PeriphaGen, Inc. v. Krystal Biotech, Inc.

PERIPHAGEN, INC., Plaintiff, v. KRYSTAL BIOTECH, INC., KRISH S. KRISHNAN, and SUMA KRISHNAN, Defendants.

KRYSTAL BIOTECH, INC., Third-Party Plaintiff, v. JAMES WECHUCK and DAVID KRISKY, Third-Party Defendants.

2:20-cv-00646

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

December 1, 2020

OPINION

Mark R. Hornak, Chief United States District Judge

Before the Court is Third-Party Defendants' Motion to Dismiss (ECF No. 46) Third-Party Plaintiff's Complaint (ECF No. 28) ("Third-Party Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, Third-Party Defendants' Motion to Dismiss is GRANTED IN PART and DENIED IN PART. Count I of the Third-Party Complaint survives the Motion to Dismiss in full. As for Count II of the Third-Party Complaint, to the extent that Third-Party Plaintiff Krystal Biotech, Inc. ("Krystal") seeks contribution for misappropriation of trade secrets and unfair competition under Pennsylvania state law (the "state law claims"), Count II survives. To the extent that Count II seeks contribution for breach of contract and violations of federal law, however, the Motion to Dismiss is GRANTED. Finally, as to Count III, to the extent that Krystal seeks indemnification via the common law, Krystal's indemnification claim may not proceed for breach of contract or violations of federal law, and the Motion to Dismiss is GRANTED as to that portion of Count III. To the extent that Krystal alternatively pleads indemnification via contractual obligations, however, Count III may proceed in full, and the Motion to Dismiss is DENIED as to that portion of that Count. In summary, Third-Party Defendants' Motion to Dismiss is DENIED as to Count I in full; Count II as it pertains to the state law claims in PeriphaGen Inc.'s Complaint (aside from breach of contract); and Count III in full to the extent Krystal seeks contractual indemnity, but if discovery reveals that Krystal instead may only pursue common law indemnity, Krystal may only seek indemnification for the state law claims identified above (and not for breach of contract or federal law violations). Thus, the portions of Count II and Count III seeking contribution or indemnification via the common law for breach of contract and violations of federal law are DISMISSED WITH PREJUDICE.

I. BACKGROUND

An underlying dispute reflected in part in the Complaint in this action and between Plaintiff PeriphaGen, Inc. ("PeriphaGen") and Defendants Krystal, Krish Krishnan, and Suma Krishnan gives rise to the present third-party action. Krystal, as Third-Party Plaintiff, brings third-party claims against David Krisky and James Wechuck ("Drs. Krisky and Wechuck" or "the individuals") seeking contribution, indemnification, along with a damages claim for breach of contract. The facts set out below are drawn from the Third-Party Complaint and other materials which the Court may properly consider.

Krystal was founded as a California limited liability company in December 2015 by Krish and Suma Krishnan to develop an HSV-based gene therapy product for a genetic skin disease.¹ In March 2017, Krystal converted to a Delaware corporation. (ECF No. 28.) PeriphaGen, a company co-founded by Drs. Krisky and Wechuck, is a Delaware corporation that focuses on researching and developing HSV-1 gene therapy vectors. (Id.) From March to May 2016, Krystal and PeriphaGen engaged in business discussions, which ultimately led to a year-and-a-half long business relationship beginning in May 2016 that ultimately soured in October 2017. Through the course of that relationship, Krystal and PeriphaGen entered in to one (1) Confidential Disclosure Agreement (CDA); five (5) Material Transfer Agreements (MTAs); and one (1) Access and Use Agreement. (Id.) In addition to the CDA and MTAs, Krystal hired two former PeriphaGen employees. (Id.)

In June 2016, Drs. Krisky and Wechuck entered in to separate but identical Consulting Agreements with Krystal. (ECF Nos. 28-1 and 28-2.) Pursuant to these Consulting Agreements, Drs. Krisky and Wechuck worked as part-time consultants to assist Krystal with its independent vector development. (ECF No. 28.) Krystal alleges that Drs. Krisky and Wechuck "assured Krystal that their consulting services would be based on their work prior to joining PeriphaGen, and not on their experience at PeriphaGen." (Id.) Further, Krystal alleges that throughout the consultingrelationship, Drs. Krisky and Wechuck were aware of Krystal's proprietary vector development, cell line, and manufacturing process. (Id.) Each Consulting Agreement included a "Warranty" section, which states that "none of the Services or Inventions or any development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity." (ECF Nos. 28-1 and 28-2.) Based on this warranty, Krystal alleges that Drs. Krisky and Wechuck, who were officers of PeriphaGen, authorized Krystal to use any services or information provided to it through the Consulting Agreements. (ECF No. 28.) The Consulting Agreements also included indemnity provisions. (ECF Nos. 28-1 and 28-2.)

