The Florey Institute of Neuroscience and Mental Health v. Kleiner Perkins Caufield & Byers et al

Filing 90

ORDER by Judge Samuel Conti granting 53 Motion to Dismiss; granting 77 Motion to Dismiss (sclc2, COURT STAFF) (Filed on 3/26/2014)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court

For the Northern District of California

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) Case No. CV 12-6504 SC
)
THE FLOREY INSTITUTE OF
) ORDER GRANTING MOTIONS TO
NEUROSCIENCE AND MENTAL HEALTH, ) DISMISS
)
Plaintiff,
)
)
v.
)
)
KLEINER PERKINS CAUFIELD &
)
BYERS, KPCB HOLDINGS, INC.,
)
DOMAIN ASSOCIATES, LLC, DOMAIN )
PARTNERS V, L.P., DP V
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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
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Trust Dated 3/11/91, CAXTON
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ADVANTAGE VENTURE PARTNERS,
)
L.P., CAXTON ADVANTAGE LIFE
)
SCIENCES FUND, L.P., STANLEY E. )
ABEL, PETER M. BREINING, and
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THOMAS G. WIGGANS,
)
)
Defendants.
)
)

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I.

INTRODUCTION

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Now before the Court is the above-captioned Defendants'

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motions to dismiss Plaintiff the Florey Institute of Neuroscience

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and Mental Health's ("Plaintiff") first amended complaint.

ECF No.

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43 ("FAC").

All Defendants except Thomas G. Wiggans join in one

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motion to dismiss, ECF No. 53 ("KPCB MTD"), while Mr. Wiggans filed

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his own motion, ECF No. 77 ("Wiggans MTD"). 1

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briefed. 2

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without oral argument.

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motions are GRANTED. 3

The motions are fully

The Court finds the matter appropriate for resolution
Civ. L.R. 7-1(b).

As discussed below, the

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8 II.

BACKGROUND

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The Court summarized the facts of this case in its September

United States District Court

For the Northern District of California

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26, 2013 Order.

ECF No. 41 ("Sept. 26 Order").

It repeats some of

11

the germane facts below, followed by a procedural summary.

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A.

Factual Background

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In 1982, Plaintiff entered a research collaboration and IP

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licensing agreement with Genentech.

FAC ¶¶ 28-31.

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concerned Plaintiff's extensive work on the relaxin peptide, whose

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many uses include treating acute heart failure.

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1993, Genentech established a separate entity that became

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Connectics Corporation ("CNCT").

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working on Genentech's relaxin projects.

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Plaintiff granted Genentech's request to sublicense Plaintiff's

Id. ¶ 32.

The agreement

Id. ¶¶ 1-11.

In

Id.

CNCT was tasked with
That same year,

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27
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The FAC adds Defendants KPCB Holdings, Inc.; 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); and
Caxton Advantage Life Sciences Fund, L.P. The parties and the
Court refer to these Defendants as the "New Defendants," as opposed
to the "Original Defendants" named in Plaintiff's original
complaint, ECF No. 1.
2

ECF Nos. 70 ("Opp'n to KPCB"), 74 ("Reply to KPCB"), 79 ("Opp'n
to Wiggans MTD"), 80 ("Wiggans Reply").
3

Both motions to dismiss also include requests to strike portions
of the FAC. Since the Court has granted the motions to dismiss,
the motions to strike are DENIED AS MOOT.

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intellectual property to CNCT, as it was required to do under the

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contract at the time.

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replaced by an amendment that granted Genentech the right to

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receive royalties on any licensed product sales by CNCT, and CNCT

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in turn agreed to pay Plaintiff royalties and other payments that

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would be due from Genentech per the 1982 Agreement.

Id. ¶ 34.

In 1994 that agreement was

Id. ¶ 30.

In 1995, CNCT informed Plaintiff in a letter from Defendant

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Wiggans (then the CNCT CEO and president) that it wanted to enter a

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new research agreement with Plaintiff.

Id. ¶ 35.

CNCT wanted to

United States District Court

For the Northern District of California

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reduce the royalty rate under the existing contracts, because it

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believed the high rate would deter corporate drug-development

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partners, so it proposed reducing the royalty rate and adding terms

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that would give Plaintiff a share of future up-front and milestone

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payments paid by CNCT's future drug-development partners.

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CNCT and Plaintiff negotiated between 1995 and 1998, after which

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they reached an agreement.

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Agreement").

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but guaranteed Plaintiff 1 percent of future up-front payments and

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15 percent of later milestone payments.

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5.2.

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Id.

Id. ¶¶ 32-35 & Ex. 1 ("1998

The 1998 Agreement reduced future royalty payments,

Id. ¶ 38; 1998 Agreement §

During the negotiations, Plaintiff expressed concerns that

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CNCT might try to avoid future payment obligations by structuring

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future drug development agreements and related payments to avoid

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the parties' intent.

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assurances to this effect from CNCT, after which "CNCT reassured

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[Plaintiff] that its concerns were unfounded, stating that CNCT

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would not attempt to convince a drug development company partner to

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restructure any future payments so as to avoid the duty to

Id. ¶ 38.

Plaintiff contends that it sought

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compensate [Plaintiff] for its relaxin know-how and related patent

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rights, and also pointed out that the duty to compensate

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[Plaintiff] would be apparent from the structuring of any future

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relationships and the nature, timing, and conditions for future

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payments from any drug development partner."

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Agreement includes no clause to that effect, but Plaintiff states

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that it relied on CNCT's statements in entering the 1998 Agreement

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and agreeing to its licensing and royalty provisions.

Id. ¶ 38.

The 1998

Id.

In 2001, CNCT ceased its development efforts after its

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United States District Court

For the Northern District of California

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clinical trials for scleroderma -- its focus on relaxin research up

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to that point -- were deemed unsuccessful.

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CNCT's relaxin team established a new commercial entity, Corthera

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(at first called BAS Medical, Inc.).

