De Simone v. VSL Pharmaceuticals, Inc. et al
Filing
676
MEMORANDUM OPINION. Signed by Judge Theodore D. Chuang on 10/9/2018. (rss, Deputy Clerk)
UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
CLAUDIO DE SIMONE and
EXEGI PHARMA, LLC,
Plaintiffs/Counterclaim
Defendants,
v.
VSL PHARMACEUTICALS, INC.,
LEADIANT BIOSCIENCES, INC., and
ALF ASIGMA USA, INC.,
Defendants/Counterclaim
Civil Action No. TDC-15-1356
Plaintiffs,
v.
DANISCO USA, INC.,
Counterclaim Defendant.
MEMORANDUM OPINION
Plaintiffs and Counterclaim Defendants Claudio De Simone and ExeGi Pharma, LLC
("ExeGi") (collectively, "the De Simone Parties") have filed a Motion for Summary Judgment
seeking summary judgment on all of their claims and all counterclaims asserted by Defendants
and Counterclaim
Plaintiffs VSL Pharmaceuticals,. Inc. ("VSL"), Leadiant Biosciences,
("Leadiant") and Alfasigma USA, Inc. ("Alfasigma") (collectively, "the VSL Parties").
Inc.
The
VSL Parties; in tum, have filed a consolidated Cross Motion for Partial Summary Judgment.
Having reviewed the submitted materials, the Court finds no hearing necessary.
See D. Md.
Local R. 105.6. For the reasons set forth below, the De Simone Parties' Motion for Summary
Judgment is GRANTED IN PART and DENIED IN PART, and the VSL Parties' Cross Motion
for Partial Summary Judgment is GRANTED IN PART and DENIED IN PART.
This case centers on disputes among the parties relating to the formulation used in a
probiotic known by the tradename VSL#3 and the "Know-How,"
developed by De Simone,
consisting of a unique biochemical profile, formulae, processes, data, and other technical and
non-technical
information.
Broadly speaking, the parties disagree on which party owns the
Know-How; whether De Simone, as the Chief Executive Officer ("CEO") of VSL, breached a
fiduciary duty as he departed the company to launch Visbiome, a probiotic using the same
formulation then found in VSL#3 ("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.
Relevant factual background is set forth in the Court's September 23, 2015 Memorandum
Opinion on the First Motion for a Preliminary Injunction, De Simone v. VSL Pharm., Inc., 133 F.
Supp. 3d 776, 780-88 (D. Md. 2015), and the June 20, 2016 Memorandum
Opinion on the
Second Motion for a Preliminary Injunction, De Simone v. VSL Pharm., Inc., No. TDC-15-1356,
2016 WL 3466033 at *1-12 (D. Md. June 20,2016).
Additional facts and procedural history are
provided below as necessary.
DISCUSSION
Following the Court's ruling on the parties' Motions to Dismiss, the remaining claims
generally consist of: (1) claims relating to the ownership of the Know-How; (2) claims relating
to the alleged breach of fiduciary duty owed to VSL by De Simone; (3) claims relating to sales of
VSL#3 by VSL between 2014 and 2016, after De Simone resigned from VSL; and (4) trademark
infringement and false advertising claims under the Lanham Act, 15 U.S.C.
2
SS
1051-1141n
(2012). The De Simone Parties seek summary judgment on all claims asserted by all parties in
this case.
The VSL Parties seek summary judgment on the following claims relating to the
ownership of the Know-How, the alleged breach of fiduciary duty, the 2014-2016 sales of
VSL#3, and ExeGi's claim of false advertising:
Counts I, III, IV, V, and VI of the De Simone
Parties' currently operative Complaint ("the Complaint"); Counts I, IV, and XXVIII of VSL's
currently operative Counterclaim ("the VSL Counterclaim");
Counts I and II of Leadiant's
currently operative Counterclaim ("the Leadiant Counterclaim");
and Counts III and IV of
Alfasigma's currently operative Counterclaim ("the Alfasigma Counterclaim").
seek partial summary judgment
The VSL Parties
on the following claims relating to the alleged breach of
fiduciary duty, trademark infringement, and false advertising, consisting of: VSL's Counts XXI
and XXII; Leadiant's Counts IV, V, VI, VII, and VIII; and Alfasigma's Counts I and II.
I.
Legal Standard
Under Federal Rule of Civil Procedure 56, the Court grants summary judgment if the
moving party demonstrates that there is no genuine issue as to any material fact, and that the
moving party is entitled to judgment as a matter oflaw.
Fed. R. Civ. P. 56(a); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986). In assessing the Motion, the Court must believe the evidence
of the non-moving party, view the facts in the light most favorable to the nonmoving party, and
draw all justifiable inferences in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986).
The nonmoving party has the burden to show a genuine dispute on a material fact.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). "A material
fact is one that might affect the outcome of the suit under the governing law."
Spriggs v.
Diamond Auto Glass, 242 F.3d 179, 183 (4th Cir. 2001) (quoting Anderson, 477 U.S. at 248). A
3
dispute of material fact is only "genuine" if sufficient evidence favoring the nonmoving party
exists for the trier of fact to return a verdict for that party. Anderson, 477 U.S. at 248-49.
"When faced with cross-motions
for summary judgment, the court must review each
motion separately on its own merits 'to determine whether either of the parties deserves
judgment as a matter of law.'''
Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir. 2003)
(quoting Philip Morris, Inc. v. Harshbarger, 122 F.3d 58,62 n.4 (1st Cir. 1997)).
II.
The Know-How Claims
A.
Prior Rulings
As part of the First Motion for a Preliminary Injunction, VSL asserted that the KnowHow associated with the De Simone Formulation is a trade secret and that VSL owns that secret.
VSL traced its claim of ownership to the Mendes Assignment, a September 2000 agreement
between VSL and Mendes SRL ("Mendes"), a company owned by De Simone.
The Mendes
Assignment was signed by De Simone on behalf of Mendes and VSL Chief Financial Officer
Antonio Nicolai on behalf of VSL. That agreement transferred to VSL the trademark rights for
the term "VSL#3."
It also transferred "any and all rights to any intellectual property owned or
licensed by [Mendes] and which relates to" the VSL#3 trademark, as well as "proprietary
information," including "trade secrets" and "know-how" relating to the VSL#3 trademark.
De
Simone, 133 F. Supp. 3d at 790.
In adjudicating whether VSL was likely to succeed on its claims of ownership of the
Know-How, the Court found that the language of the Mendes Assignment was ambiguous
because it did not "clearly establish that the Know-How relates to the VSL#3 trademark," such
that extrinsic evidence of the parties' intent needed to be considered.
Id.
Evaluating the
available extrinsic evidence, the Court found that other agreements between the parties provided
4
"specific evidence" that the Mendes Assignment did not transfer the Know-How to VSL. Id. at
792.
In particular,
Pharmaceuticals,
the
1999 Option Agreement
Inc., ("Sigma-Tau"),
between
De Simone
Leadiant's predecessor-in-interest,
and Sigma-Tau
explicitly stated that
De Simone had granted to Sigma-Tau an option for an exclusive license relating to the KnowHow and thus demonstrated that when De Simone wished to convey rights in the Know-How, he
did so expressly, rather than by implication.
Id. at 792-93.
The 1999 Option Agreement also
established that as of November 1999, De Simone himself, not Mendes, continued to own the
Know-How.
Id.
The Court found that because the Assignment transferred only intellectual
property owned or licensed by Mendes, the Know-How could be included in the sweep of the
Mendes Assignment only if there were evidence that in the brief period between the 1999 Option
Agreement and the 2000 Mendes Assignment, De Simone had conveyed the Know-How to
Mendes. Id. No such evidence was presented to the Court on that Motion. Id. at 793.
The Court also found that the 2001 Patent License Agreement, in which De Simone
granted to VSL a license to the patent underlying the De Simone Formulation ("the 615 Patent"),
contradicted VSL's broad characterization
Mendes Assignment.
of the intellectual property transferred through the
Id. As the Court noted, if VSL's reading of the intended scope of the
Mendes Assignment were correct, the patent would have been swept up in it, leaving the parties
with no need the following year for De Simone to agree to license the patent to VSL. Id. at 79293. Other, later agreements referenced by the parties did not warrant a different conclusion.
Id.
at 793-94.
Furthermore, considering documentary evidence relating to the VSL#3 trademark, the
Court noted that at the time of the Mendes Assignment, VSL#3 was an "unattached signifier" not
firmly linked to a probiotic using the De Simone Formulation, such that "it could not have been
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the understanding of the parties that in transferring the trademark VSL#3, De Simone was also
transferring the Know-How."
