Research Corp. Techs. v. Eli Lilly & Co.

• Decision Date: 19 October 2021
• Docket Number: CV-16-00191-TUC-SHR
• Parties: Research Corporation Technologies Incorporated, Plaintiff, v. Eli Lilly and Company, Defendant.
• Court: U.S. District Court — District of Arizona

Research Corporation Technologies Incorporated, Plaintiff,
v.
Eli Lilly and Company, Defendant.

No. CV-16-00191-TUC-SHR

United States District Court, D. Arizona

October 19, 2021

ORDER GRANTING IN-PART AND DENYING IN-PART SUMMARY JUDGMENT

Honorable Scott H. Rash United States District Judge

Pending before the Court are Defendant Eli Lilly and Company (“Lilly”)'s Motion for Summary Judgment (Doc. 236) and Plaintiff Research Corporation Technologies, Inc. (“RCT”)'s Motion for Partial Summary Judgment (Docs. 238^[1], 248). This action arises from a contract dispute and Lilly's alleged use of RCT's technology to produce Lilly's diabetes medications.

I. BACKGROUND

In 1990, Lilly entered into a License Agreement (the “Agreement”) (Doc. 39-1) with Phillips Petroleum Company (“Phillips”) in which Phillips licensed Lilly to use certain yeast expression technology for research and commercial purposes. Phillips agreed to provide Lilly certain strains of yeast called Pichia pastoris (“Pichia”), certain expression vectors, a procedures manual and other information related to the expression technology

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for Lilly to use to produce “Product” or “Reagent.” (Id.) In exchange, Lilly agreed to pay Phillips royalties of two percent (2%) of the net sales value derived from the sale of End Product or Reagent. (Id.) The Agreement defines the following terms:

• “Host Strain” means “the primary strain of Pichia pastoris which has been used by Phillips and the Salk Institute Biotechnology/Industrial Associates, Inc. (“SIBIA”) to produce various materials. This strain is identified by Phillips as GTS115 Host Strain shall also mean any strains of Pichia pastoris derived in any manner from the strain provided to [Lilly] by Phillips or derived using information provided to [Lilly] by Phillips directly or indirectly under this Agreement.” ¶ 1.1

• “Expression Vector” means “the vectors described in Attachment A. Expression Vector shall also include vectors derived in any manner from the Expression Vectors provided to [Lilly] under this Agreement or derived using information provided to [Lilly] by Phillips directly or indirectly under this Agreement.” ¶ 1.2

• “Expression System” means “the Host Strain containing an Expression Vector which directs the production of a Product or Reagent.” ¶ 1.3.

• “Expression Technology” means “Phillips technology and materials useful in the production of Product or Reagent.” ¶ 1.9.

• “Product” means “End Product or Bulk Product.”^[2] ¶ 1.7.

• “End Product” means “a human pharmaceutical or diagnostic or animal therapeutic or diagnostic, other than the human pharmaceutical or diagnostic or animal therapeutic or diagnostics listed in Attachment B, which is produced by an Expression System and which is sold in a final dosage form for utilization by an Ultimate Consumer and is not intended or marketed for further formulation, processing or chemical transformation.” ¶ 1.5.

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• “Ultimate Consumer” means “that person or entity whose use of the product results in its destruction or loss of activity and/or loss of value.” ¶ 1.4.

• “Reagent” means “a material produced using the Expression Technology and which is used in the manufacture or development of Product or which is used for research purposes.” ¶ 1.8.

• “Net Sales Value” means “the proceeds actually derived from the sale of End Product, Reagent, or Bulk Product by [Lilly] or an Affiliate of [Lilly] to any third parties in the [world] less eight percent (8%) of said proceeds.” ¶ 1.11.

The Agreement is governed by and construed according to Indiana Law.^[3] ¶ 13.

The following facts are undisputed:

After entering the Agreement, Phillips transferred to Lilly certain strains of Pichia, including SMD1163-a Host Strain, ^[4] certain Expression Vectors, and information related to such Host Strain and Expression Vectors. (DSOF ¶ 1, Exh. 6 ¶¶ 84-85; PSOF ¶¶ 43- 45.)^[5] In 1993, Phillips sold RCT the Pichia technology, the patent rights, the proprietary information, and all related intellectual property rights. (PSOF ¶¶ 16-18, Exh. 8.)

In the early 1990s, Lilly used SMD1163 and four of the Expression Vectors it received from Phillips to develop a Pichia Expression System called SMD1163/pLGD43.^[6]

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(DSOF ¶ 3, Exh. 6 ¶ 121; PSOF ¶ 8, Exh. 5 ¶¶ 133-35.) SMD1163/pLGD43 expresses only one thing: an enzyme (which is a type of protein) called Carboxypeptidase-B (“CpB”). (DSOF ¶¶ 3, 8, Exh. 3 ¶ 257, Exh. 6 ¶ 121; Doc. 308 (Oral Argument Transcript) at 47-48, 59.) CpB is not a human pharmaceutical or End Product and Lilly does not sell CpB. (Doc. 236 at 6; Doc. 264 at 8; Doc. 151 at 23; Doc. 308 at 66-67.)