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Kleiner Perkins and Breining, a Corthera founder, approached

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Plaintiff to seek assignment of the relaxin-related license from

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CNCT to Corthera.

Id.

Id. ¶¶ 45-46.

In 2002,

In 2003, Defendants

Id. ¶¶ 46-47.

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In July 2003, Corthera negotiated an amendment to the 1998

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Agreement that extended the agreement's terms, permitted assignment

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of CNCT's rights and obligations under the 1998 Agreement to

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Corthera, and further reduced Plaintiff's royalty rates to 2

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percent of net sales.

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The 1 percent up-front payments and 15 percent milestone payments,

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described in the 1998 Agreement, would remain the same.

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Corthera's rationale for negotiating these changes was the same as

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CNCT's: it was too small to commercialize relaxin itself, so it

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needed to license Plaintiff's IP and know-how to a bigger partner,

Id. ¶¶ 48-49 & Ex. 2 ("2003 Amendment"). 4

Id.

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28

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Collectively, the 1998 Agreement and 2003 Amendment are the
"Agreements."

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which might balk at the royalty payments -- thus the change in

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payment terms.

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negotiations, Corthera brokered an agreement with CNCT for the

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assignment of CNCT's rights under the 2003 Amendment, and shortly

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after Plaintiff had agreed to that Amendment, Corthera announced

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that CNCT had assigned to Corthera its worldwide rights to relaxin.

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Id. ¶ 50.

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Plaintiff's IP rights, Defendants made substantial investments to

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Corthera.

United States District Court

Concurrently with the spring 2003

Plaintiff contends that after Corthera had obtained

Id.

From 2003 through 2009, Plaintiff and Corthera collaborated on

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For the Northern District of California

See id.

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relaxin research.

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this time, Defendants knew that Plaintiff was working on Corthera's

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relaxin projects and that Plaintiff had granted Corthera a license

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to its relaxin patents in expectation of future payments.

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52.

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its new CEO and changed its focus from dermatology applications to

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cardiovascular treatments.

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reported that ongoing clinical trials indicated that relaxin could

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prove beneficial for cardiac treatment, and in March 2009, Corthera

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completed those clinical trials, demonstrating positive results for

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relaxin in patients with acute heart failure.

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initiated phase III clinical trials in October 2009.

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Id. ¶¶ 51-52.

Plaintiff alleges that throughout

See ¶

During this period, in 2007, Corthera hired Defendant Abel as

Id. ¶ 53.

In May 2008, Corthera

Id. ¶¶ 54-55.

It

Id.

Shortly thereafter, in December 2009, Plaintiff learned from a

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press release issued by Corthera's outside counsel, Kaye Scholer,

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that the pharmaceutical company Novartis had agreed to purchase

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Corthera up-front for $120 million in cash, characterized as a

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stock-purchase agreement that would leave Corthera as a wholly

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owned subsidiary of Novartis.

Id. ¶ 56 & Ex. 3 ("Dec. Press

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1

Release").

Under the Novartis-Corthera agreement, Novartis was to

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make additional milestone payments of up to $500 million to the

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Corthera shareholders (not Corthera itself).

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Novartis purchased all of Corthera's stock, and its outside counsel

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issued a press release stating that Novartis had acquired

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"exclusive worldwide rights to relaxin . . . through the

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acquisition of . . . Corthera, Inc."

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Agreement"), 5 ("Kaye Scholer Press Release").

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Defendants controlled most of Corthera's stock, comprised a

Id.

In January 2010,

Id. Exs. 4 ("Novartis
Up to that point,

United States District Court

For the Northern District of California

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majority of Corthera's board, and controlled and directed

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Corthera's entry into the Novartis Agreement.

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Defendant Wiggans was also on Corthera's board during this time.

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Id. ¶ 35.

Id. ¶¶ 56-63.

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B.

Procedural Background

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Plaintiff originally pled four causes of action against all

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Defendants except the New Defendants and Mr. Wiggans: (1)

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conversion, (2) misappropriation, (3) unjust enrichment, and (4)

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constructive trust.

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granted that motion in part and denied it in part.

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at 1.

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Defendants moved to dismiss, and the Court
Sept. 26 Order

The Court held, first, that no assignment occurred in the

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Corthera-Novartis deal as a matter of law.

Id. at 12-13.

Second,

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as to conversion, the Court held that Plaintiff failed to state a

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claim because it did not sufficiently plead what Defendants had

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allegedly converted: IP or some unspecified payment right.

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at 13-14.

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claim for misappropriation because its pleadings were unacceptably

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vague as to what had been misappropriated and who misappropriated

See id.

Third, the Court held that Plaintiff failed to state a

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it, partly because Plaintiff's misappropriation claim relied on its

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conversion claim.

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Defendants' motion to dismiss Plaintiff's unjust enrichment claim

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in part because Defendants had mischaracterized Plaintiff's claim,

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rendering their arguments inapposite.

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allowed Plaintiff to plead the unjust enrichment claim in the

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alternative.

Id. at 14-16.

Finally, the Court rejected

See id. at 16-17.

The Court

Id. at 18.

Now, based on the facts described above from Plaintiff's FAC,

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United States District Court

Plaintiff asserts four causes of action against Defendants: (1)

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For the Northern District of California

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conversion of intellectual property, (2) conversion of proceeds

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owed to Plaintiff, (3) misappropriation, and (4) unjust enrichment

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under quasi-contract.

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to dismiss now focus primarily on whether Plaintiff has stated

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claims under those four causes of action, and whether Plaintiff's

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claims might be preempted by various intellectual property laws.

Defendants move to dismiss.

The two motions

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17 III.

LEGAL STANDARD

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A motion to dismiss under Federal Rule of Civil Procedure

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12(b)(6) "tests the legal sufficiency of a claim."

Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001).

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on the lack of a cognizable legal theory or the absence of

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sufficient facts alleged under a cognizable legal theory."

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Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.

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1988).

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should assume their veracity and then determine whether they

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plausibly give rise to an entitlement to relief."

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Iqbal, 556 U.S. 662, 679 (2009).