Id. at 791.
Finally, the Court was unpersuaded by VSL's argument, made at the hearing on the First
Motion for a Preliminary Injunction, that the Know-How necessarily had to be transferred with
the VSL#3 trademark because one cannot practice a trademark without its associated goodwill,
and that goodwill includes "scientific formulations and methodology such as the Know-How."
Id. at 791-92.
The Court found no support for that argument in the law, and noted that,
regardless, at the time of the Mendes Assignment there was not yet a product branded VSL#3,
and thus there could be no goodwill associated with the mark. Id. at 792.
In their Motion to Dismiss VSL's Counterclaim, the De Simone Parties returned to the
issue of the Know-How and argued that the Court should decide the question on the pleadings as
a matter of law. In declining to do so, the Court explained that although on the First Motion for
a Preliminary Injunction it had considered certain extrinsic evidence such as the additional
agreements discussed above, it could not be certain that "those materials constitute the only
relevant extrinsic evidence" on whether the Mendes Assignment transferred the Know-How to
VSL. The Court thus allowed the case to proceed to discovery on that question. De Simone v.
VSL Pharm., Inc., No. TDC-15-1356, 2017 WL 66323 at *4 (D. Md. Jan. 7,2017).
B.
Discovery Evidence
Discovery has produced no additional direct evidence of the parties' intent on whether
the Mendes Assignment transferred ownership of the Know-How to VSL.
In his deposition,
Luca Guarna, VSL's corporate representative, reiterated the company's position that VSL owns
the Know-How and traces its entitlement to the Know-How to the Mendes Assignment.
As for
evidence to support VSL's interpretation of the parties' intent in the Mendes Assignment and the
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other relevant agreements, Guarna admitted that VSL does not have "any other source of
information
apart from the text of those contracts," but asserted that "the content of these
contracts were very, very clear" and thus should be the source for "what the intentions of the
various parties were."
Joint Record ("J.R.") 134.
More generally, Guarna asserted that the
Know-How was "valuable" but he stopped short of stating that it was a trade secret, explaining
that whether something was a trade secret was a legal determination he did not have the training
to make. J.R. 138.
As for circumstantial
evidence of the parties'
intent, over the De Simone Parties'
objection, VSL has submitted the Declaration of Mauro Bove, the former Chief Operating
Officer of VSL.
VSL#3.
Bove participated in numerous aspects of the original commercialization
of
Presumably based on that involvement, he states that "[i]n 2000, when VSL was
formed, all of the parties to the various agreements fully understood that any reference to VSL#3
referred to an already existing product that was called 'VSL#3' and would be sold by VSL under
the 'VSL#3'
trademark."
J.R. 2463.
Asserting that VSL#3 had already been the subject of
various clinical studies, he concludes that it is "incorrect to say that the parties did not know to
what they were referring in listing VSL#3 in the schedule of the Mendes Assignment
Agreement."
!d. He further asserts that the 615 Patent is "broader than just the VSL#3 product
alone." J.R. 2464.
The VSL Parties also cite to De Simone's June 2000 U.S. trademark application for the
mark "VSL#3."
In that application, De Simone stated his "bona fide intention" to use the mark
VSL#3 in U.S. commerce and defined the product to which the mark VSL#3 would be attached
as "pharmaceutical, veterinary and sanitary preparations; dietetic substances adapted for medical
use, food for babies; nutraceuticals;
food supplements."
7
J.R. 2459.
The VSL Parties also
reference two clinical studies of VSL#3, one published in 1999 and one in 2000.
Finally, the
VSL Parties include in the record, over the De Simone Parties' objection, a November 1, 2000
letter from Dr. R. Balfour Sartor to Antonio Croppo of Sigma-Tau and an accompanying
proposed consulting agreement.
Through that consulting agreement, Sigma-Tau retained Dr.
Balfour Sartor to conduct a study as part of the "scientific development" of VSL#3. J.R. 3719.
The stated estimated completion date for that study was October 2001. In the letter, Dr. Balfour
Sartor reported that he and De Simone had "begun" their study into VSL#3 and wished SigmaTau and VSL "the very best in your development ofVSL #3." J.R.3718.
The De Simone Parties, in tum, cite an April 2, 2002 Letter of Intent, relating to the
export of VSL#3 outside the United States, signed by De Simone and Nicolai. In that letter, De
Simone describes VSL#3 as a product "manufactured according to my know how and patent
licensed to VSL." J.R.420.
C.
Ownership of the Know-How
VSL maintains that the language of the Mendes Assignment plainly transfers the KnowHow 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. De Simone, 133 F. Supp. 3d at 790. VSL cites no new facts or legal authority on this
point, so the Court does not revisit its prior determination as to the ambiguity of the Mendes
Assignment.
On summary judgment, when a court "determines as a matter of law that the
contract is ambiguous, it may yet examine evidence extrinsic to the contract that is included in
the summary judgment materials, and, if the evidence is, as a matter of law, dispositive of the
interpretative issue, grant summary judgment on that basis."
8
Washington Metro. Area Transit
Auth. v. Potomac Inv. Properties, Inc., 476 F.3d 231, 235 (4th Cir. 2007). The Court thus turns
to extrinsic evidence of the parties' intent.
Although the parties have submitted additional evidence collected through discovery, the
most persuasive extrinsic evidence on the proper interpretation
remains the 1999 Option. Agreement
of the Mendes Assignment
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.
Indeed, VSL's corporate representative acknowledged that the language of the
parties' various agreements is the best source for the parties' intentions.
The Court reaffirms its
previous analysis ofthese agreements:
The 1999 Option Agreement specified that De Simone "co-owns the Patent and
fully owns the Know-How" related to the 615 Patent, and that he was granting 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. This agreement provides specific evidence
that the Mendes Agreement did not effect the transfer of ownership of the KnowHow for two reasons. First, it establishes that De Simone personally owned the
Know-How as of November 1999, and there is no evidence that he transferred it
to Mendes prior to September 2000. Because the Mendes Assignment only
transferred intellectual property owned or licensed by Mendes, the Know-How
could not have been conveyed through that agreement. Second, the 1999 Option
Agreement shows that when De Simone, in his dealings with the Sigma Tau
Group, wished to convey rights to the 615 Patent and its Know-How, he knew
how to do so and would use those specific terms, rather than rely on broad
definitions of generic terms to effect such a conveyance ....
The 2001 Patent License Agreement, which explicitly granted a license to the 615
Patent, including "any other proprietary rights" relating to it, also undermines
VSL's argument that the Mendes Assignment transferred the Know-How to VSL.
Under VSL's overly broad reading of that Assignment, the 615 Patent would, like
the Know-How, constitute "intellectual property" relating to the VSL#3
trademark and therefore would also have been transferred to VSL through that
Assignment. If VSL's interpretation of the Mendes Assignment were correct,
then, there would have been no need for the 2001 Patent License Agreement,
because VSL would already have obtained De Simone's ownership interest in the
615 Patent in 2000. The fact that De Simone and VSL entered into a license
9
agreement relating to the 615 Patent in 2001 thus further establishes that De
Simone did not transfer the Know-How through the Mendes Assignment.
De Simone, 133 F. Supp. 3d at 792-93 (internal citations omitted). The various other agreements
previously offered by VSL, including the 2002 Confidential Disclosure Agreement, do not alter
this analysis. See id. at 793-94. Rather, it is bolstered by an additional document offered by De
Simone, a 2002 Letter of Intent signed by De Simone and Nicoli, in which De Simone states that
he authorizes VSL to "sell and export US product which is manufactured according to my know
how and patent licensed to VSL." l.R. 420 (emphasis added). Where this letter was signed by
the same individuals who signed the Mendes Assignment, the characterization of the Know-How
as belonging to De Simone is consistent with the conclusion that the parties' did not understand
the Mendes Assignment to have transferred ownership of the Know-How to VSL. Finally, the
Court's interpretation is consistent with the numerous later documents in which De Simone's
continuing ownership of the De Formulation or the Know-How are referenced, including the
2006 Confidential Disclosure Agreement that was signed by Maurizio Terenzi, a representative
ofVSL's
parent companies.
The additional evidence offered by VSL with its Motion fails to undermine the Court's
pnor
conclusion.
The deposition
testimony
of Guarna,
VSL's
corporate
representative,
establishes that there is no direct, extrinsic evidence of the parties' intent in entering into the
Mendes Assignment.
