Beard Research Inc. v. Kates

• Decision Date: 23 April 2010
• Docket Number: Civil Action No. 1316-VCP.
• Court: Court of Chancery of Delaware
• Parties: BEARD RESEARCH, INC. and CB Research & Development, Inc., Plaintiffs, v. Michael J. KATES, ASDI, Inc., Advanced Synthesis Group, Inc., Alan Blize, Garry Smith, Michael Wagaman, and Stephen Jones, Defendants.

8 A.3d 573

BEARD RESEARCH, INC. and CB Research & Development, Inc., Plaintiffs,

v.Michael J. KATES, ASDI, Inc., Advanced Synthesis Group, Inc., Alan Blize, Garry Smith, Michael Wagaman, and Stephen Jones, Defendants.

Civil Action No. 1316-VCP.

Court of Chancery of Delaware.

Submitted: Dec. 3, 2009.

Decided: April 23, 2010.

James S. Green, Esquire, R. Karl Hill, Esquire, Kevin A. Guerke, Esquire, Seitz, Van Ogtrop & Green, P.A., Wilmington, Delaware, Attorneys for Plaintiffs.

John A. Elzufon, Esquire, Elzufon, Austin, Reardon, Tarlov & Mondell, P.A., Wilmington, Delaware, Attorneys for Defendants Michael J. Kates, Garry Smith, Michael Wagaman, Steven Jones, and Advanced Synthesis Group, Inc.

Barry M. Willoughby, Esquire, John W. Shaw, Esquire, Elena C. Norman, Esquire, Young, Conaway, Stargatt & Taylor, LLP, Wilmington, Delaware, Attorneys for Defendants ASDI, Inc. and Alan Blize.

OPINION

PARSONS, Vice Chancellor.

Plaintiffs, two companies once involved in the development and sale of chemical compounds, brought this action against a number of business competitors and former employees claiming they were the victim of a scheme by these entities and individuals to put them out of business. Plaintiffs, Charles Beard Research & Development, Inc. ("CB") and Beard Research, Inc. ("BR," collectively, with CB, "Plaintiffs"), hired Michael Kates in 1998 and made him second in command in both companies to founder Charles Beard. By 2003, Kates was ready to move on and began talking frequently with Alan Blize, whose employer, ASDI, Inc. ("ASDI"), waslooking to set up a company that would compete with Plaintiffs. Blize knew Kates from his previous job at Pfizer, Inc. ("Pfizer"), Plaintiffs' biggest customer. In early 2004, Kates left Plaintiffs to take a job with Advanced Synthesis Group, Inc. ("ASG"), a company funded by ASDI. Three other CB employees followed Kates to ASG. Within a couple of months of Kates's departure, Pfizer signed a contract with ASG and terminated a $22 million contract it had with Plaintiffs, the biggest contract in Plaintiffs' history. In the same timeframe, Plaintiffs saw numerous compounds that they alone had marketed listed for sale in a new ASG catalog.

Plaintiffs then filed suit against ASDI, ASG, Pfizer,¹ Blize, Kates, and the three former employees who followed Kates to ASG (Garry Smith, Steven Jones, and Michael Wagaman). The Complaint asserted eleven claims against various combinations of these defendants. Plaintiffs pursued five of these claims (misappropriation of trade secrets, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, tortious interference with contractual relations, and tortious interference with prospective business relations) through trial.

This Opinion constitutes my post-trial findings of fact and conclusions of law as to those claims. For the reasons stated herein, I conclude that: (1) ASDI, ASG, Kates, and Smith are liable for misappropriation of trade secrets; (2) Kates is liable for breach of fiduciary duty; (3) ASDI and Blize are liable for aiding and abetting Kates's breach of fiduciary duty; (4) none of the defendants are liable for tortious interference with contractual relations; and (5) ASDI, ASG, Blize, and Kates are liable for tortious interference with prospective business relations. Finally, I conclude that ASDI, ASG, Blize, and Kates are jointly and severally liable to Plaintiffs for damages in the amount of $4,338,463, while Smith is liable to Plaintiffs jointly and severally for $668,544 of this amount. ASDI, ASG, Blize, Kates, and Smith are also liable for pre- and post-judgment interest on the amounts that they owe as damages.

I. BACKGROUND

A. The Parties

Plaintiff CB is a Delaware corporation that was organized as a chemistry-based contract research organization ("CRO") in 1991.² CB's business focused on one-off and catalog work.³ CB's founder and namesake, Charles Beard ("Beard"), has forty-five years of experience in pharmaceutical research, including significant experience in process chemistry, which involves the manufacture of large quantities of chemical material.⁴ Because of Beard's expertise in process chemistry, CB's businessmodel focused on making large quantities of compounds, sometimes in the hundreds of kilograms. ⁵ CB sold all of its assets to Adesis, Inc. ("Adesis"), a company in which Beard is a co-owner, for $3.4 million on September 1, 2005.⁶

Beard organized Plaintiff BR as a Delaware corporation in 1999 to provide full time equivalent chemists ("FTEs").⁷ FTEs are chemists, usually with PhDs, hired by a CRO to service a client under an arrangement where the CRO pays the chemists' salaries and benefits and receives a set annual fee from the client.⁸ In the fall of 2004, Beard closed down BR, and CB took over BR's FTE work.⁹

