delaware chancery courtIn a lengthy 94-page September 1 decision in Sorrento Theraputics & Scilex Pharmaceuticals v. Mack & Virapax Pharmaceuticals, a Delaware trial court seemingly went a bit out of its way to hold accountable plaintiff's former CEO Anthony Mack for misappropriating trade secrets and diverting them to the corporate defendant while still collecting a paycheck from the plaintiffs, in breach of his fiduciary duties and noncompete agreement to the plaintiffs. Following trial, the Delaware court found that 

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.

The language of Mack's restrictive covenant, or noncompete, was standard fare, stating:

Mack shall not, directly or indirectly, anywhere in the world, have any Relationship (as defined in Section 4) with any Business Entity (as defined in Section 4) (other than the Company, any of its subsidiaries or affiliates or Scilex), in the course of which Relationship Covenantor engages in or assists such Business Entity, directly or indirectly, with respect to any activity that is directly or indirectly competitive with (a) the Product or any business related to the Product in which Scilex engages in as of the closing date of the Purchase (the “Closing Date”), or (b) any other business related to the Product that Scilex enters into while Covenantor provides or has provided services as an employee, independent contractor or consultant of Scilex (each, a “Competing Business”), in each case without the prior written consent of the Company.

One of the Major Reasons that the Trial Court Dinged Mack

Although not addressed in detail anywhere else in the opinion - nor was it applied in any material way to the facts established at trial - the trial court didn't leave a lot to the imagination as to one of the primary reasons why it was inclined to rule in the way it did. Consider the following language at page 28 of the decision:

H. Mack Deletes Evidence After Being Sued.

Less than a month after Plaintiffs filed their complaint in this action, on April 15, 2021, Mack deleted hundreds of documents from his USB device.  Many of these documents relate to Scilex.  Of the 485 files and folders deleted on this occasion, 213 mentioned “Scilex,” “Sorrento,” “ZTlido” or “ZTL” in the file or original folder name.  Mack confirmed at trial that he was aware by April 15 that he was required to preserve information relevant to this litigation.  At trial, Mack attempted to obscure the clear inference to be drawn from the facts presented by arguing that anyone in his family could have accessed the USB.  Even the most gullible reader would not believe that anyone other than Mack deleted these files, which were deleted in 26 separate actions over a 20-minute period.

Mack also deleted large swathes of email communications regarding Scilex, including all personal Gmail messages between October 2016 and March 2018.  Discovery revealed that Mack used that account to communicate about the Pipeline Products and other Scilex business. Mack could not explain why his emails or the USB’s contents had been deleted.  Mack manually deleted documents and emails relevant to this case.

The Basis for the Court's Ruling that Mack Was Guilty of Misappropriation

Applying the law regarding misappropriation to the facts of this case, the Court stated as follows:

2. Duty Not to Misappropriate Corporate Assets.  “Most basically, the duty of loyalty proscribes a fiduciary from any means of misappropriation of assets entrusted to his management and supervision.”  U.S. West, Inc. v. Time Warner, Inc., 1996 WL 307445, at *21 (Del. Ch. June 6, 1996).  Mack violated that duty when he used Scilex employees, funds, and data to advance his development opportunities at Virpax.   Plaintiffs demonstrated at trial that Mack received compensation from Scilex for travel in which he solicited opportunities for his other businesses, rather than Scilex.  In addition, Mack asked Scilex employees to perform work for Virpax, treating them as resources for himself personally rather than company resources. This included both the use of administrative employees, like Shana Panzarella and Sheila Roberts, as well as Scilex consultants, like Shawn Sahebi, Judee Strouss, Dr. Patel, and Dr. Gudin.

Where Things Stand Now

At the end, the Court acknowledged that arriving at a proper damages figure and other remedies based on the facts established at the trial was indeed tricky for a number of reasons, including that the value of the trade secrets that were misappropriated was murky, stating:

Having found that Mack breached the RCA, breached his fiduciary duties, and misappropriated Scilex’s trade secrets, and that Virpax tortiously interfered with the RCA, aided and abetted Mack’s fiduciary breaches, and misappropriated Scilex’s trade secrets, the court must craft an appropriate remedy.  The question remaining is what is the scope of that relief?  The Plaintiffs seek a combination of equitable and monetary relief, including an injunction, extension of the RCA, damages, constructive trust and/or a reasonable royalty on the revenues that may eventually be generated by the Pipeline Products. It is this court’s responsibility to “put in place a balanced remedy that is equitable and reasonably tailored to address the precise nature of the misconduct at issue.”  Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *24 (Del. Ch. Feb. 18, 2010).  The parties’ briefing on the question of remedy is helpful, but the court would benefit from additional briefing in crafting a remedy that most appropriately implements the rulings set forth in this opinion.  Accordingly, further proceedings will be necessary to determine the precise form of the final order. 

Jonathan Cooper
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Non-Compete, Trade Secret and School Negligence Lawyer
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