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must accept as true all of the allegations contained in a complaint

"Dismissal can be based

"When there are well-pleaded factual allegations, a court

Ashcroft v.

However, "the tenet that a court

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is inapplicable to legal conclusions.

Threadbare recitals of the

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elements of a cause of action, supported by mere conclusory

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statements, do not suffice."

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Twombly, 550 U.S. 544, 555 (2007)).

Id. (citing Bell Atl. Corp. v.

5
6 IV.

DISCUSSION

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A.

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Plaintiff's allegations against the New Defendants, including

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Rule 8

Defendant Wiggans, fail under Rule 8.

In making this conclusion,

United States District Court

For the Northern District of California

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the Court relies on a close reading of Plaintiff's complaint and

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controlling Supreme Court precedent.

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complaint states a plausible claim for relief will . . . be a

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context-specific task that requires the reviewing court to draw on

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its judicial experience and common sense."

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"[W]here the well-pleaded facts do not permit the court to infer

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more than the mere possibility of misconduct, the complaint has

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alleged -- but has not 'show[n]' -- 'that the pleader is entitled

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to relief.'"

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Id.

"Determining whether a

Iqbal, 556 U.S. at 679.

(quoting Rule 8, alterations in the original).

In this case, Defendants did not originally challenge

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Plaintiff's pleadings under Rule 8.

This time they do, though it

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is unclear whether Defendants raise it for both the Original and

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New Defendants, or just for the New Defendants.

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11-12; KPCB Reply at 1.

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himself.

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Defendants and Defendant Wiggans, the Court rejects the Rule 8

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challenge.

See KPCB MTD at

Defendant Wiggans raises the issue for

Wiggans Reply at 3.

As to all Defendants except the New

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However, Plaintiff's pleadings are factually deficient as to

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the New Defendants and Defendant Wiggans, because while Plaintiff

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explains who those Defendants are, none of Plaintiff's allegations

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explain what they did or why it was wrong in a way specific enough

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to satisfy Rule 8.

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Defendant Wiggans's roles were, FAC ¶¶ 23, 32, and that he

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communicated with Plaintiff about changes to the payment structure

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in the agreements, id. ¶ 35, made statements about the CNCT-

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Corthera license, id. ¶ 50, and was a member of Corthera's board,

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id. ¶ 58, at no point does the FAC plausibly explain how Defendant

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Wiggans did anything actionable.

United States District Court

For the Northern District of California

10

While Plaintiff explains, for example, what

Further, there is virtually nothing specific in the FAC as to

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what the New Defendants did.

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parties because they held significant stock in Corthera and

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received most of the payments made by Novartis, but this is hardly

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actionable behavior.

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Plaintiff states that it added those

Plaintiff's claims as to the New Defendants and Defendant

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Wiggans are DISMISSED.

As explained below, since Plaintiff also

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fails to state claims against any Defendant regardless of whether

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Plaintiff satisfied Rule 8 as to Defendant Wiggans or the New

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Defendants, the dismissal is WITH PREJUDICE.

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B.

Conversion

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Plaintiff previously claimed that Defendant converted an

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undifferentiated mix of intellectual property and rights to

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payment.

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parts: conversion of intellectual property, and conversion of

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proceeds owed to Plaintiff.

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Plaintiff now divides its conversion claim into two

A conversion claim arises where there is an "act of dominion

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wrongfully exerted over another's personal property in denial of or

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inconsistent with his rights therein."

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Weiss v. Marcus, 51 Cal.

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App. 3d 590, 599 (Cal. Ct. App. 1975).

Neither legal title nor

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absolute ownership of the property in question is necessary for a

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conversion claim -- "[a] party need only allege it is entitled to

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immediate possession at the time of conversion."

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Day/Eisenberg, LLP, 184 Cal. App. 4th 38, 45 (Cal. Ct. App. 2010).

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Further, "[m]oney cannot be the subject of a cause of action for

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conversion unless there is a specific, identifiable sum involved,

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such as where an agent accepts a sum of money to be paid to another

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and fails to make the payment."

Plummer v.

PCO, Inc. v. Christensen, Miller,

United States District Court

For the Northern District of California

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Fink, Jacobs, Glaser, Weil & Shapiro, LLP, 150 Cal. App. 4th 384,

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395 (Cal. Ct. App. 2007).

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payment, without more, will not suffice" to establish conversion,

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courts have recognized a sufficient ownership interest when the

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plaintiff has a lien on the funds in question.

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v. Zerin, 53 Cal. App. 4th 445, 452 (Cal. Ct. App. 1997); see also

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Weiss, 51 Cal. App. 3d at 598 (finding that the plaintiff had a

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conversion claim where the plaintiff had a lien on the proceeds of

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a settlement).

While "a mere contractual right of

Farmers Ins. Exch.

19

The elements of a claim for conversion are (1) ownership or

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right to possession of property, (2) wrongful disposition of the

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property right, and (3) damages.

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1029 (9th Cir. 2003).

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absolute ownership of the property.

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Cal. App. 3d 1324, 1329 (Cal. Ct. App. 1988).

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that it is entitled to immediate possession of the property at the

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time of conversion.

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2d 217, 236 (Cal. Ct. App. 1954).

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///

Kremen v. Cohen, 337 F.3d 1024,

A plaintiff need not have legal ownership or
Messerall v. Fulwider, 199
It need only allege

Bastanchury v. Times-Mirror Co., 68 Cal. App.

10

1
2

i.

Conversion of Intellectual Property

Plaintiff's conversion of intellectual property claim is

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premised on Defendants' alleged disposal of Plaintiff's domestic

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and foreign relaxin patents, as well as of Plaintiff's relaxin-

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related know-how.

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this by giving, transferring, and assigning to Novartis, "by

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implication if not expressly, the right to use [Plaintiff's] know-

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how" in a way that denied Plaintiff compensation, and also by

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depriving Plaintiff of its exclusive right to license its foreign

United States District Court

For the Northern District of California

10

FAC ¶¶ 70-72.

and domestic patents.