VSL instead relies on the Bove Declaration, the clinical studies, and the
2000 trademark application to advance its argument that the transfer of the trademark VSL#3
was intended to include the transfer of the Know-How.
At a threshold level, the Bove Declaration's
assertions about the intent of the parties to
the Mendes Assignment, such as the claim that "all of the parties to the various agreements fully
understood that any reference to 'VSL #3' referred to an already existing product that was called
10
'VSL#3' and would be sold by VSL under the 'VSL#3' trademark," are not competent evidence
on the Motion. An affidavit submitted in support of a motion for summary judgment "must be
made on personal knowledge [and] set out facts that would be admissible in evidence."
Civ. P. 56(c)(4).
Fed. R.
Where Bove was not a signatory to the Mendes Assignment, and thus is
characterizing the intentions of other individuals on both sides of that transaction, he lacks'
personal knowledge of these assertions.
To the extent that his knowledge is based on the
statements of those other individuals to him, his statements would constitute inadmissible
hearsay. See Fed. R. Evid. 801(c), 802 (stating that, except in certain situations not present here,
hearsay is inadmissible at trial); Fed. R. Civ. P. 56(c)(2) (stating that parties may object to
evidence submitted on summary judgment on the basis that it "cannot be presented in a form that
would be admissible in evidence"); Evans v. Tech. Applications & Servo Co., 80 F.3d 954, 962
(4th Cir. 1996) (stating that Rule 56 requires that "affidavits submitted on summary judgment
contain admissible evidence" and thus that they cannot be "based on hearsay"); Md. Highways
Contractors Ass'n, Inc.
V.
State of Md., 933 F.2d 1246, 1251-52 (4th Cir. 1991) (stating that
"hearsay evidence, which is inadmissible at trial, cannot be considered on a motion for summary
judgment").
VSL's argument that the Declaration is admissible because, at trial, unnamed
witnesses would provide direct testimony as to the parties' intent is unpersuasive because it runs
afoul of the plain language of Rule 56, which requires that declarations "be made on personal
knowledge" and "show that the affiant or declarant is competent to testify on the matters stated."
Fed. R. Civ. P. 56(c)(4) (emphasis added).
Even if the Court were to consider Bove' s statements, they would not create a material
dispute of fact on the parties' intent. Read in the light most favorable to VSL, Bove's statements
establish, at most, that the trademark "VSL#3" was, at the time of the Mendes Assignment,
11
already associated with a product that VSL planned to bring to market.
But the linking of the
trademark "VSL#3" to, a particular probiotic does not mean that transferring the trademark
necessarily effected the transfer of all rights to the Know-How.
VSL has already made, and this
Court has already rejected, the argument that as a matter of trademark law, the Know-How
necessarily travels with the trademark. See De Simone, 133 F. Supp. 3d at 791-92.
Finally, the additional evidence that De Simone filed a u.S. trademark application for
VSL in 1999 and that there were clinical studies relating to VSL#3 before the Mendes
Assignment
does not provide
Assignment.
The Court previously discussed the relevance of the VSL#3 trademark application
and pre-Mendes Assignment
a basis to alter the Court's
interpretation
of the Mendes
studies of VSL#3 to the question whether the transfer of the
trademark necessarily included transfer of the Know-How and found neither form of evidence to
be probative.
See id.
Although the proffered studies provide more specific evidence that a
probiotic known as VSL#3 was under study prior to the Mendes Assignment, they do not
necessarily show that VSL#3 was a finished product understood to be synonymous with the
trademark, much less that a transfer of the trademark would necessarily include a transfer of the
specific Know-How underlying the present-day De Simone Formulation.
Indeed, where Dr.
Balfour Sartor was hired in November 2000 expressly to aid in the "scientific development" of
"VSL#3,"
J.R. 3719, it appears that VSL#3 continued to be in development after the Mendes
Assignment was executed, thus illustrating the disjuncture between the Know-How and the
trademark.
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.
Regardless of what the parties believed the term "VSL#3" to mean, if
12
Mendes did not own the Know-Howat
the time of the Mendes Assignment, there is no way to
read it as having transferred the Know-How to VSL.
Where the ambiguity of the Mendes Assignment can be resolved by consideration
other,
contemporaneous
agreements
between
the parties,
specifically,
the
of
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."
Potomac Inv. Properties, Inc., 476 F.3d at 235.
The Court thus
concludes that, as a matter of contract interpretation, De Simone owns the Know-How.
D.
Trade Secrets
Perhaps anticipating the Court's ruling as to ownership of the Know-How, VSL has
sought to re-formulate the question and argue that it should prevail on the Know-How claims
because the Know-How was not, and is no longer, a trade secret. A trade secret consists of:
[I]nformation, including a formula,
method, technique, or process, that:
pattern,
compilation,
program,
device,
(1) Derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances
maintain its secrecy.
Md. Code Ann., Com. Law
Definitional Aspects,
S
S
to
11-1201(e) (West 2013); see also Milgrim on Trade Secrets Ch. 1,
1.01 (Matthew Bender 2018). To remain a trade secret, the information
must remain "more or less, secret." Id.
S
1.03.
Beyond the obvious fact that this arg.ument is squarely contradicted by VSL's assertion in
its pleadings that the Know-How is a trade secret and its allegation that De Simone has
misappropriated
a trade secret by using the Know-How, see, e.g., VSL Countercl. ~ 313, ECF
13
No. 153, 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.
Not only did VSL assert in its
Counterclaim that the Know-How "is not commonly known or available to the public, is not
readily ascertainable by proper means" and is "the subject of extensive efforts" to keep it secret,
VSL Countercl. ~ 315, but Luca Guarna, VSL's corporate representative, described the KnowHow as "a wide amount of information" that is "very complex" and has "value."
l.R. 137-38.
In her deposition testimony, Dr. Mary Ellen Sanders stated that since the start of this litigation,
she was retained by VSL to conduct a comparative analysis of VSL#3 and Visbiome, the results
of which would be "helpful" in an effort to reverse engineer the composition of Visbiome.
3261.
l.R.
That some aspects of the De Simone Formulation may be publicly available does not
render the Know-How readily ascertainable, nor can the Court draw such a conclusion when the
record evidence establishes VSL's own understanding of the complexity of the Know-How and
its efforts to decipher that complexity.
More fundamentally, however, whether the Know-How presently remains an enforceable
trade secret need not be decided to resolve the Know-How claims. The core issue on the KnowHow 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 claims for a declaratory judgment in
Count I of the Complaint and Count I ofVSL's
Counterclaim seek only a declaration on which
party owns the rights to the Know-How, not whether the Know-How currently qualifies for
protection as a trade secret and whether De Simone can presently enforce such rights against
others. As discussed below, the De Simone Parties' claim of misappropriation of trade secrets in
14
Count IV of the Complaint can be resolved without reaching this issue.
Thus, the Court need not evaluate VSL's eleventh-hour
See infra part IV.C.
assertion that the Know-How lost
protection as a trade secret upon the expiration of certain confidentiality agreements.
Accordingly, the De Simone Parties' Motion for Summary Judgment on Count I of the
Complaint will be granted, and De Simone will be declared to be the owner of the Know-How.
See 28 U.S.C.
S 2201
(2012) (stating that "any court of the United States, upon the filing of an
appropriate pleading, may declare the rights and other legal relations of any interested party
seeking such declaration, whether or not further relief is or could be sought). The De Simone
Parties' Motion is also granted as to the declaratory judgment claims in Count I of the VSL
Counterclaim,
Count II of the Leadiant Counterclaim,
and Count IV of the Alfasigma
Counterclaim, which are all dismissed with prejudice. 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 De Simone Parties' Motion for Summary
Judgment is therefore granted as to VSL's
Counts IX, X, XI, XVII, XIX, and XX; and
Leadiant's Count III, all of which are dismissed with prejudice.
To the extent that the VSL
Parties sought summary judgment on any of the above claims, their Motion is denied. The De
Simone Parties' Motion for Summary Judgment is also granted in part as to (1) all claims within
VSL's Count III except the claim relating to the 2014 Supply Agreement with Danisco USA,
Inc., the U.S. manufacturer ofVSL#3
("the 2014 Danisco Supply Agreement"), which involves
issues related to De Simone's fiduciary duty and thus cannot be resolved solely through an
adjudication of ownership of the Know-How; and (2) all claims within Leadiant's Count I and
Alfasigma's Count III, except those relating to trademark infringement.