Defendant ASDI is a Delaware corporation formed as the successor to Analytical Services of Delaware, Inc. ASDI was founded by Ronald Paloni and runs its operations from Newark, Delaware.¹⁰ ASDI runs a "monomer store," through which it stores and ships chemical compounds to chemists worldwide. ¹¹

Defendant Advanced Synthesis Group, Inc. ("ASG") was formed initially as MainLine Chemical Limited on December 19, 2003.¹² At that time, ASG's shareholders were Kates's wife, Wendy, Paloni and his wife, Oksana, Blize, and Smith.¹³ ASDI provided start-up funding for ASG, which generally was viewed as an affiliate of ASDI, even though ASDI did not own any ASG stock. ¹⁴ ASG's business model involved the custom synthesis of chemical compounds to create small libraries.¹⁵ ASG ceased operations in 2005 when ASDI purchased its assets.¹⁶

Defendant Blize served as a "Molecular Broker" ¹⁷ at Pfizer from 1995 to 2002.¹⁸ In this capacity, Blize managed Pfizer's relations with CB and BR.¹⁹ Blize joined ASDI in 2002 and became its chief executive officer ("CEO") in June 2006 and a part-owner in 2007.²⁰ ASDI hired Blize, in part, to develop custom synthesis operations.²¹

Defendant Kates was hired by CB as a chemist in 1998 and later became CB's Executive Vice President and Director of Marketing.²² When BR was founded inDecember 2003, Kates received a 33 percent ownership stake in the company and was appointed a director and an officer.²³ Kates was at all times an at-will employee of both CB and BR and never signed a written noncompete agreement.²⁴ Kates left CB and BR on February 13, 2004 to become ASG's President.²⁵ Kates was removed as a director and officer of BR on the same date.²⁶

Defendant Smith began working at CB in November 2001 and became CB's Director of Chemistry in April 2002.²⁷ Smith left CB on March 26, 2004 to take a job with ASG. Smith is currently ASDI's Director of Chemistry.²⁸

Defendant Wagaman served as a Senior Group Leader at CB from June 2000 to April 27, 2004, when he took a job as Senior Director, Global Chemistry for ASDI.²⁹

Defendant Jones ³⁰ worked at CB as a Senior Scientist and Group Leader from January 2003 until April 8, 2004. After leaving CB, Jones took a job with ASG, where he served as a Group Leader and Director of Chemistry.³¹

B. Facts

In early 1999, CB first solicited custom synthesis business from Parke-Davis. ³² Over the next year, CB completed roughly thirty-five one-off projects for Parke-Davis and Pfizer.³³ In September 2000, BR and Pfizer agreed to a contract whereby Pfizer would pay BR for FTE work. ³⁴ Having been very satisfied with BR's work under this contract, Pfizer began in early 2002 to discuss a more extensive collaboration with CB and BR.³⁵ Within the next year, Pfizer and CB executed two separate two-way confidentiality agreements whereby Pfizer agreed to protect the confidentiality of CB proprietary information.³⁶

In December 2002, Pfizer and CB agreed to a nonexclusive contract worth over $22 million (the "Pfizer Contract" or the "Contract"). Under the Contract, Pfizer agreed to provide funding for at least sixteen FTEs at a minimum rate of $226,000 per year and give CB at least $950,000 per quarter in one-off work forthe next three years.³⁷ The Pfizer Contract contains a "key man clause" which states: "The following shall constitute events of termination ('Event of Termination'): departure or reassignment of Dr. Chuck Beard and / or Dr. Michael Kates unless Pfizer and CB agree to a replacement." ³⁸ Upon the occurrence of an Event of Termination, the nonresponsible party could terminate the Contract immediately.³⁹

Blize participated in the negotiations of the Pfizer Contract on behalf of Pfizer. He reviewed a draft of the Contract and specifically discussed with his assistant the inclusion of Kates in the key man clause.⁴⁰ During the negotiation of the Pfizer Contract, Blize was receiving paychecks from both ASDI and Pfizer, as he had accepted a job at ASDI in July 2002, but did not leave Pfizer until December 23, 2002.⁴¹

Despite evidence indicating that CB's work for Pfizer was not only satisfactory, but consistently exceeded the performance required under the Contract, Pfizer began pressuring CB to reduce the prices called for in the Contract almost immediately after it went into effect.⁴² Pfizer also expressed concerns about CB in terms of its allegedly questionable business ethics and reputation as a "sweat-shop." ⁴³

In addition to its work under the Pfizer Contract, CB routinely performed one-off custom synthesis work for a variety of customers. Over time, certain customers provided so much repeat business for CB that CB came to expect recurring business from these customers.⁴⁴

CB also maintained a catalog business through which customers could buy desired quantities of ready-made compounds for immediate delivery. CB based its catalog on a "tree concept." CB had seven core intermediate compounds (which it called the "magnificent seven") that served as trees. From these trees, CB chemists would build branches by performing reactions to create more advanced chemical intermediates. CB then would list these branches for sale in its catalog. The recipes for...