Defendants allegedly accomplished

Id. ¶¶ 72-75.

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Plaintiff first acknowledges that the Court held in its

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September 26 Order that a reverse triangular merger does not

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necessarily effect assignment as a matter of law from the acquired

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company to its acquirer.

15

Order at 12-13).

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assignment as a matter of fact or assignment by implication,

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meaning that Defendants objectively intended to transfer

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Plaintiff's rights from Corthera to Novartis.

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this point, Plaintiff continues to rely on an assignment theory,

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stating that regardless of the Court's holding on assignment as a

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matter of law, Defendants effected an assignment in fact, or an

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assignment by implication, of Plaintiff's licensed intellectual

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property from Corthera to Novartis.

Opp'n to KPCB at 12 (citing Sept. 26

Plaintiff now argues that it sufficiently alleged

Id. at 12-13.

On

Id. at 13-14.

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Defendants respond that "assignments in fact" or "implied

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assignments" do not exist as legal concepts, and that Plaintiff is

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barred from raising the issue due to the Court's prior order on the

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assignment issue.

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because Plaintiff contradicts itself in asserting that any

KPCB Reply at 6-7.

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Defendants also contend that

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assignment was ineffective regardless of intentions, the claim for

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conversion of intellectual property must fail.

3

Opp'n to KPCB at 12-13 & n.3).

4

Merger Agreement itself states that Corthera would use diligent

5

efforts to develop and sell pharmaceuticals, and contend that

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nothing in that Agreement says anything about Novartis itself

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developing or having the right to develop a relaxin-based drug,

8

indicating that Corthera remains licensee and no intellectual

9

property has been either assigned or converted.

Id. at 7 (citing

Further, Defendants note that the

See id. at 7-8

United States District Court

For the Northern District of California

10

(citing Merger Agreement ¶ 9.3).

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Plaintiff's interpretation of the 2003 Amendment as voiding any

12

transfer without Plaintiff's consent, because part of that contract

13

permits non-consensual assignment in the event of a complete stock

14

purchase.

15

Finally, Defendants dispute

As a threshold issue, the Court does not find that its holding

16

on assignment as a matter of law would necessarily bar Plaintiff

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from making a different argument about assignment.

18

round of briefing on this matter concerned whether the reverse

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triangular merger itself effected an assignment, not whether an

20

assignment could have occurred by other means.

21

The original

However, the Court does not find Plaintiff's new position

22

convincing.

Plaintiff contends that Defendants assigned Corthera's

23

license as a matter of fact.

24

maintains that "such an assignment, while clearly intended by

25

Defendants and Novartis, was ineffective," based on Section 6.6 of

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the 2003 Amendment's provision non-assignment clause, which voids

27

assignments made without Plaintiff's consent (with exceptions,

28

noted below).

But in the same section Plaintiff

Opp'n to KPCB at 12 & n.3.

12

In this context,

1

Plaintiff contradicts itself to the point of implausibility.

2

Plaintiff's theory depends on an assignment or transfer having

3

taken place, but Plaintiff's position is that no assignment was

4

possible under any circumstances.

Plaintiff and Defendants also raise the issue of Section

5
6

6.6(b), which reads in relevant part:

7

[E]ither party may assign, upon written notice to the
other, both the rights and obligations of the [1998
Agreement] to the surviving corporation ("Surviving
Party") in any acquisition, merger or consolidation to
which it is a party or to any person who acquires all or
substantially all of its capital stock or assets or of
the assets of that portion of such party's business as
to which the [1998 Agreement] pertains so long as such
party (i) is reasonably determined to be financially
able to fulfill its obligations under this Agreement;
and (ii) does not materially impair the reputation of
[Plaintiff].

8
9

United States District Court

10
For the Northern District of California

See FAC ¶¶ 56, 61, 65, 70, 72.

11
12
13
14

Plaintiff states that nothing in that exception would preclude

15

Plaintiff from being entitled to its share of payments in the event

16

of a partnership agreement.

17

be true, but Plaintiff pled that it never received notice under

18

Section 6.6 or any other provision, and Plaintiff's argument is not

19

that a partnership agreement took place -- its position has always

20

been that the merger was a ruse for Corthera and Novartis to become

21

"partners" without legally triggering the payment provision of the

22

contract. 5

23

notice, any purported assignment based on a stock purchase remains

24

void, in which case Plaintiff's conversion claim fails for the

25

reason stated above: there was never any assignment, so Corthera

Opp'n to KPCB at 15 n.6.

That might

Under Section 6.6(b), given Plaintiff's position on

26
27
28

5

To the extent Defendants contend that they did in fact provide
notice to Plaintiff pursuant to Section 6.6(b), that is a factual
dispute not suitable for decision on a motion to dismiss because
Plaintiff denies receiving notice.

13

1

remains licensee.

Neither of Plaintiff's arguments as to

2

assignment are effective, and without further explanation its

3

pleadings that Defendants gave, transferred, or assigned

4

Plaintiff's patents and know-how to Novartis are impermissibly

5

conclusory.
Even if the Court were to evaluate the entire transaction and

6
7

the parties' conduct, as Plaintiff states is necessary per McCown

8

v. Spencer, 8 Cal. App. 3d 216, 225 (Cal. Ct. App. 1970),

9

Plaintiff's assignment theory is ineffective.

If Plaintiff is

United States District Court

For the Northern District of California

10

asserting that Defendants accomplished the assignment via the

11

merger alone, they are wrong, and the assignment is void for the

12

reasons explained in the September 26 Order.

13

12.

14

transaction and the parties' conduct effected an assignment, then

15

the Agreements Plaintiff attached to its FAC contradict Plaintiff's

16

pleadings, because they explain unambiguously what the effects of a

17

putative assignment would be.

18

Sept. 26 Order at 10-

If Plaintiff is arguing instead that, merger aside, the

The Court also does not find, contrary to Plaintiff's

19

suggestion, that Section 9.3(a) of the Merger Agreement constitutes

20

an assignment, since it says only that Novartis and the "Surviving

21

Corporation" (Corthera, post-merger) would use diligence to achieve

22

milestones.