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III.
The Fiduciary Duty Claims
VSL asserts that De Simone breached his fiduciary duty as CEO of VSL in a number of
ways and has pleaded that breach as part of his claim for a declaratory judgment in Count III of
the VSL Counterclaim and as three, additional separate claims: breach of fiduciary duty (Count
IV), conspiracy (Count V), and fraud (Count VI). 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 is more direct, citing three agreements that it
asserts were fraudulent transactions designed to enable De Simone to supplant VSL in the
marketplace as the supplier ofVSL#3 or an equivalent probiotic: the January 2010 Know-How
Agreement, an agreement between De Simone in his personal capacity and VSL granting VSL
an exclusive license to the Know-How from the period beginning at the expiration of the 2001
Patent License Agreement until January 31, 2016 ("the 2010 Know-How
Agreement");
a
separate March 2010 Know-How Agreement between De Simone in his personal capacity and
VSL granting VSL an exclusive license to distribute the De Simone Formulation in China; a
similar 2007 Know-How Agreement relating to Canada; the 2008 Danisco Supply Agreement,
between De Simone in his personal capacity and Danisco authorizing Danisco to use De
Simone's
trade secrets consistent with various confidentiality
requirements;
and the 2014
Danisco Supply Agreement, between De Simone in his personal capacity and VSL, providing
that if the 2010 Know-How Agreement were terminated, De Simone would take VSL's place as
the buyer of the supply of Danisco-produced VSL#3.
16
Under Delaware law, which controls the substantive issues on these claims, a corporate
officer or director owes a fiduciary duty to the corporation and therefore must exhibit an
"undivided and unselfish loyalty to the corporation," such that there is "no conflict between duty
and self-interest."
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
Delaware courts have
subdivided this fiduciary duty into three component duties: a duty of care, a duty of loyalty, and
a duty to act in good faith. See In re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 52
(Del. 2006). Here, the duty of loyalty is implicated, a duty that prohibits a corporate officer or
director from deriving "any personal benefit through self-dealing."
Anadarlw Petroleum Corp.
v. Panhandle E. Corp., 545 A.2d 1171, 1174 (Del. 1988). Self-dealing, or "the rule of corporate
opportunity," includes usurping a corporate opportunity for oneself. Guth, 5 A.2d at 510-11.
A.
Know-How Claims
To begin, 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, as discussed above,
De Simone owned the Know-How.
Because self-dealing requires usurpation of an opportunity
that could otherwise have been taken by the corporation, the rule of corporate opportunity is not
implicated when "a business opportunity comes to a corporate officer or director in his individual
capacity rather than in his official capacity, and the opportunity is one which, because of the
nature of the enterprise, is not essential to his corporation, and is one in which it has no interest
or expectancy."
Guth, 5 A.2d at 510-11.
The Court has determined that De Simone rightfully
possessed the Know-How, such that the opportunity to license it was necessarily presented to
him in his individual capacity and was one in which VSL could have had no expectancy.
See
Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 157 (Del. 1996) ("The teaching of Guth and its
17
progeny is that the director or officer must analyze the situation ex ante to determine whether the
opportunity is one rightfully belonging to the corporation."); see also Science Accessories Corp.
v. Summagraphics
Corp., 425 A. 2d 957, 963 (Del. 1980) (holding that a corporate opportunity
"was not an opportunity available to" the corporation but one that the defendants "could legally
embrace as their own"). Accordingly, the Court will grant summary judgment to the De Simone
Parties on the claims in VSL Counts III-VI relating to the formation of the 2008 Danisco Supply
Agreement,
the January 2010 Know-How Agreement,
the March 2010 China Know-How
Agreement, and the 2007 Canada Know-How Agreement.
B.
Statute of Limitations
Outside of the claims based on the failed argument that De Simone did not own the
Know-How, VSL's breach of fiduciary duty, conspiracy, and fraud claims center on the claims
that De Simone breached his fiduciary duty by (1) inserting into the 20 10 Know-How Agreement
a change-in-control
provision that would allow him to terminate the agreement upon the
resignation of two of the three directors of VSL; and (2) including in the 2014 Danisco Supply
Agreement a provision that allowed him to take over VSL' s position as buyer of the supply of
VSL#3 produced by Danisco upon the termination of2010 Know-How Agreement. As to claims
arising from the 2010 Know-How Agreement, the De Simone Parties assert they are time-barred.
While substantive issues on the fiduciary duty and related claims are controlled by
Delaware law, procedural issues, such as the running of the statute of limitations, are governed
by Maryland law. See Sherwin-Williams Co. v. Artra Group, Inc., 125 F. Supp. 2d 739, 756-57
(D. Md. 2001) (stating that "the statute of limitations of the forum state applies even when that
state's choice-of-Iaw rules require that another state's substantive law be applied"); Lewis v.
Waletzky, 31 A.3d 123, 133 (Md. 2011) (holding that Maryland law controls procedural matters
18
and that "statutes of limitations are procedural for choice-of-law purposes").
In Maryland, civil
suits must be filed within three years from the date the action accrues. Md. Code Ann., Ct. &
Jud. Proc. ~ 5-101 (West 2011). Here, VSL filed its original Counterclaim on June 2,2015, so it
can proceed on only those claims that accrued on or after June 2, 2012.
In Maryland, a claim
accrues when a litigant "in fact knew or reasonably should have known of the wrong."
See
Poffenberger v. Risser, 431 A.2d 677, 680 (Md. 1981). However, "[i]f the knowledge of a cause
of action is kept from a party by the fraud of an adverse party, the cause of action shall be
deemed to accrue at the time when the party discovered, or by the exercise of ordinary diligence
should have discovered the fraud." Md. Code Ann., Cts. & Jud. Proc. ~ 5-203. VSL asserts that
as a result of De Simone's malfeasance, it did not learn of De Simone's breach of fiduciary duty
relating to the change-in-control provision of the 2010 Know-How Agreement until November
2014, when De Simone resigned as CEO ofVSL.
The De Simone Parties, however, contend that
VSL was on notice of the 2010 Know-How Agreement by no later than September 2009, when it
was discussed at a meeting of the VSL Board of Directors ("VSL Board").
In support of this argument, the De Simone Parties rely on the minutes of the September
18, 2009 meeting of the VSL Board ("the Minutes").
As a preliminary issue, VSL objects to
consideration of the Minutes because the submitted document is a copy of the Minutes, not the
original, and claims that there are "suspicious inconsistencies in spacing and pagination" in these
Minutes as compared to the minutes of other VSL Board meetings. VSL Cross-Mot. Summ. J. at
38, ECF No. 562. They also assert, incorrectly, that no notice of the meeting was produced. See
J.R.233.
The fact that the original Minutes were not provided is not a basis to exclude the copy,
"unless a genuine question is raised about the original's authenticity."
However, VSL offers no evidence for its allegations of inauthenticity.
19
Fed. R. Evid. 1003.
Where the Minutes do not
appear to have been altered or modified in any way and bear the signature of the three VSL
Directors at the time-De
Simone, Dr. Bo Young "Beth" Park, and Maurizio Terenzi-the
finds no reason to exclude the Minutes from the record.
Court
See Kassel v. United States, 319 F.
App'x 558, 561 (9th Cir. 2009) (rejecting an argument of inauthenticity under Rule 1003 because
the appellant "offered only an unsupported assertion of disbelief as to the authenticity of the
documents").
The Minutes reflect that on September 18, 2009, the VSL Board discussed the fact that
VSL's right to use the Know-How would terminate with the expiration of the 615 Patent in
February 2015, and that in order for VSL to maintain its right to use the Know-How and to sell
VSL#3 in the United States, a licensing agreement relating to the Know-How needed to be put in
place. As to that agreement, the Minutes state:
De Simone clearly indicated that he will not accept any term longer than beyond
January 31, 2016 to protect his interest as an inventor and owner of know-how
(including trade secret) related to VSL#3. [De Simone] mentioned that he is
already pressure[d] from SINAF and TAUFIN which he considers undue and
unfair for the evident conflict of interest. He wants to reserve irrevocable right to
terminate know-how license agreement by January 31, 2016 and protection in
new license agreement (such as termination clause related to (i) the change of
control of VSL, (ii) sales of trademark (VSL#3), (iii). breach of confidentiality,
(iv) non payment/lack of performance and etc)[.] Mr. Terenzi expressed that the
concerns from Prof. De Simone may be overstated. However, since Prof. De
Simone (as a licensor) did not agree on longer term, the Board who can vote on
this matter without conflict of interest (Maurizio Terenzi and Boyoung Park)
agreed and voted unanimously to accept the terms (by the end of January 2016)
and royalty at 5% of sales (sale as defined in the current agreement). The Board
who can vote on this matter without conflict of interest agreed and voted that Bo
Young Park, COO, will finalize and execute the new Know-How license
agreement with Prof. Claudio De Simone based on terms approved today by VSL
Board (Mr. Maurizio Terenzi and Boyoung Park).