The relationship between the two companies quickly deteriorated, ultimately leading to PeriphaGen suing Krystal in this case for allegedly misappropriating PeriphaGen's trade secrets and confidential information. (Compl., ECF No. 1.) PeriphaGen terminated the CDA and MTAs with Krystal on October 26, 2017. (Id.) The next day, Krystal terminated its Consulting Agreements with Drs. Krisky and Wechuck and vacated the PeriphaGen lab space. Krystal now brings the present third-party claims against Drs. Krisky and Wechuck, contending that "to the extent that Krystal is found liable to PeriphaGen under any claim of the Complaint, such liability arises from the conduct of [Drs.] Wechuck and Krisky." (ECF No. 28.)

Specifically, Krystal brings the following third-party claims against Drs. Krisky and Wechuck. First, Krystal seeks contribution from Drs. Krisky and Wechuck to the extent that Krystal is found liable for any of the claims raised in PeriphaGen's underlying Complaint.² Second, Krystal alleges it is entitled to indemnification by Drs. Krisky and Wechuck via contract,or secondarily, via the common law. (Id.) Finally, pursuant to Federal Rule of Civil Procedure 18(a), Krystal joins to this action a breach of contract claim against Drs. Krisky and Wechuck for alleged violations of their Consulting Agreements. (Id.)

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), which Third-Party Defendants rely upon to bring the instant Motion, the Court may dismiss a complaint for "failure to state a claim upon which relief can be granted." The Supreme Court's decision in Ashcroft v. Iqbal held that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements" are not enough to survive a Rule 12(b)(6) motion. 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Rather, a plaintiff's factual allegations must "raise a right to relief above the speculative level" and state a plausible claim for relief. Twombly, 550 U.S. at 555. In reading the complaint, the Court should "accept all factual allegations as true, construe the complaint in a light most favorable to the plaintiff, and determine whether, under a reasonable reading of the complaint, the plaintiff may be entitled to relief." Blanyar v. Genova Prods. Inc., 861 F.3d 426, 431 (3d Cir. 2017) (citing Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009)).

The Third Circuit further guides lower courts to utilize a three-part framework. First, the Court "identif[ies] the elements of the claim." Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011). Second, the Court "review[s] the complaint to strike conclusory allegations." Id. Third, the Court "look[s] at the well-pleaded components of the complaint and evaluat[es] whether all of the elements identified in part one of the inquiry are sufficiently alleged." Id. If the facts alleged in the complaint "show" that the plaintiff is entitled to relief, the motion to dismiss should be denied. See Fowler, 578 F.3d at 210-11.

III. DISCUSSION

A. Count I: Breach of Contract

Pursuant to Federal Rule of Civil Procedure 18(a), Krystal brings a breach of contract claim against Drs. Krisky and Wechuck alongside its third-party claims of contribution and indemnification. Krystal rests its breach of contract claim against these individuals on the following: Drs. Krisky and Wechuck "each covenanted that they would not use the intellectual property of any third party, including PeriphaGen, in connection with providing their consulting services to Krystal"; "each warranted that all of their work under the consulting agreements would be their original work"; and finally, "each warranted . . . that they had full rights to provide Krystal the 'assignments and rights provided[.]'" (ECF No. 28.) In sum, Krystal argues that "to the extent any confidential information or trade secrets of PeriphaGen were improperly disclosed to Krystal, they were disclosed by [Drs. Krisky and Wechuck] in breach of their consulting agreements," as summarized above. (ECF No. 28.)

In their Brief in Support of their Motion, Third-Party Defendants Drs. Krisky and Wechuck first argue that Krystal's claim for breach of contract fails as a matter of law because Krystal's claims for indemnification and contribution fail as a matter of law. (ECF No. 47.) The Third-Party Defendants rely on a case decided in the Middle District of Pennsylvania, Vercusky v. Wech, in which the court first dismissed a third-party contribution claim because it concluded that the third-party plaintiff and the third-party defendant were not joint tortfeasors. No. 13-01459, 2013 WL 5966159, at *1 (M.D. Pa. Nov. 8, 2013). The court then dismissed the third-party plaintiff's breach of contract claim, concluding that a...