Abs Global, Inc. v. Inguran, LLC

ABS GLOBAL, INC., Plaintiff/Counterclaim Defendant, v. INGURAN, LLC, Defendant/Counterclaimant/Third-Party Plaintiff,andXY, LLC, Intervening Defendant/Counterclaimant/Third-Party Plaintiff,andCYTONOME/ST., LLC, Intervening Defendant, v. GENUS PLC, Third-Party Defendant.

14-cv-503-wmc

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WISCONSIN

July 21, 2016

OPINION & ORDER

This lawsuit arises out of the breakdown of a now ten-year business relationship between plaintiff ABS Global, Inc. ("ABS") and defendant/counterclaimant Inguran, LLC d/b/a Sexing Technologies ("ST"). Originally, ABS sued seeking a declaration that the parties' latest agreement, under which ST is to continue to provide sexed semen processing services for prized bulls at ABS facilities from 2012 to at least 2017, is void under § 2 of the Sherman Antitrust Act and Wisconsin unfair competition law. Not to be outdone, ST then counterclaimed that: (1) ABS and ABS's parent company, Genus plc ("Genus"), had fraudulently induced ST to enter into the Agreement; (2) ABS and Genus breached the agreement in a number of ways; (3) ABS and Genus are liable under an alternative theory of promissory estoppel; and (4) ABS and Genus has infringed two U.S. patents owned by ST. Finally, ST's wholly-owned subsidiary, XY, LLC ("XY"), intervened in this action with its own claims against ABS and Genus for infringement of two additional U.S. patents owned by XY, and for misappropriation of XY's alleged trade secrets. Sadly for all concerned, most of these claims will now proceed to a jury trial for the reasons set forth below.

OVERVIEW OF UNDISPUTED FACTS¹

I. The Parties

ABS is in the business of providing bull semen to dairy and beef producers for artificial insemination. ST provides a service to ABS and other similar companies using "sorting" technology to separate male and female bull sperm. From 2006 to 2012, ABS and ST did business together under the terms of several contracts called "Sorting Agreements." In 2012, ABS explored alternatives to doing business with ST, including use of its own technology for sorting, but was unsuccessful. As a result, ABS reupped, signing a 2012 Semen Sorting Agreement with ST (the "Agreement") after some six months of negotiation over its specific terms. Also in 2012, ABS continued researching and developing technology for processing sexed bovine semen, which it calls "Genus Sexed Semen" or "GSS" technology.

II. Background

Although the parties' characterizations of the bull semen market differ drastically, they do not appear to dispute the following facts that provide necessary context to their claims and defenses.² Dairy and beef producers often use artificial insemination to impregnate cows with semen from a high quality bull. The suppliers of bull semen like ABS are referred to as "bull studs." Along with ABS, who appears to be the industry leader, just three other major bull studs -- Select Sires, Cooperative Resources International ("CRI") and Accelerated Genetics -- represent some 96% of the U.S. market for bull studs.

Although ST also operates as a bull stud, it is mainly in the business of sorting bull ejaculate so that the viable sperm cells are either predominantly female or male. The parties, and apparently the marketplace, refer to the final product of this process as "sexed semen" or "sexed bovine semen."

On dairy farms, female calves are generally more valuable than male calves. Inseminating cows with sexed semen that has a higher proportion of X-chromosome sperm is more likely to lead to birth of a female calf than impregnating them with so-called "conventional" semen that is not sexed. As a result, sexed semen has become a tool for many (although not all) dairy producers using artificial insemination, especially for heifers, who tend to be more fertile and therefore more likely to be impregnated bythe substantially more expensive, though generally less potent sexed semen.³ Accordingly, even though the majority of its sales are comprised of conventional semen, companies like ABS and the three other major American bull studs, offer both conventional bovine semen and sexed semen.

ST was founded in October of 2002, and it began attempting to commercialize sexed semen processing in 2003. ST entered into its first contract with a U.S. bull stud to provide sexed semen processing services in 2004. By virtue of its patented method and related advantages it has received from acquiring XY, Inc. (as described below), ST currently has nearly 100 percent of the sales of sexed semen processing services in the United States. ABS asserts (and ST disputes) that bull studs like ABS have had no choice but to work with and accept ST's contract terms, including those in the Agreement at issue here. In particular, ABS and ST dispute whether ABS needed, or had the ability to find, another source for sexed semen processing.