23

Corthera's rights as a result of the merger.

24

9.3(a).

25

especially when Plaintiff's pleadings do not support the conclusion

26

Plaintiff asks the Court to draw.

27
28

It does not state that Novartis acquires any of
Merger Agreement §

Third-party press releases are not convincing here,

Finally, to the extent Plaintiff suggests that the CortheraNovartis merger itself effected an assignment, the Court's

14

1

September 26 Order on that issue is law of the case.

2

The Court

declines to revisit it.
Plaintiff does not further explain how its pleadings, absent

3
4

an assignment theory, indicate how Defendants had anything to do

5

with the conversion of Plaintiff's intellectual property rights.

6

Plaintiff continues to rely on Defendants' alleged role in the

7

Novartis merger.

8

46-51, 56-58-63, 72).

9

intellectual property distinct from the merger, so it appears that

Opp'n at 14-15 (citing FAC ¶¶ 35-36, 38-40, 44,
Plaintiff has alleged nothing concerning its

United States District Court

For the Northern District of California

10

nothing else in Plaintiff's FAC could support a conversion of

11

intellectual property claim.

12

claims are implausible, impermissibly vague, and fail to state a

13

claim -- the only plausible inference as to conversion of

14

intellectual property, based on Plaintiff's facts, would point

15

toward Plaintiff suing Corthera or Novartis, not Defendants.

16

Court declines to address the parties' preemption arguments at this

17

time.

Beyond these allegations, Plaintiff's

The

Plaintiff's conversion of intellectual property claim is

18
19

DISMISSED WITH PREJUDICE, because the Court finds that further

20

amendment on this claim would be futile.
ii.

21

Conversion of Proceeds Owed

22

Plaintiff's claim for conversion of proceeds owed is based on

23

Plaintiff's alleged reliance on Defendants' promise that Plaintiff

24

would receive the agreed percentages of up-front and milestone

25

payments from drug development partners, per the Agreements.

26

77.

27

that both parties conducted themselves in accordance with the

28

earlier promises and expectations.

FAC ¶

Plaintiff pleads that it relied on those representations, and

15

Id. ¶¶ 78-79.

Defendants

1

characterize Plaintiff's claim for conversion of proceeds owed as

2

being an impermissible attempt to recover a right of payment under

3

the Agreements, which is barred by California law.

4

contend that Plaintiff's claims are barred by the Agreements'

5

integration clause and the parol evidence rule.

6

that its claims are not based on the Agreements, that the parol

7

evidence rule does not foreclose its claims primarily because they

8

are not based on the Agreements, and that the integration clause

9

does not bar its claims because of the same reasons and because

Defendants also

Plaintiff responds

United States District Court

For the Northern District of California

10

Defendants are not parties to the Agreements.

See Opp'n to Wiggans

11

at 12-19; Opp'n to KPCB at 15-19.

12

Court should interpret its conversion of proceeds claim as a claim

13

for the imposition of an equitable lien, or alternatively as a

14

claim for monies had and received.

Plaintiff also contends that the

Opp'n at 16 & n.8. 6

Money cannot be the basis of a cause of action for conversion

15
16

unless there is a "specific, identifiable sum involved, such as

17

where an agent accepts a sum of money to be paid to another and

18

fails to make the payment."

19

Mere contractual rights to payment are not enough to establish

20

conversion, but in some cases courts have recognized ownership

21

interests if plaintiffs have a lien on the funds, which is what

22

Plaintiff now argues.

23

liens can arise from a contract that reveals the intent to charge a

24

particular property with a debt.

25

6

26
27
28

PCO, Inc., 150 Cal. App. 4th at 395.

See Zerin, 53 Cal. App. at 452.

Equitable

Zerin, 53 Cal. App. 4th at 453-

Defendant Wiggans argues that Plaintiff's latter position is an
improper attempt to amend its pleadings through an opposition
brief. Wiggans Reply at 8-10; Reply at 9-12. The Court disregards
the procedural argument because, as the parties' briefs explain,
the merits of Plaintiff's equitable lien theory are resolvable at
this time.

16

1

454.

The question of whether a lien has actually been created

2

under a contract depends upon the facts of the case, including

3

questions of detrimental reliance or unjust enrichment.

Id.

4

Plaintiff relies primarily on an analogy to McCafferty v.

5

Gilbank, 249 Cal. App. 2d 569, 575 (Cal. Ct. App. 1967), in which a

6

plaintiff had been contractually promised payment from the proceeds

7

of her husband's personal injury action, and in reliance on that

8

promise she had failed to file a judgment lien in that action.

9

Court of Appeal held that the plaintiff had an equitable lien on

The

United States District Court

For the Northern District of California

10

the litigation recovery enforceable against the defendant,

11

plaintiff's husband's attorney, who had made the promise to the

12

plaintiff and drafted the contract guaranteeing plaintiff proceeds

13

from the personal injury action.

Id. at 575-76.

The Court does not find McCafferty an apt analogy to this

14
15

case.

While the defendant in McCafferty was, like Defendants here,

16

not himself a party to any contract, he promised plaintiff a

17

specific portion of a specific payment, and drafted a contract to

18

that effect.

19

in 1997, an unnamed representative of CNCT promised Plaintiff that

20

future payments from drug-development partners would not be

21

characterized in ways that avoided paying Plaintiff the agreed

22

percentage under the Agreements, and that any future duty to

23

compensate Plaintiff would be clear from the structure of future

24

relationships and the nature, timing, and conditions for future

25

payments from drug-development partners.

26

claims that Defendant Breining and an unnamed representative of

27

CNCT later reiterated that the Agreements' up-front and milestone

28

payment structures would be preserved.

Id. at 575-76.

Here, Plaintiff alleges at most that

17

FAC ¶ 38.

Id. ¶ 49.

