Surgenex, LLC v. Predictive Therapeutics, LLC

462 F.Supp.3d 1160

SURGENEX, LLC, an Arizona limited liability company; Abel Bullock, an individual, Plaintiffs,

v.PREDICTIVE THERAPEUTICS, LLC, a Utah limited liability company; Predictive Biotech, Inc., a Utah corporation; and Doug Schmid, an individual, Defendants.

Case No. 2:19-cv-295-RJS-DAO

United States District Court, D. Utah.

Signed May 26, 2020

Heidi G. Goebel, Goebel Anderson PC, Salt Lake City, UT, Michael Gerity, Pro Hac Vice, Israel & Gerity PLLC, Phoenix, AZ, for Plaintiffs.

Alan S. Mouritsen, Parsons Behle & Latimer, Salt Lake City, UT, Matthew D. Gorman, Pro Hac Vice, Marina C. Tsatalis, Pro Hac Vice, Wilson Sonsini Goodrich & Rosati PC, New York, NY, for Defendants.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS

ROBERT J. SHELBY, United States Chief District Judge

This case arises from a fractured business relationship in the stem cell products market. Plaintiffs Surgenex, LLC and Abel Bullock (Surgenex) bring this action asserting numerous contract and tort claims against Defendants Predictive Therapeutics, LLC, Predictive Biotech, Inc., and Doug Schmid (Predictive). In short, Surgenex alleges that when Schmid—a former outside consultant—left his prior company to work for Predictive, Schmid took Surgenex's trade secrets with him and helped Predictive market and sell essentially the same product he had previously developed for Surgenex. Predictive insists it has never acted unlawfully nor used any of Surgenex's proprietary trade secrets to create its products. Before the court is Predictive's Motion to Dismiss, in which it asks the court to dismiss all of Surgenex's claims.¹ For the reasons explained below, Predictive's Motion is GRANTED in part and DENIED in part.

BACKGROUND

I. Factual Background²

Surgenex produces and distributes high quality amniotic membrane tissue allografts.³ These biomedical products are derived from stem cells for a range of medical and pharmacological applications.⁴

To expand its product lines and business, Surgenex sought out a laboratory to help it develop new processes, procedures, and protocols related to allograft tissue.⁵ To that end, Surgenex executed in December 2014 a consultant agreement (Consultant Agreement) with Utah Cord Bank (Cord Bank), a Utah corporation owned and operated by Elliott Spencer and Doug Schmid.⁶

Under the Consultant Agreement, Surgenex and Cord Bank were to work together to develop and produce biomedical products derived from stem cells.⁷ As the consultant, Cord Bank's role was to develop "Work Product," which the Consultant Agreement defined as "certain strategies, reports, technical information, inventions, software, products, processes, apparatuses, programs, discoveries, [and] designs" to assist Surgenex.⁸ The Consultant Agreement granted Surgenex sole ownership of the Work Product, including all modifications, derivative works, and copies.⁹

Two weeks after Surgenex and Cord Bank entered into the Consultant Agreement, they signed a nondisclosure, non-circumvention, and non-competition agreement (the NDA).¹⁰ The NDA acknowledged Bullock and Surgenex would share "Confidential Information" and trade secrets with Cord Bank to pursue their joint "Business Purpose"—the development of "a protocol regarding morselized flowable tissue allograft."¹¹ The NDA defines Confidential Information to include:

[A]ll information conveyed by [Surgenex] to [Cord Bank] ... related to the business, products, services, research or development ... relating to the Business Purpose, including without limitation: (a) compilations of data (whether in whole or in part) and all analyses, processes, methods, techniques, systems, formulae, research, records, reports, manuals, documentation and models relating thereto; (b) computer software, documentation and databases ...; (c) identities of and information about [Surgenex's] suppliers and customers and their confidential information ...; (d) inventions, designs, developments, devices, methods and processes ...; (e) internal business information, including ... information relating to ... marketing, promotional and sales plans, ... cost and pricing structure ...; and (f) all similar or related information.¹²

Cord Bank further agreed not to use any confidential information to compete with Surgenex.¹³

After successfully developing new allograft tissue products for market, Surgenex sought Cord Bank's help with commercial production.¹⁴ In April 2015, Surgenex and Cord Bank executed a manufacturing contract, and Cord Bank began producing Surgenex's new products.¹⁵

Sometime after Cord Bank began manufacturing Surgenex's new products, Cord Bank allowed Surgenex's Confidential Information and Work Product to be disseminated to outside parties.¹⁶ Cord Bank also began manufacturing, marketing, and selling a competing product it developed using Work Product in violation of its contracts with Surgenex.¹⁷