J.R. 238.
Thus, the Minutes plainly establish that Terenzi, an undisputedly disinterested director,
was aware in September 2009 that VSL and De Simone would enter into an agreement that gave
20
VSL a license to use the Know-How only until January 31, 2016 and contained a change-incontrol provision, and that he voted to approve such an agreement. Terenzi's knowledge is fairly
imputed to VSL. See Teachers' Retirement Sys. of Louisiana v. Aidioff, 900 A.2d 654, 671 n.23
(Del. Ch. 2006) ("[I]t is the general rule that knowledge of an officer or director of a corporation
will be imputed to the corporation."), aff'd sub nom Teachers' Ret. 8ys. of La. v. Gen. Re Corp.,
11 A. 3d 228 (Del. 2010). Moreover, the Minutes reflect that Terenzi acted independently, as
reflected by his statement that De Simone's concerns about pressure to alter the De Simone
Formulation were "overstated."
J.R.238.
From the uncontradicted testimony of Park, a member
ofthe VSL Board and VSL's Chief Operating Officer from 2006 to 2014, it is clear that Terenzi
reviewed the 2010 Know-How Agreement and thus was aware of its contents.
Where the record definitively establishes that Terenzi was independent and fully aware of
the particular transaction, the Court is unpersuaded by VSL's assertion that Terenzi could not
have acted in an informed matter in approving the 2010 Know-How Agreement without an
understanding that "the Patent License Agreement contained no survival language that would
preclude VSL from using the know-how associated with the Patent after its expiration."
VSL
Cross-Mot. Summ. J. at 26. VSL cites no authority for the proposition that a board member is on
notice of a claim for purposes of the statute of limitations only if he or she fully understands
sophisticated legal questions of contract interpretation.
Nor is the Court persuaded by the VSL Parties' argument that the doctrine of "adverse
domination" precludes the accrual of the claim when the 2010 Know-How Agreement was
approved.
That doctrine provides that for an action by a corporation against its directors for
injury to the corporation, the statute of limitations is tolled until there exists a disinterested
majority of non-culpable directors. Hecht v. Resolution Trust Corp., 635 A.2d 394, 402, 408
21
(Md. 1994).
Here, the VSL Parties argue that Park was not a disinterested director, such that at
the time of the September 2009 Board meeting and the approval of the 2010 Know-How
Agreement, no such disinterested majority existed.
An interested director is a director with "a
personal pecuniary interest" in a particular decision of the board of directors.
Chef! v. Mathes,
199 A.2d 548,554 (Del. 1964). VSL cites no provision ofthe 2010 Know-How Agreement that
secured a personal pecuniary benefit to Park. Rather, the evidence in the record aligns Park's
pecuniary interest with VSL's, as evidenced by her Executive Employment Agreement, which
provided that her salary would be significantly higher if any new licensing agreements would
result in higher expected gross profits for VSL. Cf Unocal Corp. v. Mesa Petroleum Co., 493
A.2d 946, 958 (Del. 1985) (emphasizing that board members do not become interested directors
"merely because [they] are large stockholders").
As for whether Park could be deemed culpable for any conspiracy with De Simone to
breach a fiduciary duty as early as 2009 or 2010, the VSL Parties have not submitted sufficient
evidence to support such a claim. Particularly where the Court has found that De Simone owned
the Know-How, the execution of agreements in that time frame reflecting that fact are not
evidence of any such conspiracy. Although De Simone identified Park and invited her to join the
Board, there is no evidence in 2009 or 2010 of any communications between De Simone and
Park relating to such a scheme, or that Park was aware of any plan by De Simone to undermine
VSL by starting a company to take over the sales ofVSL#3.
All the VSL Parties have offered to
show that Park was culpable for a breach of fiduciary duty relating to the 2010 Know-How
Agreement is her Executive Employment Agreement, which they assert is not commercially
reasonable.
The VSL Parties cite no factual or legal authority for that assessment.
Notably,
while it was ultimately De Simone who signed and approved Park's employment contract, Park's
22
uncontroverted deposition testimony establishes that she negotiated the terms of that contract
with Terenzi, who assisted VSL in this time frame even during periods he was not a member of
the Board, and that Terenzi reviewed and approved the final agreement.
Indeed, Terenzi told
Park during such negotiations that VSL could not provide her with medical insurance or a
retirement plan.
Where a disinterested,
independent
individual with ties to VSL' s parent
company negotiated and approved Park's Employment Agreement, that agreement cannot fairly
be deemed to be evidence of a conspiracy to breach a fiduciary duty. Although VSL argues that
. Park's testimony need not be believed by a jury, where VSL has not offered evidence to
contradict that testimony, such an assertion is not sufficient to create a genuine issue of material
fact. See Anderson, 477 U.S. at 256 (stating that summary judgment cannot be defeated "by
merely asserting that the jury might, and legally could, disbelieve"
a party, and that the
nonmoving party must produce evidence that would support a verdict in that party's favor).
Finally, the terms of Park's Employment Agreement make abundantly clear that Park's
financial interest would be in maintaining VSL's right to sell VSL#3. The VSL Parties' theory
that Park was part of a conspiracy to enter into the 2010 Know-How Agreement in order to assist
De Simone in usurping that right is therefore undermined, not advanced, by the terms of her
Employment Agreement.
In the end, the VSL Parties have offered insufficient evidence for a
reasonable factfinder to conclude that Park had an interest in, or was culpable for, a breach of
fiduciary duty arising from the adoption of the 2010 Know-How Agreement.
See id. ("The mere
existence of a scintilla of evidence in support of the plaintiffs position will be insufficient; there
must be evidence on which the jury could reasonably find for the plaintiff.").
Accordingly, a
majority of disinterested directors, consisting of Park and Terenzi, was aware of the 2010 KnowHow Agreement when it was adopted, such that the "adverse domination" doctrine does not
23
apply. See Hecht, 635 A.2d at 402,408.
The Court does not address whether there is sufficient
evidence to support a conspiracy involving Park at a later time, such as in 2014.
Thus, any claim that the terms of the 2010 Know-How Agreement, including the changein-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.
Counts IV, V, and VI of the VSL Counterclaim
are therefore
dismissed as to this issue because the claims accrued before June 3,2012.
C.
Remaining Breach of Fiduciary Duty Claims
VSL has also asserted breach of fiduciary duty, conspiracy, and fraud relating to events
since June 3, 2012. These claims include VSL's assertion that De Simone breached his fiduciary
duty to VSL by inserting a provision into the 2014 Danisco Supply Agreement that allowed him
to take over VSL's position as the buyer of VSL#3 in the event that the 2010 Know-How
Agreement
was terminated
and then by actually terminating
the Know-How
Agreement,
becoming the buyer in place of VSL, and seeking to cut off the supply of VSL#3 to VSL. They
also include claims that while still CEO of VSL, De Simone sought trademarks that infringed on
VSL's trademark of VSL#3. Related to these claims is Count IV of the Leadiant Counterclaim,
which asserts a cause of action for tortious interference with economic relations based on De
Simone's disruption ofVSL's
supply chain.
Both sides seek summary judgment on these claims. In resolving VSL's First Motion for
a Preliminary Injunction, the Court found that VSL was likely to succeed on its claim for a
breach of fiduciary duty because:
In June 2014, De Simone amended VSL's Supply Agreement with Danisco to add
a provision whereby if the 2010 Know-How Agreement were terminated and VSL
was left without a license to produce VSL#3, De Simone would step into VSL's
shoes as the buyer. Through the express terms of the 2014 Supply Agreement, De
24
Simone made VSL's loss into his own personal gain, by squarely placing himself
as the beneficiary of any termination of VSL's Know-How Agreement. The
degree of self-dealing was magnified by the fact that the means by which to
terminate the Know-How Agreement-the
change of control provision-was
something over which De Simone exercised significant influence. Under that
provision, the resignation from the Board of Directors of De Simone and his
handpicked co-director, Dr. Park, would establish grounds for termination of the
Supply Agreement. ...