Plaintiff also

This does not

1

come close enough to McCafferty -- the proper analogy would arise

2

if a Defendant had informed Plaintiff of Corthera's impending

3

acquisition, told Plaintiff that it was entitled to a portion of

4

the acquisition price, and then refused to pay Plaintiff.

5

event, it is not clear how promising that the Agreements' payment

6

structures would be preserved would be actionable here: they were

7

preserved.

8

similarly inapposite to this case.

9

In any

Plaintiff's other cases, see Opp'n to KPCB at 16, are

Further, Plaintiff has not established that Defendants, as a

United States District Court

For the Northern District of California

10

virtually undifferentiated group, all knew about the vague promises

11

made in the 1998 Agreement or 2003 Amendment negotiations,

12

especially when Defendants all enter and exit this fact pattern at

13

various times, having come and gone as board members, employees, or

14

investors at times not always made clear in the FAC.

15

equity nor the facts support this, especially since Plaintiff first

16

contended that it was the CEO of CNCT who had made the promise, but

17

Plaintiff now pleads more vaguely that it was "CNCT" who

18

"reassured" Plaintiff about future payments, which does not support

19

the contention either that Defendants themselves knew of any

20

promise, or that it is plausible for the Court to find that any

21

Defendant promised Plaintiff anything particular at all.

22

Plaintiff's FAC fails to allege reasonable or plausible grounds for

23

inferring that Defendants made a promise to Plaintiff at all,

24

especially one that would entitle Plaintiff to payments never

25

described in the Agreements.

26

Neither

Finally, in terms of equity, if Plaintiff were seeking

27

recovery of Partner payments against Corthera or Novartis its

28

theory would be more plausible, but as pled here it appears to be

18

1

an attempt to avoid those avenues for repayment.

See Zerin, 53

2

Cal. App. 4th at 456-57 (distinguishing between express and

3

implicit promises to pay from a fund, and attempts to avoid seeking

4

repayment from proper parties).

5

Court does not find that the equities require the existence of an

6

equitable lien.

7

theories for recovery arise from the Agreements, suggesting to the

8

Court that Plaintiff is simply avoiding pursuing adequate remedies

9

at law against the more apt parties for recovery (e.g., breach of

Under these circumstances, the

First, the Court now finds that all of Plaintiff's

United States District Court

For the Northern District of California

10

contract or infringement of intellectual property claims).

11

Farmers Ins. Exch. v. Smith, 71 Cal. App. 4th 660, 671 (Cal. Ct.

12

App. 1999) (finding same); Zerin, 53 Cal. App. 4th at 456-57.

13

Second, it is inequitable to impose a lien in situations like this

14

one essentially because Plaintiff is able to allege, without much

15

more, a vague promise to do something other than what the contract

16

says.

17

indicate that there was no intent to charge Defendants with a debt

18

(e.g., payment to Plaintiff in the event of an acquisition

19

purportedly undertaken to take the place of a "Partnership"),

20

because the Agreements are integrated and contain no such apparent

21

intention or contractually memorialized promise.

22

Cal. App. 4th at 453-454.

23

See

In fact, the negotiations surrounding the Agreements all

See Zerin, 53

Separately, the Court rejects Plaintiff's footnotes argument

24

that the Court should interpret its conversion of proceeds claim as

25

a claim for money had and received.

26

agrees that plaintiffs need not correctly name each of their

27

actions so long as the facts alleged support a claim, Self Directed

28

Placement Corp. v. Control Data Corp., 908 F.2d 464, 466 (9th Cir.

19

Opp'n at 16 n.8.

The Court

a claim for money had and received.

3

unjust enrichment of a defendant by its receipt of a definite sum

4

to which the plaintiff was justly entitled.

5

Mirror Co., 68 Cal. App. 2d 217, 236 (Cal. Ct. App. 1945).

6

above, the Court does not find such an entitlement here: Plaintiff

7

has not pled that there is a specific sum to which it is entitled,

8

only that a different amount of money should have been

9

characterized as a payment under a different contract, which is not

10

United States District Court

1990), but here the Court does not find that Plaintiff's FAC states

2

For the Northern District of California

1

the point of either a conversion claim or a claim for money had and

11

received -- which appear to be the same claims stated in different

12

ways.

13
14

Such a claim is founded on the

Bastanchury v. TimesAs

Plaintiff's conversion of payment owed claim is DISMISSED WITH
PREJUDICE, since amendment would be futile.

15

C.

16

Apart from the legal and pleading deficiencies described

17

above, Plaintiff's arguments based on promises allegedly made

18

during negotiations for the 1998 Agreement and 2003 Amendment are

19

barred by the parol evidence rule.

20

Defendants do not have standing to rely on the parol evidence rule,

21

since they were not parties to the Agreements.

22

contends that if the Court finds the parol evidence rule

23

applicable, it still does not bar Plaintiff's theory because

24

Plaintiff's claims are not based on the Agreements, that its theory

25

based on the earlier promises would not modify the Agreements (even

26

if they are integrated), and that the Court should admit parol

27

evidence to interpret the terms of the Agreement.

28

Parol Evidence

Plaintiff argues first that

Plaintiff also

As a threshold matter, Plaintiff contends that Defendants

20

1

cannot raise an argument based on the integration clause because

2

they are not parties to the Agreements.

3

rejects this argument.

4

Agreements, and Plaintiff's authority does not support its position

5

that non-parties cannot invoke the parol evidence rule or

6

integrated contracts when the contracts are central to the issue at

7

hand.

8

Ct. App. 2011) (holding the parol evidence rule applicable where

9

contractual obligations are at issue, but noting that in some

Opp'n at 8-9.

The Court

Plaintiff is suing Defendants based on the

See Thomson v. Canyon, 198 Cal. App. 4th 594, at 609 (Cal.

United States District Court

For the Northern District of California

10

cases, it is unclear whether third parties can rely on the rule).

11

Defendants' cases, however, support the conclusion that a non-party

12

can raise these issues in its defense, in certain situations.

13

Cnty. Water Agency v. Belridge Water Storage Dist., 18 Cal. App.