Lilly uses a separate E. coli expression system to express a protein called proinsulin. (DSOF ¶ 13, Exhs. 4-5; PSOF ¶ 97, Exhs. 56, 68.) Proinsulin is not a human pharmaceutical or End Product under the Agreement because it must undergo further processing to become a human pharmaceutical. (Doc. 267 at 12; Doc. 236 at 8-10; DSOF Exh. 5 ¶ 83, Exh. 4 ¶¶ 124, 126-27, 201, 261; PSOF Exh. 68; Doc. 308 at 12, 47, 62.)

Neither SMD1163/pLGD43 nor the E. coli expression system alone can produce the active pharmaceutical ingredient (“API”) in the Diabetes Drugs at issue.^[7] (DSOF Exh. 5 ¶¶ 77, 83; PSOF ¶¶ 103-12.) Rather, Lilly uses the proinsulin expressed by the E. coli expression system and the CpB^[8] expressed by SMD1163/pLGD43, along with many other materials, to produce insulin. (Doc. 308 at 53-54, 63-64.) Essentially, CpB acts as scissors to cleave certain amino acids from the proinsulin protein, which, in combination with other chemical processes, ultimately yields insulin. (DSOF Exh. 5, ¶ 85; PSOF ¶¶ 103-08; Doc. 308 at 60.) That is, without CpB, proinsulin cannot become active and operate as a human pharmaceutical. (PSOF Exh. 69 ¶¶ 109-11, 117; DSOF Exh. 9.) The insulin created by using proinsulin and CpB is the API of the Diabetes Drugs, which Lilly markets and sells in final dosage form to an Ultimate Consumer. (PSOF ¶¶ 105-12; Doc. 151 at 23; Doc. 236 at 8 n.8; DSOF Exh. 4 ¶¶ 124, 126-27, 201, 261.)

In 2001, Lilly extended a sublicense to and entered into a manufacturing agreement

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with an Austrian company, Sandoz GmbH (“Sandoz”), ^[9] under which Sandoz used SMD1163/pLGD43 to produce CpB, which Lilly then used in the process described above to manufacture the Diabetes Drugs. (Doc. 151 at 18-20; Doc. 178 at 4; DSOF Exh. 9.) Lilly did not provide written notice to RCT of the manufacturing agreement until October 2015. (Doc. 151 at 21.)

In November 2015, Lilly sent RCT a letter explaining it had been purchasing Pichia-made CpB from Sandoz and using that CpB to “trim off amino acids” from “an intermediate protein” in the “production of each API” of the Diabetes Drugs. (DSOF Exh. 9.)

In April 2016, RCT brought this action against Lilly. (Doc. 6.) In its Fourth Amended Complaint (“Complaint”) (Doc. 149), RCT alleges the following:

I. Breach of Contract - Exceeding the Scope of License;

II. Breach of Contract - Confidentiality / Failure to Notify RCT of Sublicense;

III. Breach of Contract - Failure to Report Sales and Pay Royalties;

IV. Breach of Contract - Failure to Cease Using and Returning Materials and Information to RCT After RCT Terminated Agreement;

V. Conversion; and

VI. Unjust Enrichment.

Lilly has moved for summary judgment on all counts and RCT has moved for partial summary judgment on Counts II and III. RCT has also asked the Court to find the Agreement would have naturally expired on September 14, 2016 and to “summarily dismiss” Lilly's mutual mistake and statute of limitations defenses, as well as Lilly's argument that royalties should be calculated as 2% of the amount Lilly pays its contractor for the production of CpB. (Doc. 248 at 2-4 (citing Doc. 149 at 24-36).) The parties have thoroughly briefed the issues. On August 5, 2021, the Court held oral argument on the motions. (Docs. 305, 308.) For the reasons that follow, the Court grants in-part and denies in-part both motions.

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II. SUMMARY JUDGMENT STANDARD

Under Rule 56 of the Federal Rules of Civil Procedure, upon a party's motion, a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” A genuine dispute exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party, ” and material facts are those “that might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

III. DISCUSSION

At oral argument, the parties agreed there are no genuine disputes of material fact and the Court may resolve these motions on summary judgment. (Doc. 308 at 23-24, 36, 46-50, 68, 70, 80, 94.) The Court agrees and finds summary judgment is appropriate on some issues raised by the parties. For the reasons that follow, the Court concludes Count III is dispositive and determinative of other counts; therefore, this Order begins with Count III.

A. Count III - Failure to Report Sales and Pay Royalties

RCT alleges Lilly “used an Expression System to produce or direct the production of ‘[End] Product'” when it used SMD1163/pLGD43 in the production of Lilly's Diabetes Drugs, breached its reporting obligation, and failed to pay royalties on the Net Sales Value of the Diabetes Drugs. (Doc. 149 at 18, ¶ 160.) Lilly argues it is entitled to judgment on this count because the Diabetes Drugs are not “[End] Product” under the Agreement because “under the Agreement, ‘[End] Product' must be expressed by a Pichia Expression System” and “it is undisputed” the Diabetes Drugs “are not expressed by a Pichia expression system, ” and SMD1163/pLGD43 expresses CpB-not insulin. (Doc. 236 at 12-16.) In summary, Lilly argues that under the plain...