In December 2015, Schmid notified Spencer that he was leaving Cord Bank and would be selling his forty percent interest in the company.¹⁸ Surgenex alleges Schmid had been courted by other companies "to exploit, convert, and usurp" Surgenex's Work Product and Confidential Information.¹⁹ One of those companies, Predictive, allegedly offered Schmid stock options in exchange for Surgenex's customer list, confidential information, and other proprietary information.²⁰ Schmid possessed this information because of his previous role producing, packaging, and shipping products to Surgenex's customer base.²¹ Schmid ultimately joined Predictive as its Chief Laboratory Officer around February 2016.²²

Just prior to Schmid leaving Cord Bank, Predictive contacted Spencer and Schmid in January 2016 about purchasing Cord Bank and requested Surgenex's proprietary customer list.²³ Though Predictive did not ultimately acquire Cord Bank,²⁴ Surgenex alleges Predictive conspired with Spencer and Schmid to convert Surgenex's Work Product, Confidential Information, and business expectancies.²⁵ Predictive allegedly sought this information to develop a competitive product that could be marketed and sold to Surgenex's customers.²⁶

After becoming aware Schmid may be providing Predictive with Surgenex's confidential and proprietary information, Surgenex sent on February 8, 2016, a cease and desist letter to Schmid, Predictive, and Cord Bank.²⁷ Despite Predictive's representations it would not use any of Surgenex's proprietary material,²⁸ Surgenex alleges it later learned Schmid helped Predictive develop a competitive product using Surgenex's Confidential Information and Work Product.²⁹ As a result, Predictive now competes directly with Surgenex.³⁰

II. Procedural History

Surgenex initially sued Predictive—as well as Cord Bank and Spencer—in the United States District Court for the District of Arizona in July 2017.³¹ Following Predictive's motion to dismiss the case for lack of personal jurisdiction, Surgenex stipulated in February 2018 to Predictive's dismissal.³² Surgenex continued litigating its case against Cord Bank and Spencer until the parties reached a settlement in December 2018.³³ The Arizona action was terminated in February 2019, and Surgenex filed this case in the District of Utah in May 2019.³⁴ Predictive then filed its Motion to Dismiss, asserting Surgenex fails to sufficiently plead its claims. Predictive's Motion is now ripe for review.

LEGAL STANDARD

"To survive a [Rule 12(b)(6) ] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ "³⁵ A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."³⁶ When determining whether a complaint meets these criteria, the court "assume[s] the truth of the plaintiff's well-pleaded factual allegations and view[s] them in the light most favorable to the plaintiff."³⁷ Although a complaint "need not provide ‘detailed factual allegations,’ it must give just enough factual detail to provide ‘fair notice of what the ... claim is and the grounds upon which it rests.’ "³⁸ However, the court will not accept as true "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements."³⁹

ANALYSIS

Surgenex asserts in its Complaint nine causes of action.⁴⁰ The court addresses each claim in turn.⁴¹

I. Breach of Contract and Breach of the Implied Covenant of Good Faith

A. Breach of Contract (Count I)

Surgenex brings its two contract claims against only Defendant Schmid, alleging Schmid breached the confidentiality and non-compete provisions of various contracts by transmitting Surgenex's trade secrets to Predictive and helping it create a competing product.⁴²

"The elements of a prima facie case for breach of contract are (1) a contract, (2) performance by the party seeking recovery, (3) breach of the contract by the other party, and (4) damages."⁴³ Therefore, to survive Predictive's Motion, Surgenex must plead sufficient factual content to plausibly allege that a contract existed between Surgenex and Schmid, Surgenex performed its contractual obligations, Schmid breached the contract, and Surgenex was damaged.

Predictive argues the contract claim must be dismissed because Schmid is not a party to any of the contracts at issue.⁴⁴ The three relevant contracts—the Consulting Agreement, the NDA, and the manufacturing contract—are all between Surgenex and Cord Bank.⁴⁵ Predictive asserts the contract claim must be dismissed because Surgenex cannot plausibly allege that a contract exists between Surgenex and Schmid.

For its part, Surgenex does not dispute that Schmid is not a party to any of the relevant contracts. This alone compels the court to dismiss the contract claims. Under Utah law, "[a]s a general rule, none is liable upon a contract except those who are parties to it."⁴⁶ Courts routinely reject breach of contract claims...