14

77, 86 (Cal. Ct. App. 1993)(noting that a 1978 amendment to

15

California Code of Civil Procedure section 1856 deleted the parol

16

evidence rule's limitation to actions involving contractual

17

parties, and holding that the non-party litigants could rely on the

18

parol evidence rule in a contract interpretation dispute).

19

is more recent than Kern, but it is inapposite.

20

court's discussion of the parol evidence rule in that case

21

concerned whether a defendant in a tort case could rely on the

22

parol evidence rule to exclude facts suggesting that it breached a

23

duty to plaintiff, but the court never questioned the parol

24

evidence rule's applicability to disputes that arise over contract

25

interpretation.

26

Kern

Thomson

The Thomson

Substantively, Plaintiff's first two arguments are addressed

27

in the venerable Supreme Court case Seitz v. Brewers' Refrigerating

28

Machine Co., 141 U.S. 510, 517 (1891):

21

1
2
3
4
5
6
7
8
9

Undoubtedly, the existence of a separate oral agreement
as to any matter on which a written contract is silent,
and which is not inconsistent with its terms, may be
proven by parol, if, under the circumstances of the
particular case, it may properly by inferred that the
parties did not intend the written paper to be a
complete and final statement of the whole of the
transaction between them.
But such an agreement must
not only be collateral, but must relate to a subject
distinct from that to which the written contract
applies; that is, it must not be so closely connected
with the principal transaction as to form part and
parcel of it. And when the writing itself upon its face
is couched in such terms as import a complete legal
obligation, without any uncertainty as to the object or
extent of the engagement, it is conclusively presumed
that the whole engagement of the parties, and the extent
and manner of their undertaking, was reduced to writing.

United States District Court

For the Northern District of California

10
11

In other words, extrinsic evidence relating to a term not actually

12

included in a contract -- like a promise made during a negotiation

13

-- is sometimes permissible if the contract is not integrated and

14

the evidence concerns a matter distinct from the contract.

15

But if that evidence is "so closely connected with the principal

16

transaction as to form part and parcel of it," and the agreement is

17

integrated, the evidence is barred.

18

See id.

See id.

Plaintiff's first argument -- that the parol evidence rule is

19

inapplicable because Plaintiff's claims and the underlying promises

20

are not based on the Agreements -- appears compelling at first,

21

since the parties do not focus on how the parol evidence rule might

22

apply to extrinsic evidence relating to terms that are not actually

23

in the contract.

24

above.

25

Plaintiff bases its claims are part and parcel of the Agreements,

26

and they would not exist without these contracts.

27

Agreements are integrated, and the parties clearly cognizes the

28

import of a merger or acquisition both before enacting either

However, Seitz addresses that, as explained

The right of payment and the intellectual property on which

22

Moreover, the

1

Agreement and in the Agreements themselves.

2

rule bars Plaintiff's reliance on promises allegedly made during

3

the negotiations to impose payment terms other than those included

4

in the Agreements.

5

The parol evidence

Plaintiff's second argument, that Defendants' alleged promises

6

not to structure future arrangements in ways that would evade the

7

Agreements do not modify or contradict the Agreements, is also

8

incorrect.

9

1998 and 2003 promises as extrinsic evidence supporting an

First, to the extent that Plaintiff seeks to use the

United States District Court

For the Northern District of California

10

interpretation of the Corthera-Novartis deal as a "Partnership"

11

under the Agreements, thereby triggering a payment obligation,

12

Plaintiff's theory would modify or contradict the Agreements, which

13

are clear and not capable of Plaintiff's new interpretation.

14

Agreements, as noted above, cognize both partnerships and

15

acquisitions, and per Plaintiff's pleadings, the negotiating

16

parties discussed but did not include clauses governing the

17

situation that has now arisen between these parties.

18

because the promises on which Plaintiff bases its claims were

19

clearly topics of discussion during the Agreements' negotiations,

20

Plaintiff's reliance on the promises for its licensing and payment

21

theories would modify the Agreements by adding terms specifically

22

discussed but not added to the Agreements.

The

Second,

23

Finally, Plaintiff's third argument -- that the Court should

24

admit extrinsic evidence to interpret the Agreements -- is wrong.

25

The Agreements are not reasonably susceptible of the meaning

26

Plaintiff proffers.

27

Erectors, Inc., 971 F.2d 272, 278 (9th Cir. 1992).

28

unconvincing Plaintiff's contention that the promises and the

See Brinderson-Newberg Joint Venture v. Pac.

23

The Court finds

1

parties' behavior elucidate the "Partner" term or anything else in

2

the Agreements.

3

anything in the Agreements; it only permits Plaintiff to seek

4

payment for an acquisition, an event the Agreements cognize, but

5

for which they set up no payment structure like the one Plaintiff

6

requests.

7

promises made during contractual negotiations contradict

8

Plaintiff's argument on this point.

9

evidence rule is to avoid precisely this situation.

United States District Court

For the Northern District of California

10
11
12

Accepting Plaintiff's theory does not clarify

In fact, Plaintiff's references to statements or

The point of the parol
See Seitz, 141

U.S. at 517.
Therefore, the Court finds that Plaintiff's claims are barred
by the parol evidence rule.

13

D.

Misappropriation

14

Plaintiff contends that its claim succeeds based on its

15

conversion claims as to the proceeds of the Novartis transaction,

16

but the Court finds to the contrary.

17

claim only restates its conversion claims, and it fails for the

18

same reasons.

19

finds that amendment would be futile.

Plaintiff's misappropriation

It is DISMISSED WITH PREJUDICE, because the Court

20

E.

Unjust Enrichment

21

Plaintiff maintains that it has a claim for unjust enrichment

22

or quasi-contract, the elements of which are (1) a defendant's

23

receipt of a benefit and (2) unjust retention of that benefit at

24

the plaintiff's expense.

25

4th 1583, 1593 (Cal. Ct. App. 2008).

26

equitable claim that sounds in implied or quasi-contract.

