Sorrento Therapeutics, Inc. v. Mack

1

SORRENTO THERAPEUTICS, INC., a Delaware corporation, and SCILEX PHARMACEUTICALS INC., a Delaware corporation, Plaintiffs, v. ANTHONY MACK, an individual, and VIRPAX PHARMACEUTICALS, INC., a Delaware corporation, Defendants.

C. A. No. 2021-0210-PAF

Court of Chancery of Delaware

September 1, 2023

Date Submitted: January 20, 2023

Kevin M. Coen, Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT &TUNNELL LLP, Wilmington, Delaware; Jamie L. Wine, Steven N. Feldman, LATHAM &WATKINS LLP, New York, New York Matthew W. Walch, Russell Mangas, LATHAM &WATKINS LLP Chicago, Illinois; Attorneys for Plaintiffs Sorrento Therapeutics, Inc. and Scilex Pharmaceuticals Inc.

Elizabeth A. Sloan, Brittany M. Giusini, Fred DeRitis BALLARD SPAHR LLP, Wilmington, Delaware; Paul Lantieri III, BALLARD SPAHR LLP, Philadelphia, Pennsylvania; Attorneys for Defendant Virpax Pharmaceuticals, Inc.

Stephen B. Brauerman, Justin C. Barrett, BAYARD, P.A., Wilmington, Delaware; Attorneys for Defendant Anthony Mack.

MEMORANDUM OPINION

FIORAVANTI, VICE CHANCELLOR

Anthony Mack is a successful pharmaceutical executive who has founded several pharmaceutical companies over the course of his more than 30-year career. One of those businesses was Scilex Pharmaceuticals Inc. ("Scilex"), a pain-focused company which was actively trying to shepherd ZTlido, an early-stage drug candidate, through the FDA approval process. In 2016, Mack engineered the sale of a controlling stake in Scilex to Sorrento Therapeutics, Inc. ("Sorrento"), for which Mack received $12 million. Mack agreed to stay on after the sale as Scilex's President and to seek potential investment opportunities for Scilex. He also signed a non-competition agreement.

Immediately after the transaction, Mack began developing a new pharmaceutical business aimed at pain management. While serving as Scilex's President and under the restrictions of the non-compete, Mack diverted development opportunities to his other enterprises. All the while, Mack took steps to conceal his conduct from Sorrento and the Scilex board. He downloaded a trove of Scilex documents to his personal devices and later uploaded those documents to the servers of his new company. Mack's new company, Virpax Pharmaceuticals, Inc. ("Virpax"), has since gone public and has three drug candidates, each of which arises from a development opportunity presented to Mack during his time at Scilex. Sorrento and Scilex contend in this litigation that those products compete with ZTlido.

Sorrento and Scilex have asserted claims against Mack for breach of contract, breach of fiduciary duty, and misappropriation of trade secrets, and against Virpax for tortious interference, aiding and abetting Mack's breaches of fiduciary duties, and misappropriating trade secrets. In this post-trial opinion, the court addresses liability, finding: (1) Mack breached the RCA by developing Epoladerm; (2) Virpax is liable for tortious interference with contract; (3) Plaintiffs waived their claims for breach of Mack's employment contract and for tortious interference with prospective economic advantage; (4) Mack breached his fiduciary duty of loyalty to Scilex; (5) Virpax aided and abetted Mack's breach of fiduciary duty; and (6) Mack misappropriated certain Scilex trade secrets. The question of an appropriate remedy must await further proceedings.

I. BACKGROUND

What follows is the court's findings of fact following trial.^[1]

A. The Parties

Sorrento is a biopharmaceutical company that develops and markets pharmaceuticals intended to fight cancer, manage pain, and prevent and treat Covid- 19.^[2] Sorrento is headquartered in California and incorporated in Delaware. Dr. Henry Ji cofounded Sorrento in 2006, and has served as its CEO and President since 2012 and Chairman of the board of directors since 2017.^[3] Through the date of trial, Sorrento was publicly traded on the Nasdaq stock exchange under the symbol "SRNE."^[4]

Scilex is a Delaware corporation engaged in pharmaceutical development. Scilex's mission is to develop and commercialize non-opioid pain-management products. Scilex has one product on the market, a 1.8% lidocaine patch called "ZTlido."^[5] Sorrento acquired 72% of Scilex's outstanding common stock in November 2016.^[6]

Defendant Anthony Mack has worked in the pharmaceutical industry for more than 30 years. Between 1998 and 2009, Mack worked as a Hospital Training Manager for Purdue Pharma, a Product Manager for Endo Pharmaceuticals, and a National Sales Director for EKR Therapeutics.^[7] During this period, Mack leveraged his background in pharmaceutical sales to assist in the development and marketing of Lidoderm, a prescription 5% lidocaine patch with an indication of post-herpetic neuralgia.^[8] In 2009, Mack founded ProSolus Pharmaceuticals LP ("ProSolus"), a pharmaceutical company focused on developing and manufacturing transdermal drug delivery products.^[9] Mack left ProSolus after it was sold to Mission Pharmaceutical Company in 2015.^[10]