Through the 2014 Supply Agreement, De Simone set himself up to take over
VSL's supply and did so in such a way that he had unilateral control over when
that takeover would occur. Through his trademark applications, he was poised to
market that co-opted supply so as to capitalize on VSL's brand recognition. In
essence, De Simone appears to have laid the groundwork to substitute himself for
the corporation of which he was the chief executive officer. Such actions likely
would violate De Simone's fiduciary duty as an officer and director of VSL
because it "would work injury to the corporation," "deprive it of profit or
advantage," and constitute self-dealing. Guth, 5 A.2d at 510-11.
De Simone, 133 F. Supp. 3d at 795.
In seeking summary judgment on the breach of fiduciary duty and related claims, the
VSL Parties largely rely on the same factual landscape that was before the Court on the First
Motion for a Preliminary Injunction.
In addition, however, they cite to a few buttressing facts,
specifically, De Simone's admission that by September or October 2013, De Simone had decided
that he wanted to leave VSL; that in September 2014, De Simone began discussions with Marc
Tewey, the Chief Executive Officer of ExeGi, about starting a new company to compete with
VSL; and that at about the same time, De Simone asked VSL' s outside counsel to return to him
all documents containing confidential information about the De Simone Formulation and to
destroy any remaining copies. Upon consideration of this and other evidence in the record, the
Court concludes 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.
At the same time, summary judgment in favor of the VSL Parties is also not warranted
because there remain genuine issues of material fact. In her deposition, Park provided a different
25
explanation for the changes to the 2014 Danisco Supply Agreement, which she and another
individual negotiated on behalf of VSL.
In Park's account, De Simone was inserted into the
Agreement, which allowed him to take over as the buyer of VSL#3, due to issues of potential
liability.
Specifically, Park asserted that Danisco had concerns about product liability because
some VSL#3 customers were a "high risk" population, so Danisco wanted VSL to bear the risk
of product liability claims. l.R.309.
VSL, in tum, did not want the risk because it was only a
licensee, not the owner of the De Simone Formulation.
According to Park, the resolution of this
issue was that De Simone was inserted as a fallback buyer ofVSL#3.
Park's account of the reasoning behind contested terms of the 2014 Danisco Supply
Agreement is not without support in the language of the contract.
There is an entire section of
the 2014 Danisco Supply Agreement devoted to parsing out responsibility for product liability,
with several of the sections that limit the scope of Danisco' s responsibility appearing in all
capital letters.
No such sections appear in the 2008 Danisco Supply Agreement.
The 2014
Danisco Supply Agreement also explicitly states that Danisco is not liable for certain types of
claims, such as those based on the marketing of VSL#3: "Buyer shall indemnify and hold Seller
harmless from and against and all liability related to any marketing or sale of or claims made
with respect to the Products."
l.R. 104. Furthermore, the 2014 Danisco Supply Agreement
provides that upon taking on the role of "Buyer," De Simone assumed not just rights, but "all
obligations of Buyer." l.R. 103.
To be sure, Park's deposition testimony leaves important questions unanswered.
For
example, the ability to trigger the contract provisions providing for De Simone's role as fallback
buyer, by terminating the 2010 Know-How Agreement through its change-in-control provisions,
appears to have been at least in part within the control of De Simone. However, where Park's
26
account is not entirely implausible, the Court must, at this stage, view the facts in the light most
favorable to the De Simone Parties and draw all justifiable inferences in their favor. Anderson,
477' U.S. at 255.
The Court therefore finds that there is a genuine dispute of material fact
whether De Simone breached his fiduciary duty by executing the 2014 Danisco
Agreement.
Supply
Because this question needs to be resolved by a finder of fact, and the resolution of
this issue is likely to impact the VSL Parties' remaining theories of liability for their breach of
fiduciary duty and related claims, the Court concludes that all remaining aspects of these claims
should be resolved at trial.
See Forest Hills Early Learning Ctr. v. Lukhard, 728 F.2d 230,245
(4th Cir. 1984) (stating that even if summary judgment may be appropriate based on the record at
the time of the motion, "a court may properly decline, for a variety of reasons, to grant it"). Cf
Kuchenbecker v. Northern Wyoming Drilling Co., 647 F.2d 836, 839 (8th Cir. 1981) (stating that
where there were material disputes of fact as to the liability of one defendant, it was the "much
better practice" and "[i]n the interest of judicial economy" for the case to proceed to trial as to all
defendants) .
Accordingly, as to those claims within Counts III-VI not otherwise addressed above,
specifically those claims based on the 2014 Danisco Supply Agreement and subsequent events,
the De Simone Parties' Motion for Summary Judgment will be denied. The VSL Parties' Motion
for Summary Judgment will be denied as to VSL's Counts IV, V, and VI and Leadiant's Count
IV. Those claims, as limited above, will proceed to trial.
D.
Conversion
In Count XVIII of the VSL Counterclaim, VSL pleads 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, and that he withheld from
27
VSL information belonging to the company, such as electronic account information.
Conversion
is "an intentional exercise of dominion or control over chattel which so seriously interferes with
the right of another to control it that the actor may justly be required to pay the other the full
value of the chattel."
United States v. Arora, 860 F. Supp. 1091, 1097 (D. Md. 1994) (quoting
Restatement (Second) of Torts,
S 222A(1)),
aff'd 56 F.3d 62 (4th Cir. 1995).
The De Simone Parties seek summary judgment on this claim, asserting that the record
contains no evidence to support it. That assertion is incorrect. For example, the record contains
a declaration from attorney Diane McColl, counsel to VSL until 2014. McColl asserts that in
September 2014, De Simone instructed her to send him all information she possessed on VSL's
behalf that contained confidential information about the formula for VSL#3 and to destroy any
remaining copies. De Simone acknowledges destroying the paperwork he received from McColl
but claims that it consisted of only publicly available articles. Without determining specifically
what documents were actually destroyed, the Court (Sullivan, MJ.), has sanctioned De Simone
for spoliation of evidence arising out of this incident. See Mem. Op. at 4-17, ECF No. 556.
Thus, there are genuine issues of material fact relating to what exactly was sent by McColl to De
Simone, and whether any of that paperwork constituted VSL property that was improperly
removed and destroyed. The De Simone Parties' Motion for Summary Judgment as to this claim
will therefore be denied.
IV.
2014-2016 VSL#3 Sales Claims
De Simone asserts several claims in the Complaint based on VSL's sale of VSL#3 after
he resigned as the CEO of VSL in November 2014.
He asserts that (1) in Count II, VSL
breached the 2001 Patent License Agreement by failing to pay royalties on sales after August
2014; (2) in Count III, VSL was unjustly enriched when it continued to acquire and sell VSL#3
28
after the expiration of the Patent License Agreement on February 9,2016; and (3) in Counts IV
and V, by stockpiling supplies of Danisco-manufactured
VSL#3 after the termination of the 2010
Know-How Agreement, the VSL Parties misappropriated a trade secret, specifically, the KnowHow.
A.
Breach of the Patent License Agreement
In Count II, De Simone alleges that VSL breached a contract, specifically, the 2001
Patent License Agreement, by failing to pay him royalties on sales of VSL#3 beginning in
August 2014. De Simone seeks summary judgment on this claim.
The Patent License Agreement required VSL to pay De Simone royalties on sales of
VSL#3 at a rate of 3% on net sales up to $50 million, and at a rate of 5% on net sales above $50
million. In return for those royalties, De Simone "grant [ed] to VSL an exclusive license related
to his co-ownership right on the Patent ... for the production and for the commercialization"
in
the United States of any product "marketed as dietary supplement or functional food" containing
the bacteria described in the 615 Patent.
J .R. 30, 31.
The license and requirement to pay
royalties would "continue in effect until the expiry of the Patent" on February 9, 2015. lR.33.
The Patent License Agreement also stated that if and when De Simone acquired full ownership
rights to the 615 Patent, he would give VSL an option to acquire those rights. On May 18,2015,
after the natural expiration of the Patent License Agreement, De Simone informed Danisco that
VSL and Sigma-Tau no longer had a license to purchase the De Simone Formulation.
VSL
admits, however, that although it has made no royalty payments to De Simone since August
2014, it sold more than $10 million ofVSL#3 between August 1,2014 and February 10, 2015.
"To prevail in an action for breach of contract, a plaintiff must prove that the defendant
owed the plaintiff a contractual obligation and that the defendant breached that obligation."