27

Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1167

28

(9th Cir. 1996).

Peterson v. Cellco P'ship, 164 Cal. App.
Unjust enrichment is an
See

"The doctrine applies where plaintiffs, having no

24

1

enforceable contract, nonetheless have conferred a benefit on

2

defendant which defendant has knowingly accepted under

3

circumstances that make it inequitable for the defendant to retain

4

the benefit without paying for its value."

5

Cal. App. 4th 932, 938 (Cal. Ct. App. 2009).

6

Hernandez v. Lopez, 180

In its September 26 Order, the Court rejected some of the

7

Defendants' arguments that the unjust enrichment claim had to be

8

dismissed because, among other things, Plaintiff failed to explain

9

the "benefit" to which it was entitled, and Plaintiff's claim was

United States District Court

For the Northern District of California

10

governed by the express terms of the Agreements.

11

17-18.

12

was inapposite, because parties to a contract have no unjust

13

enrichment claims if the contract expressly defines their rights.

14

Cal Med. Ass'n, Inc. v. Aetna U.S. Healthcare of Cal., Inc., 94

15

Cal. App. 4th 151, 172 (Cal. Ct. App. 2001).

16

held that, with Plaintiff being given leave to amend its conversion

17

and misappropriation claims, the unjust enrichment claim could be

18

pled in the alternative without Plaintiff's having to say so

19

explicitly.

20

potentially remain available.

21

legal arguments and clearer pleadings not at issue in the September

22

26 Order establish that equity does not permit or require the

23

availability of an unjust enrichment claim here.

24

Sept. 26 Order at

The first argument misstated the pleadings, and the second

Finally, the Court

In short, the Court held that unjust enrichment would
However, as explained below, new

First, Defendants challenge Plaintiff's citation to cases

25

finding unjust enrichment where funds specifically designated for

26

the plaintiff were taken or diverted by an agent who was to make

27

the payment to the plaintiff.

28

77 Cal. App. 4th 723, 725 (Cal. Ct. App. 2000); Cnty. of Solano v.

See, e.g., Lectrodryer v. Seoulbank,

25

1

Vallejo Redevelopment Agency, 75 Cal. App. 4th 1262, 1277-78 (Cal.

2

Ct. App. 1999).

3

analogous to this case, as discussed in the above section on

4

conversion of proceeds owed.

5

funds paid to Defendants as consideration for their shares in

6

Corthera were specifically designated for Plaintiff.

7

Defendants are correct that those facts are not

Plaintiff has not indicated that the

Second, Plaintiff's other cases are inapposite not just

8

because, as Defendant Wiggans contends, they involve extra-

9

contractual harm and do not require contract interpretation, but

United States District Court

For the Northern District of California

10

because they depend on the ruling courts' balancing of equities in

11

determining whether plaintiffs had stated claims for unjust

12

enrichment.

13

Ret. Fund, Inc., 339 F.3d 1087, 1093 (9th Cir. 2003) (interpreting

14

Delaware law, finding that unjust enrichment claims against

15

defendants who were not parties to a contract were not necessarily

16

precluded in an action based on securities fraud, but holding that

17

the availability of a legal remedy did not warrant piercing the

18

corporate veil to hold shareholders liable in equity, even if they

19

had been unjustly enriched); Kossian v. Am. Nat'l Ins. Co., 254

20

Cal. App. 2d 647, 649-51 (Cal. Ct. App. 1967) (holding that a

21

plaintiff who had repaired damaged property could recover under a

22

contract made between plaintiff and a non-party, because the

23

defendant insurance company had already been indemnified for the

24

repair and was not entitled to be repaid twice, in money and in

25

labor).

26

See, e.g., McKesson HBOC, Inc. v. N.Y. State Common

These cases do not state maxims about when plaintiffs can

27

recover under an unjust enrichment theory.

28

analyses of the equities at work under those cases' facts, which is

26

They undertake careful

1

what application of unjust enrichment requires.

In this case, the

2

Court does not find that equity counsels allowing an unjust

3

enrichment claim to go forward.

4

Plaintiff's explanation of its conversion claims and the Court's

5

dismissal of those claims above, Plaintiff is ultimately asking for

6

something inequitable: that the Court should hold Defendants, all

7

corporate shareholders or employees of Plaintiff's contracting

8

party at one time or another, liable essentially because Plaintiff

9

believes it was entitled to payments under the Agreements.

The Court finds that, based on

The

United States District Court

For the Northern District of California

10

Court sees no comparison here to the cases Plaintiff cites, in

11

which courts stated that unjust enrichment was available not just

12

because the plaintiffs had been wronged by defendants not parties

13

to related contracts, but because independent factors demanded the

14

application of an equitable remedy.

15

Moreover, the availability of legal remedies against other

16

parties -- Corthera or Novartis -- counsels against the Court's

17

application of an equitable remedy against defendants who are, in

18

most cases, protected by the corporate form.

19

339 F.3d at 1094-95.

20

claims, it is clear that the parties' rights to payment were the

21

subject of the Agreements, and those integrated contracts exclude

22

Plaintiff's theory (despite the fact that they claim their suit is

23

not based on the contracts).

24

This claim was ironically well served by the original complaint's

25

vague pleading, since the clarified claims and briefing show that

26

there is no basis for equitable relief here.

27
28

See McKesson HBOC,

And based on Plaintiff's explanation of its

See Paracor Finance, 96 F.3d at 1167.

The Court DISMISSES Plaintiff's unjust enrichment claim WITH
PREJUDICE, since the Court finds that amendment would be futile.

27

1
2

V.

CONCLUSION
For the reasons described above, the Court GRANTS both motions

3

to dismiss Plaintiff Florey Institute of Neuroscience and Mental

4

Health's complaint.

5

PREJUDICE.

Plaintiff's claims are DISMISSED WITH

6
7

IT IS SO ORDERED.

8
9

Dated: March 26, 2014

United States District Court

For the Northern District of California

10

UNITED STATES DISTRICT JUDGE

11
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