Mack co-founded Scilex in 2012 with Bill Dixon, who had also been involved with ProSolus.^[11] Mack later recruited George Ng, the lawyer for ProSolus, to join Scilex.^[12] At Ng's urging, William Pedranti also joined the Scilex management team.^[13] In 2013, Scilex licensed a preclinical product that would later become ZTlido.^[14] Shortly after obtaining that license, Scilex raised approximately $5 million through Aegis Capital, a company affiliated with Ji and with George Uy.^[15] In total, Scilex raised between $100 and $140 million to commercialize ZTlido.^[16] In 2013, Mack also founded IACTA Pharmaceuticals ("IACTA").^[17] IACTA was focused on developing products for eye care and was owned by Mack, Pedranti, Damon Burrows, and Ng.^[18] Mack, Pedranti, Burrows, and Ng already owned another entity, Troy Capital Health ("Troy").^[19]

Virpax is a Delaware corporation with a principal place of business in West Chester, Pennsylvania.^[20] Virpax's stock began trading under the symbol "VRPX" on the Nasdaq stock exchange on February 17, 2021.^[21] Mack is the Chairman and CEO of Virpax.^[22]

B. The FDA Approval Process

Before a new drug can be marketed for human use, the U.S. Food and Drug Administration (the "FDA") must approve it. Three potential routes to approval are relevant to this case.

A new drug, called a "pioneer" or "innovator" drug, must go through an arduous approval process with the FDA.^[23] New drugs involve new chemical entities ("NCE"). First, the drug will undergo laboratory and clinical testing. If the results of those tests are promising, the sponsor will seek to conduct human clinical trials. To do so, it must file and the FDA must approve an investigational new drug application ("IND"). If the IND is approved, the drug will enter into a three-phase investigatory testing process. The three phases ramp up testing in terms of scope and intensity, with the first stage seeking early evidence of effectiveness by studying the drug's effect on twenty to eighty volunteers and the final stage typically involving up to several thousand human subjects. See Smart Loc. Unions &Councils Pension Fund v. BridgeBio Pharma, Inc., 2022 WL 17986515, at *2 n.16 (Del. Ch. Dec. 29, 2022), aff'd, 2023 WL 5091086 (Del. Aug. 9, 2023) (ORDER); see also 21 C.F.R. § 312.21. The sponsor will then submit a new drug application ("NDA") to the FDA that includes "full reports of all clinical investigations, relevant nonclinical studies, and any other data or information relevant to an evaluation of the safety and effectiveness of the drug product obtained or otherwise received by the applicant from any source." Mut. Pharm. Co., Inc. v. Bartlett, 570 U.S. 472, 476 (2013) (internal quotations omitted). Only if the drug is "safe for use" under "the conditions of use prescribed, recommended, or suggested in the proposed labeling thereof" will it be approved. 21 U.S.C. § 355(d).

Second, a sponsor may seek approval of a generic version of an already approved drug. Once a pioneer drug has been approved, and subject to certain waiting periods, a drug's sponsor can file an abbreviated new drug application ("ANDA"). The ANDA process allows the FDA to approve generic versions of a previously approved pioneer drug. Because the pioneer drug's sponsor has already convinced the FDA that the drug's formula and packaging are safe and effective for human use, the sponsor of a generic drug candidate must establish that its product is equivalent to the approved drug. See Takeda Pharms., U.S.A., Inc. v. Burwell, 78 F.Supp.3d 65, 71 (D.D.C. 2016) (explaining that a generic drug's sponsor must "show that its drug has the same relevant characteristics (including, inter alia, the same labeling, active ingredient, route of administration, dosage form, strength, and bioequivalency)"). If the generic version is sufficiently similar to the approved pioneer drug, the FDA may approve it without requiring the more rugged process for pioneer drugs.

The third pathway is referred to as the 505(b)(2) pathway. "Under § 505(b)(2) of the [Federal Food Drug and Cosmetic Act or 'FDCA'], a drug manufacturer may file an NDA for a drug that is not entirely new but is not simply a generic version of a branded drug." Ethypharm S.A France v. Abbott Lab'ys, 707 F.3d 223, 227 (3d Cir. 2013). The approved drug on which the application is based is referred to as the "Reference Listed Drug" ("RLD") or colloquially as the "comparator" or "bioequivalent." Under this pathway, the sponsor may rely on the clinical studies focused on the RLD, rather than independently undertaking clinical studies. Takeda, 78 F.Supp.3d at 72. A drug sponsor using the 505(b)(2) pathway is required to produce data establishing that the differences between the original drug and the 505(b)(2)...