29
Taylor v. NationsBank, NA., 776 A.2d 645, 651 (Md. 2001). De Simone asserts that, on these
uncontested facts, he is entitled to summary judgment because VSL was obligated under the
Patent License Agreement to make royalty payments to De Simone but, by its own admission,
VSL ceased making those payments in August 2014. In response, VSL asserts that De Simone is
estopped from claiming a breach of the Patent License Agreement because De Simone himself
breached that agreement.
VSL provides no explanation for its theory of a prior breach by De
Simone and cites no evidence in the record to support it. To the extent that VSL's theory of
breach is that De Simone never offered his rights in the 615 Patent to VSL, it would fail for two
reasons.
First, De Simone has produced a 2005 letter in which he notified VSL that he had
acquired full rights to the 615 Patent, but there is no evidence that VSL then sought to exercise
the option to acquire his rights.
Second, this Court has already determined that any claim of
breach based on the failure to offer the 615 Patent to VSL is time-barred.
See De Simone, 2017
WL 66323 at *6. To the extent that VSL's theory of breach hinges on its assertion that De
Simone did not own the Know-How, that theory also fails based on this Court's determination,
as a matter oflaw, that De Simone rightfully owns the Know-How.
The uncontested facts thus 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 will therefore be granted on the issue of
liability, with damages to be proven at trial.
B.
Unjust Enrichment
In Count III, De Simone asserts a claim of unjust enrichment against the VSL Parties
based on the orders for VSL#3 that they placed with Danisco after the expiration of the Patent
30
License Agreement in February 2015.
De Simone asserts that, at that point, because he had
terminated the 2010 Know-How Agreement in November 2014, there was no longer any
operative agreement giving the VSL Parties a license to purchase products made with De
Simone's Know-How.
De Simone thus argues that any acquisition by the VSL Parties ofVSL#3
from Danisco after that date amounts to unjust enrichment for which the De Simone Parties
should be compensated.
Both sides seek summary judgment in their favor. Certain facts appear to be undisputed.
The VSL Parties continued to purchase VSL#3 from Danisco between February 2015 and
January 31, 2016, and for some portion of that time, they purchased the product in amounts
greater than their historical volume of purchases.
On September 23,2015, the Court granted the
VSL Parties' First Motion for a Preliminary Injunction to the extent that it enjoined De Simone
from interfering with VSL's acquisition
of VSL#3 from Danisco until January 31, 2016.
Concerned that the VSL Parties were increasing the volume of their purchases to stockpile
VSL#3, the De Simone Parties filed a Motion for Clarification on the Scope of Preliminary
Injunction, seeking a supplemental order from the Court to cap the volume of the VSL Parties'
purchases. The Court denied that motion.
A claim of unjust enrichment has three elements:
1. A benefit conferred upon the defendant by the plaintiff,
2. An appreciation or knowledge by the defendant of the benefit, and
3. The acceptance or retention by the defendant of the benefit under such
circumstances as to make it inequitable for the defendant to retain the benefit
without the payment of its value.
Hill v. Cross Country Settlements, LLC, 936 A.2d 343, 351 (Md. 2007).
Based on the
undisputed facts, the first two elements of the claim appear to be satisfied: the VSL Parties were
was able to purchase VSL#3 from Danisco after February 9, 2015, and were certainly aware of
31
that fact, as they placed the orders with Danisco. It is at the third element that difficulties arise.
"The final element of an unjust enrichment claim is a fact-specific balancing of the equities." Id.
at 355. Whether the VSL Parties' acquisition and sale of VSL#3 up to January 31, 20l6-the
original expiration date of the 2010 Know-How Agreement-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. Although De Simone has asserted that he
took that and other actions to prevent the VSL Parties from altering the scientific formulation of
VSL#3 in a way that would be detrimental to consumers, the VSL Parties have claimed that De
Simone's action was a breach of his fiduciary duty to VSL undertaken in order to usurp the
company's ability to profit from the sale of VSL#3.
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.
See id. at 348 ("The only thing
crystal clear about this case is that the grant of summary judgment,
inappropriate.").
on this record, was
The Motions for Summary Judgment will be denied as to the unjust enrichment
claim in Count III of the Complaint.
C.
De Simone's Trade Secrets Claims
In Counts IV and V, the De Simone Parties assert that in stockpiling supplies of Daniscomanufactured 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"), Md. Code Ann., Com. Law.
SS
11-1201-09 (West 2013) and engaged in a
civil conspiracy to do so.
To prevail on a misappropriation claim under the MUTSA, a plaintiff must establish that
"(1) it possessed a valid trade secret, (2) the defendant acquired its trade secret, and (3) the
32
defendant knew or should have known that the trade secret was acquired by improper means."
Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 660 (4th Cir. 1993). To establish that a
defendant acquired a trade secret, a plaintiff must have proof that the defendant "possesses secret
information," not, as the De Simone Parties assert here, that it merely possesses a product made
by virtue of the trade secret.
Cir. 2001).
DTM Research, L.L.c. v. AT & T Corp., 245 F.3d 327, 332 (4th
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.
V.
Lanham Act and Related Claims
A.
Trademark Infringement
The VSL Parties have pleaded six trademark infringement and unfair competition claims
against the De Simone Parties pursuant to the Lanham Act, 15 U.S.C.
S
1114 and 15 U.S.C.
S
1125(a), as well as section 1-414 of the Business Regulations Article of the Maryland Code, Md.
Code Ann., Bus. Reg.
S
1-414 (West 2002). This Court has twice found that the VSL Parties are
likely to succeed on their trademark infringement claims.
796-99; De Simone, 2016 WL 3466033 at *24-26.
See De Simone, 133 F. Supp. 3d at
In now moving for summary judgment on
these claims, the VSL Parties cite to no new evidence produced in discovery, but instead rely on
the evidence before the Court on the prior Motions for a Preliminary Injunction.
Although the VSL Parties proceed with their trademark infringement
claims under
several different statutes, the relevant test is the same:
A plaintiff alleging causes of action for trademark infringement and unfair
competition must prove (1) that it possesses a mark; (2) that the defendant used
the mark; (3) that the defendant's use of the mark occurred "in commerce"; (4)
that the defendant used the mark "in connection with the sale, offering for sale,
33
distribution, or advertising" of goods or services; and (5) that the defendant used
the mark in a manner likely to confuse consumers.
People for the Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 364 (4th Cir. 2001)
(adjudicating trademark infringement claims under both 15 U.S.C.
S
1114 and
S
1125(a)); see
Community First Bank v. Community Banks, 360 F. Supp. 2d. 716, 722 (D. Md. 2005)
("Maryland courts have recognized that trademark infringement cases under either the Maryland
statute or the federal Lanham Act are based on the same legal theory and require the same
proof.") (internal citations omitted)).
complex enterprise.
Assessing the final element, likelihood of confusion, is a
The Fourth Circuit has identified nine factors to be considered when
determining whether an allegedly infringing use of a trademark is likely to cause confusion:
(1)
the distinctiveness of the allegedly infringed mark, (2) the similarity of the new mark to the
allegedly infringed mark, (3) the similarity of the goods or services that the marks identify, (4)
the similarity of the facilities employed by the parties to transact their business, (5) the similarity
of the advertising used by the parties, (6) the defendant's
intention in adopting the same or
similar mark, (7) actual confusion, (8) the quality of the defendant's
product, and (9) the
sophistication of the consuming public. Sara Lee Corp. v. Kayser-Roth Corp., 81 F.3d 455, 46364 (4th Cir. 1996). As the Fourth Circuit has recognized, "[ c]ertain factors may not be germane
to every situation," and "some factors may, depending on the case, be more important to others."
Id.
Unsurprisingly,
in light of the complexity of assessing the likelihood of consumer
confusion, the Fourth Circuit has also emphasized that "determining the likelihood of confusion
is an inherently factual issue that depends on the facts and circumstances
of each case."
Anheuser-Busch, Inc. v. L & L Wings, Inc., 962 F. 2d 316, 318 (4th Cir. 1992) (citation omitted).
In particular, likelihood of confusion "has long been recognized to be a matter of varying human
34
reactions to situations incapable of exact appraisement" and thus is "frequently a fairly disputed
issue of fact on which reasonable minds may differ." Id. While on a motion for a preliminary
injunction, the Court is required to assess the relative strength of the parties' evidence, such
factual assessments are inappropriate on a motion for summary judgment. Anderson, 477 U.S. at
249 ("(A]t the summary judgment stage the judge's function is not himself to weigh the evidence
and determine the truth of the matter.").