III. The Agreement

The Agreement became effective September 1, 2012, and continues by its terms until at least September 1, 2017, with the opportunity for additional one-year extensions. In it, ABS agreed to provide raw ejaculate from bulls owned or leased by ABS for sorting by ST. The agreement is governed by Texas law and contains the following preamble:

ST is engaged in the business of sorting and freezing bovine semen into X (female) chromosome bearing and Y (male) chromosome bearing populations, for use in the artificial insemination of cattle (herein the processing service shall be known as "Sort Semen" or "Sorting Semen" andresultant X or Y chromosome bearing populations of sperm shall be known as "Sorted Semen"). ABS wishes to engage ST as a service provider to Sort Semen from its bulls in strict compliance with Certified Semen Services' processes and procedures (known as "CSS Compliance") and retain the X (female) and Y (male) chromosome bearing population, respectively, as separated (known as "Cells").

(Agreement, Ex. 7 to Horowitz decl., dkt. #258-7.)

The parties' contractual and antitrust/unfair competition-related disputes stem from several sections of this agreement, principally involving:

• Section 2, which includes annual commitments for ABS and ST. Each year, ABS must provide a certain annual amount of semen and ST must provide its services for a certain amount of semen.

• Section 3, which includes a provision that makes the contract extend for an additional year "unless either party ... gives written notice to the other party of its election not to so extend the term" three years in advance. (Agreement, dkt. #258-7, at ING 005740.)

• Section 4(a), which provides for liquidated damages if either party terminates the Agreement for any reason other than the other party's material breach, as defined by Section 19 of the Agreement. Section 4(b) provides that ABS will pay ST $1,500,000 "as liquidated damages" if ABS terminates the agreement, including by non-renewal under Section 3, or if ST terminates it due to ABS's material breach.

• Section 16, which defines "ST's Confidential Information" and ABS agreed not to use, disclose or make such information available to any third party.

• Section 18(a), which restricts ABS's ability to research and develop a sorting technology that would compete with ST's technology. Section 18(b) permits ABS to continue research and development on programs that were in place at least ninety (90) days prior to the Agreement's effective date.

IV. The Technology

A. ST Sexed Semen Processing

ST originally based its sexed semen technology on a process developed by Lawrence Johnson at the U.S. Department of Agriculture (the "Johnson method"). The Johnson method is the subject of U.S. Patent No. 5,135,759 ("Johnson Patent") and requires a device called a flow cytometer, which is used to separate cells physically based on their different properties. The Johnson Patent involves the use of fluorescent dye that binds to the DNA in sperm cells. Because X chromosomes, which are female, have more DNA than Y chromosomes, which are male, an X-carrying/female sperm will give off more fluorescent light when exposed to a detection laser than a Y-carrying/male sperm. The Johnson method uses this difference in fluorescence to sort female from male sperm by applying a positive, negative or no charge to a droplet containing an individual cell and then deflecting the charged droplet one way or another with electrostatic deflection plates.

Since the Johnson Patent expired in 2006, ST has purchased, acquired or licensed several U.S. patents related to sexed semen processing. Principally, ST acquired control of XY, Inc., in 2007. At the time, ST was one of several U.S. licensees using XY's U.S. Patent Nos. 7,195,920 ("'920 patent") and 7,820,425 ("'425 patent"). The parties dispute exactly how the other licenses ended, but they do not dispute that ST is now XY's sole current licensee for its patented sexed semen process in the United States for bull studs. Since 2007, XY has also been a wholly-owned subsidiary of ST. In 2008, ST also purchased several pending patent applications related to sexed semen processingfrom Monsanto Company ("Monsanto"). Those applications matured into 24 U.S. patents, including U.S. Patent Nos. 8,206,987 ("'987 patent") and 8,198,092 ("'092 patent") that remain in suit here. Finally, ST obtained an exclusive license for non-human applications to a portfolio of U.S. patents relating to sexed semen processing from Cytonome, Inc., covering an additional 46 U.S. patents related to sexed semen.

B. ABS Sexed Semen Processing

ABS has developed its own technology, known as the "GSS technology" for "Genus Sexed Semen," that uses a laser-based method for producing sexed semen. The GSS technology kills or incapacitates the male or female sperm, rather than separating sperm by sex. Through this technology, all of the sperm remain in a single stream throughout the process and are collected in a single container after the laser operates on them. ABS's corporate representative indicates that...