.

Ownership of the Know-How. VSL argued that the language of the Mendes Assignment plainly transfers the Know-How to VSL. The court previously rejected that argument and instead found that the Mendes Assignment was ambiguous on the question of whether the reference to the transfer of the VSL#3 trademark from De Simone to VSL implicitly transferred ownership of the Know-How as well. VSL cited no new facts or legal authority on this point, so the court declined to revisit its prior determination as to the ambiguity of the Mendes Assignment. Although the parties submitted additional evidence collected through discovery, the most persuasive extrinsic evidence on the proper interpretation of the Mendes Assignment remains the 1999 Option Agreement and the 2001 Patent Agreement. These agreements bookend the Mendes Assignment and so are particularly probative on the issue of how the parties understood and defined the multiple forms of intellectual property involved in these contractual relationships. The additional evidence offered by VSL with its motion failed to undermine the court's prior conclusion. The deposition of VSL's corporate representative established that there is no direct, extrinsic evidence of the parties' intent in entering into the Mendes Assignment.

"In the end, the most significant flaw in the additional evidence submitted by VSL is that it fails to show in any way that De Simone transferred the Know-How to Mendes prior to the Mendes Assignment," the court said. Regardless of what the parties believed the term "VSL#3" to mean, if Mendes did not own the Know-How at the time of the Mendes Assignment, there is no way to read it as having transferred the Know-How to VSL. The court added, "Where the ambiguity of the Mendes Assignment can be resolved by consideration of other, contemporaneous agreements between the parties, specifically, the 1999 Option Agreement and the 2001 Patent License Agreement, and VSL provides no other evidence that fairly draws that interpretation into question, the Court finds those agreements to be ‘dispositive of the interpretative issue.’" The court thus concluded that, as a matter of contract interpretation, De Simone owns the Know-How.

Trade secrets. The claim that the Know-How does not qualify as a trade secret is not supported by the record. The evidence does not establish that the Know-How is "readily ascertainable," whether from the packaging of VSL#3 or Visbiome or from testing. The core issue on the Know-How claims is not whether the Know-How is currently a trade secret, but whether De Simone transferred ownership rights in the Know-How to VSL, and, if he did, whether as a result he is liable to VSL for misuse of rights owned by VSL. The De Simone Parties' motion for summary judgment on Count I of the complaint was granted, and De Simone will be declared to be the owner of the Know-How. Because De Simone cannot be held liable for misappropriating intellectual property that he rightfully owned, and because ExeGi licensed the Know-How from De Simone, the VSL Parties' other claims based on their alleged ownership of the Know-How must also be dismissed.

The fiduciary duty claims. VSL asserts that De Simone breached his fiduciary duty as CEO of VSL in a number of ways. In the breach of fiduciary duty and conspiracy counts, VSL provides a non-exhaustive list of actions it believes amount to malfeasance on the part of De Simone, most of which relate to agreements by De Simone, in his personal capacity, to license the Know-How. In the fraud claim, VSL cites three agreements that it asserts were fraudulent transactions designed to enable De Simone to supplant VSL in the marketplace.

To the extent that certain parts of the claims of breach of fiduciary duty, conspiracy, and fraud are premised on alleged self-dealing arising from De Simone's improper appropriation of the Know-How, they are dismissed with prejudice because De Simone owned the Know-How. Next, any claim that the terms of the 2010 Know-How Agreement, including the change in-control provision, constituted a breach of fiduciary duty, conspiracy, or fraud accrued when that agreement was signed in January 2010, more than five years before VSL filed its counterclaim in June 2015.

VSL has also asserted breach of fiduciary duty, conspiracy, and fraud relating to events since June 3, 2012. The court concluded that the remaining parts of VSL' s breach of fiduciary duty claims are viable, and that the De Simone Parties' request for summary judgment on these claims will be denied. Those claims, as limited above, will proceed to trial.

Conversion. VSL pleaded a cause of action for conversion against De Simone, asserting that upon his departure from VSL, he took with him confidential and proprietary information, such as VSL documents and computers. There are genuine issues of material fact. The De Simone Parties' Motion for Summary Judgment as to this claim will therefore be denied.

2014-2016 VSL#3 sales claims. The uncontested facts establish that VSL had an obligation under the Patent License Agreement to pay De Simone royalties for sales of VSL#3 and that from August 2014 until the expiration of that agreement in February 2015, VSL failed to do so. De Simone's motion for summary judgment as to Count II of the complaint was granted on the issue of liability, with damages to be proven at trial.

On the unjust enrichment claim, whether the VSL Parties' acquisition and sale of VSL#3 up to January 31, 20l6 was unjust depends significantly on whether De Simone's November 2014 termination of the 2010 Know-How Agreement was itself unjust, a question that involves a factual dispute. Because there remains a genuine issue of material fact as to the motivation and necessity for the termination of the 2010 Know-How Agreement, summary judgment on this claim is not warranted.

DeSimone’s trade secret claims. The De Simone Parties assert that in stockpiling supplies of Danisco-manufactured VSL#3 after the termination of the 2010 Know-How Agreement, the VSL Parties misappropriated De Simone's Know-How, in violation of the Maryland Uniform Trade Secrets Act ("MUTSA"), and engaged in a civil conspiracy to do so. Because the record contains no evidence that VSL acquired secret information simply by virtue of receiving and shipping VSL#3 product manufactured by Danisco, the VSL Parties will be granted summary judgment on these claims, which will be dismissed with prejudice. The De Simone Parties' motion as to these claims is denied.

Trademark infringement. The VSL Parties have pleaded six trademark infringement and unfair competition claims against the De Simone Parties pursuant to the Lanham Act, as well as section 1-414 of the Business Regulations Article of the Maryland Code. Here, contrary to the suggestion of the VSL Parties, a substantial portion of the evidence relating to alleged trademark infringement deals with the De Simone Parties' marketing efforts to a sophisticated buying audience of medical professionals, who could be presumed to be less susceptible to confusion. The fact that the parties are vigorously contesting the quality of their respective products, with De Simone asserting that Visbiome is superior to VSL#3, further supports the conclusion that confusion has not been established as a matter of law. The VSL Parties' trademark claims are thus properly left for a jury.

The parties' false advertising claims, as well as the related tortious interference with prospective economic advantage claims asserted by Leadiant and Alfasigma, must be resolved at trial.

This case is No. 8:15-cv-01356-TDC.

Attorneys: Jeremy W. Schulman (Schulman Bhattacharya, LLC) for Claudio De Simone and ExeGi Pharma, LLC. Andrew D. Mathews (Williams Mullen PC) VSL Pharmaceuticals, Inc. Charles S. Fax (Rifkin Livingston Levitan and Silver LLC) for Leadiant Biosciences, Inc. f/k/a Sigma-Tau Pharmaceuticals, Inc. and Sigma-Tau HealthScience USA, Inc. Brian T. Carr (Herzfeld & Rubin, P.C.) for Alfasigma USA, Inc.

Companies: ExeGi Pharma, LLC; VSL Pharmaceuticals, Inc.; Leadiant Biosciences, Inc. f/k/a Sigma-Tau Pharmaceuticals, Inc.; Sigma-Tau HealthScience USA, Inc.; Alfasigma USA, Inc.

MainStory: TopStory Trademark TradeSecrets MarylandNews

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