That is particularly true here where, 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.
See Perini Corp. v. Perini Constr., Inc., 915 F.2d 121, 127-28 (4th Cir. 1990) (finding that the
district court erred in granting summary judgment on a trademark infringement claim where the
court had made no inquiry into the sophistication
of the purchasers, noting that consumer
confusion cannot be presumed where the purchasers are "highly trained" professionals
in the
field). 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. See Arrow Fastener Co., Inc. v.
Stanley Works, 59 F.3d 384, 398 (2d Cir. 1995) (noting that the "quality of defendant's product
factor" "is primarily concerned with whether the senior user's reputation could be jeopardized by
virtue of the fact that the junior user's product is of inferior quality").
trademark claims are thus properly left for a jury.
The VSL Parties'
Both the VSL Parties' Cross Motion for
Partial Summary Judgment as to these claims, and the De Simone Parties' Motion for Summary
Judgment on these claims, will be denied.
VSL's Counts XII, XIII, XXI, and XXII and
Leadiant's Counts V and VI will proceed to trial.
35
B.
False Advertising
In their Counterclaims,
VSL, Leadiant,
and Alfasigma
have each asserted
advertising claims against De Simone and ExeGi under 15 U.S.C. sI125(a).
false
In Count VI ofthe
Complaint, ExeGi asserts its own claim of false advertising under the same statute against
Leadiant and Alfasigma.
Leadiant and Alfasigma have also each asserted a related claim for
tortious interference with prospective economic advantage.
In ruling on the Second Motion for a Preliminary Injunction, the Court previously found
that VSL and Leadiant's predecessor were likely to succeed on their false advertising claims.
See De Simone, 2016 WL 3466033 at *18-23. To the evidence before the Court on that motion,
the VSL Parties have added evidence of efforts by the De Simone Parties to disseminate
information, allegedly false, that VSL#3 is no longer composed of the De Simone Formulation
and no longer offers the same clinical benefits. This evidence includes posts to online listservs
by Susan Linke, a dietician and an expert witness for the De Simone Parties. On the issue of the
composition of VSL#3, the VSL Parties cite to their own experts as to the continued clinical
equivalence between VSL#3 and Visbiome. The De Simone Parties, in tum, assert that the VSL
Parties' continued insistence on the equivalence between VSL#3 and Visbiome is scientifically
false, backing up their assertion with their own bevy of experts and articles.
Under the Lanham Act, a cause of action for false advertising arises when "(aJny person
who, on or in connection with any goods or services ...
misleading
representation
uses in commerce any ...
of fact which . . . in commercial
advertising
false or
or promotion,
misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another
person's goods services, or commercial activities."
15 U.S.C.
S
1125(a)(l)(B).
To prevail on a claim of false advertising, a plaintiff must establish that:
36
(1)
(2)
(3)
(4)
(5)
The defendant made a false or misleading description of fact or
representation of fact in a commercial advertisement about its product or
the product of another;
The misrepresentation is material, in that it is likely to influence the
purchasing decision;
The misrepresentation actually deceives or has the tendency to deceive a
substantial segment of its audience;
The defendant placed the false or misleading statement in interstate
commerce; and
The plaintiff has been or is likely to be injured as a result of the
misrepresentation, either by direct diversion of sales or by a lessening of
goodwill associated with its product.
Scotts Co. v. United Indus. Corp., 315 F.3d 264, 272 (4th Cir. 2002). The contested statement
may either be "false on its face" or "although literally true, likely to mislead and to confuse
consumers given the merchandising
context."
Id.
(quoting CB. Fleet Co. v. SmithKline
Beecham Consumer Healthcare L.P., 131 F.3d 430,434 (4th Cir. 1997)). If an advertisement is
literally false, a party can succeed on a false advertising claim without evidence of any consumer
deception. Id. at 273. However, "if a plaintiffs
theory of recovery is premised upon a claim of
implied falsehood, a plaintiff must demonstrate, by extrinsic evidence, that the challenged
advertisements tend to mislead or confuse consumers." Id.
In resolving the Second Motion for a Preliminary
Injunction, the Court found that
statements in the following passage that appeared on the Visbiome website as of February 10,
2016 were likely literally false:
Recently, I made the decision to end my long-term partnership with VSL
Pharmaceuticals, Inc., the company for which I collaborated for many years to
produce and market the De Simone Formulation under the trademark, "VSL#3@"
a trademark owned by VSL Pharmaceuticals, Inc.
I am pleased to announce that my formulation is now exclusively available from
ExeGi Pharma under the trademarks Visbiomeā¢ and Visbiomeā¢ Extra Strength.
See De Simone, 2016 WL 3466033 at *19. The Court reasoned that because VSL had been
allowed to purchase VSL#3 from Danisco up until January 31, 2016 and had been, over the De
37
Simone Parties' objections, apparently stockpiling the product, it was almost certainly "simply
untrue" to assert, only 10 days later, that the De Simone Formulation was available exclusively
from Visbiome.
!d. The parties have submitted no new evidence on summary judgment that
calls this initial determination into question. The record has not, however, been augmented with
evidence clearly establishing the final element of a false advertising claim: that the VSL Parties
have been or are likely to be injured as a result of this misrepresentation on the website, either by
direct diversion of sales or by a lessening of goodwill associated with their product.
record is somewhat inconclusive.
Rather the
The total volume of sales of VSL#3 appears to have increased
from 2015 to 2016. From 2016 to 2017, the net sales ofVSL#3 dropped, but the overall volume
of sales for VSL#3 increased during that same period.
Although VSL points to evidence that
various doctor's offices now prescribe or recommend Visbiome instead ofVSL#3, that lessening
of goodwill appears to have been effected by sales representatives or information disseminated
through internet listservs, not website statements.
As for the alleged false advertising arising from statements by sales representatives, there
remain genuine issues of material fact as to whether ExeGi sales representatives
made false
statements, and the Court previously found in resolving the Second Motion for a Preliminary
Injunction that those statements, even if made, likely did not amount to commercial advertising
or promotion within the meaning of the statute. See De Simone, 2016 WL 3466033 at *22-23.
The VSL Parties have not revisited that argument in their Motion.
Likewise, there remains a
factual dispute whether Linke was affiliated with ExeGi and thus acting as its agent in sending
such communications.
The evidence in the record therefore does not warrant a finding that the
VSL Parties are entitled to summary judgment on the false advertising claims based on alleged
false statements that stated or implied that VSL#3 was no longer on the market.
38
Nor is there cause to grant summary judgment either to the VSL Parties or the De Simone
Parties on the new issue of whether VSL#3 and Visbiome are clinically equivalent.
The VSL
Parties allege that the De Simone Parties have engaged in false advertising by claiming that the
current version of VSL#3 made in Italy no longer uses the De Simone Formulation; the De
Simone Parties counter with the claim that the VSL Parties have engaged in false advertising by
claiming that the new version of VSL#3 is exactly the same as the prior version that used the De
Simone Formulation.
Each side has submitted extensive, conflicting evidence on the scientific
question whether VSL#3 and Visbiome use the same formulation which, on its own, precludes
summary judgment.
Anderson, 477 U.S. at 249. Furthermore, there are significant questions
about whether the challenged representations are actionable advertising.
It is by no means clear
that scientific publications on this issue, or Linke's emails to listservs forwarding such studies,
amount to commercial advertising or promotion by ExeGi. See Mem. Gp. 3d Mot. Prelim. Inj. at
8-10, ECF No. 674 (finding that scientific articles are not actionable under the Lanham Act).
Nor is it clear whether VSL's claim on its website to have eight strains of bacteria, rather than
seven, even if that statement is determined to be false, is one likely to injure the De Simone
Parties.
Accordingly,
the Parties'
false advertising
claims, as well as the related tortious
interference with prospective economic advantage claims asserted by Leadiant and Alfasigma,
must therefore be resolved at trial. See Kuchenbecker, 647 F.2d at 839. The Parties' Motions for
Summary Judgment on the Lanham Act and related claims will therefore be denied.
CONCLUSION
For the foregoing reasons, and in accordance with the determinations set forth above, the
DeSimone Parties' Motion for Summary Judgment is GRANTED IN PART and DENIED IN
39
PART, and the VSL Parties' Cross Motion for Partial Summary Judgment is GRANTED IN
PART and DENIED IN PART. A separate Order shall issue.
Date: October 9,2018
THEODORE D. CHUA
United States District
dge
40
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